Feb 11, 2015
Executives
Fernando Dasso - Chief Financial Officer Walter Bayly Llona - Chief Operating Officer
Analysts
Thiago Batista - Itau Philip Finch - UBS Carlos Macedo - Goldman Sachs Saul Martinez - JPMorgan Jose Barria - Bank of America Carlos Gomez - HSBC Boris Molina - Santander Jordan Hymowitz - Philadelphia Financial Amit Mehta - PIMCO
Operator
Hello and welcome to the Fourth Quarter 2014 Credicorp Earnings Conference Call. My name is Hilda and I will be your operator for today.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.
I will now turn the call over to Mr. Fernando Dasso, Chief Financial Officer.
Mr. Dasso, you may begin.
Fernando Dasso
Good morning and welcome to Credicorp’s fourth quarter and year end earnings results conference call for 2014. The year 2014 has been a challenging one.
Not only for us giving the multiple fronts, we are actively working on such as the acquisition of Mibanco, but for the country as a whole, given the country’s economic performance and the drastic drop in GDP growth, which persisted throughout the quarter and resulted in the lowest annual GDP growth number for our country in years, 2.4%. We have been fortunate at Credicorp to see our business growing consistently despite this scenario and the last fourth quarter was not an exception with the lending business showing further growth.
However, the fourth quarter has also been a period to clean up the house and the decision was taken to account for a series of valuation adjustments in extraordinary costs in order to leave a clear path for future growth. Those one-off costs represented a significant amount accumulated in the fourth quarter and strongly affected reported results for the quarter.
In the aggregate for the year, these got however compensated by some extraordinary income we were able to generate in previous quarters. So, the effect for the full year just softens up as we will see further on.
But before talking about Credicorp, we thought appropriate to start with two charts on the Peruvian economy, which has been the source of serious concern in the market this last month. Next page please.
The Peruvian economy became subject of concern due to constant revisions to reduce expected GDP growth numbers for the year following surprising and disappointing data. Not only was Peru affected by the LatAm’s worst growth year in the last 12 years, but also by the deteriorating terms of trade as copper and gold prices drop.
In addition, Peru’s primary sector suffered as we experienced the worst fishing year since 1998. Coffee [ph] growers suffered under an aggressive plague and technical problems delayed or hampered production of copper collection.
Furthermore, besides all these factors which actually outside our span of control, internal political mismanagement led to a segment following investment activity in the last year. This lack of investments and actions from all – from municipal to regional to the central government to promote investments resulted in a vacuum of government investment leadership and consequent loss in business confidence, leading to a drop in GDP growth we have seen.
Throughout the year, an increase of the constant disappointing data, the Ministry of Economy took the lead and became an active promoter of investment giving a significant push to the approval process machining pushing further investment regulations to Congress, which speaks with the approval – with the approved gradual reduction in corporate taxes by 4%, down to 26% by 2019, a measure by far unique in the region. The Central Bank supported these measures and focused on maintaining a stable financial market introducing regulations to further safeguard the strength of the financial systems and provided the liquidity instruments necessary to fund growth focused in de-dollarizing further the economy.
The resource of these measures can be seen in the next slide. Next page please.
As mentioned, points two and four of this chart are direct consequence of the actions taken by the approved Ministry of Economy and central banks last year. The tracks, of course, continue and a positive dialogue with the business community and the financial players is now in place.
The impact of such stimulus is expected to add an estimated 2.2% to GDP growth this year. In addition primary sectors are expected to have significantly better performance.
Most technical obstacles that affected the main mining projects are being taken care of and corporate production is projected to start an expansion phase this year to almost double volumes output by 2017. And lastly, the normalization of the financial system which was somewhat nervous and cautious in the previous year continuing to that slowdown as credit standards were tightened slows the increase the availability of credit, alright with better credit standards which in turn helps boost economic activity.
Though everything points towards a capital recovery and acceleration in economic activity, timing is the biggest uncertainty. We are cautiously optimistic and see as a threat [indiscernible] in the pickup of economic activity since the expected political noise of the 2016 elections in the second half of this year, we will have a stronger dampening impact in GDP growth if the economy hasn’t reached some momentum before that.
Next page, moving on now to Credicorp’s performance, Credicorp reported net income for the fourth quarter of 2015 of PEN495.6 million, which compared to PEN645.4 million in the previous quarter. This represents a drop of 23% leading to an impressed ROAE of 14.5% for the quarter.
For the year 2014, total net income reported reached PEN2,388 million reflecting an ROAE of 18.5%. Though at first sight these numbers failed to reach the expected performance, core business results tell a different story and show the strength of the business and strong results.
Despite the cost of the learning curve which translated into higher cost of risk in the SME/Retail business. Loan growth was strong at 5.6% quarter-over-quarter, portfolio quality continued improving showing a drop in PDLs of 8 basis points and in cost of risk of 10 basis points.
Also, the insurance business was able to sustain results close to improved performance for the third quarter. For the year, loan expansion reached 24.3%, but shows the cost of the learning curve under Mibanco acquisition to a moderate increase of 27 basis points in that PDL ratio and 22 basis points higher cost of risk which reached 2.15% provisions over total loans.
Furthermore, the efficiency ratio shows seasonality situation in the quarter with an improvement of almost 1% in the year. And the insurance business reported a significant improvement with underwriting results of 10% and medical results of 53%.
This performance is especially remarkable given the economic slowdown. However, the positive core results, especially fourth quarter results were however affected by substantial extraordinary costs incurred and reported mainly in this fourth quarter related to Mibanco acquisition, the reorientation of BCP’s business strategy and focus to take better advantage of the acquisition.
And a substantial impairment on Credicorp’s investment in the Chilean market operation [indiscernible]. Extraordinary items for the year however include also substantial non-core income reported previously that reduced the negative impact for the year as we will see in detail in the next slide.
Next page please. The largest of the one-off expenses is related to the Mibanco acquisition and includes merger charges and business model implementation charges which accounted for PEN40 million in the fourth quarter and an aggregate amount for the year of PEN78 million, this amount in both charges, such as systems migration and charge-off of redundant and obsolete systems, closure of some branches, staff lay-off costs, amortization of intangibles etcetera.
Another relevant source of one-off charges has been our acquisition of IM Trust in Chile. The operation was acquired in 2012, a time when markets were bullish and valuations high compared to today’s environment.
The acquisition involved a series of Puts and Calls with our partners which generates valuation adjustments using a contractual formula as a function of the business results, that has worked against us and explain an extraordinary charge of PEN52 million. In addition, value adjustments through the goodwill imbedded in the price due to change in market conditions are no results that generated an impairment of an additional PEN67 million.
Most of these costs affect the fourth quarter. A more recent one-off charge of PEN24 million is related to the reversal of expected tax credits which should not be realized due to the corporate tax reductions we can introduce at a net to higher tax positions.
The last relevant one-off charge of PEN7.6 million is related to the closure of Tarjeta Naranja, a green-field investment that proved unprofitable at this time and we decided to withdraw from, to give the market for such low income lending business time to develop. On the other hand, Credicorp was in the position to also realize some extraordinary gains to gain on the sale of assets and non-strategic investments, such as the Alicorp shares sold in the first quarter of last year, which generated PEN62 million extraordinary income, the sale of some other corporate shares PEN28 million, corporate bonds PEN15 million, and real estate PEN8 million.
In addition, Credicorp was successful in a lawsuit and won a claim related to the losses incurred during the 2008 crisis in connection to the Madoff scandal and recovered PEN41 million in the second quarter last year. Such extraordinary items, as shown in the previous tables, accounted for a total net expense after extraordinary income of PEN77 million in aggregate for the year 2014, which includes a net non-recurrent expense of PEN131 million in the last quarter which strongly affected fourth quarter reported results.
For convenience and to facilitate your analysis, in this chart, we have also excluded the translation gains of 2013 and 2014 and excluded the Mibanco operation and impact of the acquisition on the 2014 results to make these numbers comparable with the 2013 numbers, net of the extraordinary items of the year, isolating this way core business performance of both years to evaluate its evolution. Therefore, excluding the net impact of extraordinary items after tax adjustments, core business evolution showed an excellent performance revealing recurrent net income for the fourth quarter of PEN626 million and PEN2,461 million for the year 2014, and adjusted ROAE of 18.2% in the fourth quarter and 18.6% for the full year.
This compares extremely well with the adjusted ROE of 2013 of 17.3% for the previous year, an improvement of 1.3% in ROE. Furthermore, what becomes also evident in this chart is that without the Mibanco acquisition, Credicorp delivers close to 19.1% ROE, a fact that a) helps determine the real impact of the SME business learning curve and general market slowdown on the total of Credicorp’s business, and b) helps quantify the real cost and profitability of the Mibanco position, which appears to be a small cost to incur for having acquired - that has become the fifth largest financial institution in the Peruvian financial system, specialized in the most attractive and fastest growing segment, the low SME-Pyme & Micro-lending sectors.
Next page please. As I mentioned before, despite a persistent economic slowdown in the last quarter of the year, total loans continue expanding and were up a significant 4.4% quarter-over-quarter measured in average daily balances or 5.6% growth from third quarter end into the fourth quarter.
On a daily basis the important [ph] expansion reached by 21.8% growth in average daily balances which includes the non-organic expansion in the Mibanco position and the revaluation of the U.S. dollar denominated portfolio, which still accounts for growth of 50% of the total portfolio.
Therefore organic growth reached about 15% [indiscernible] and adjusting for foreign exchange operation, the organic growth is closer to 12% for the year, which would yield a dynamic portfolio given the slowdown in GDP expansion experienced in this period. As we can see in this chart this year the wholesale banking sector plays a relevant role that explains 31% of the portfolio expansion for the year whereas the retail book was way behind with 13%.
This is the consequence of an improved risk management and in this sector where lending standards were changed, more cautious measures were taken and SME book [indiscernible] was experienced in the course of the year. Furthermore, non-organic growth represents 29% of the total expansion and even the dual currency nature of our portfolio and the still strong portion of about 49% of U.S.
dollar denominated loans, the move in the exchange rate represented 16% of the reported expansion, nevertheless an important expansion in the context of a slowdown environment. Next page.
With regards to portfolio quality, this chart clearly shows a controlled situation with basically all sectors showing improvement, even the Mibanco portfolio. Therefore Credicorp reported a peer ratio of 2.51% eight basis points lower than the previous quarter.
Cost of risk improved 10 basis points this quarter to reach 2.19%. For the year 2014, cost of risk does reflect the cost of learning curve and for the acquisition of Mibanco, as U.S.
reported at 2.15% for the year versus 1.93% for 2013. Still this is a not a too extensive learning curve and acquisition cost of 22 basis points for the total portfolio.
Next page, given the mix of the portfolio expansion, we just reported the fourth quarter, which was concentrated in the low margin wholesale business and the timing of a good portion of disbursements towards the end of the quarter. Net interest income improved that was way behind portfolio growth, which is a significantly lower 1.5% quarter-over-quarter expansion, as such they affected the net interest margin negatively.
A more detailed breakdown to show NIM evolution what we’ve shown in the following chart. At this point it’s important to point that extremely proactive approach of the central bank to provide the necessary liquidity in Soles to the financial system through low-cost central bank instruments and promote this way the de-dollarization process that is becoming rare.
The availability of liquidity has allowed for our portfolios to grow according to demand and risk appetite we felt constraints and/or tangible pressure on margins. Furthermore, it is interesting to see the charts at the right-hand side that show net interest income contribution by subsidiaries, which reveals that a combined net interest income of Edyficar and Mibanco, which will soon be the new merged Mibanco reaches over 25% of the total net interest income contribution of BCP 100%, 18% of the total net interest income of Credicorp, the fact that makes the new Mibanco a very important subsidiaries of Credicorp.
Next page please. This chart provides a more detailed explanation of the NIMs within the Credicorp Group.
As a consequence of the portfolio evolution, NIMs showed a contraction of 10 basis points to 5.65% for the fourth quarter, which is spread out towards the different portfolios without any being especially responsible. This chart also helps to see that for the full year the significant improvement of 61 basis points to reach 5.65% and on BCP up 37 basis points and sales by Mibanco as a result of the price corrections introduced in the course of the year and good cost for funds management.
Next page please. Fee income expanded 11.5% for the quarter, explained by better lending and capital markets activity and gains of foreign exchange transactions expanded also 14.5% helped by the increase in the volatility of the nuevo sol/U.S.
dollar exchange rate. However, the drop in total non-financial income reflects the absence this quarter of revenues from the sale of non-strategic investments or other securities, which were realized in previous quarters and the impairment of the IMTrust good work.
On a yearly basis, non-financial income as a whole expands 17.5% with all elements showing a strong expansion on the overall. It is worth noting that fee income contributed by Prima represents 15.2% of total non-financial income of Credicorp, while Credicorp Capital contributes 13.1%.
On the expense side and excluding higher operating expenses which encompass most of the extraordinary costs reported, the seasonality is evident in the administrative expenses, which increased at year-end and reflected in the efficiency ratio which deteriorates for the quarter. Please flip to the next slide to see the composition of the efficiency ratio in more detail.
As we have stated in the past the process to improve efficiencies is never a straight line. And the fourth quarter is certainly a proof of that.
We always have a seasonal increase in administrative expenses in the fourth quarter and this year is no exception. So efficiency improvements are better measured for the year.
And in that comparison a clear success of the process becomes evident. In the year 2014 BCP standalone reduces its efficiency ratio from 47.1% to 42.2%.
The important effort of particularly the insurance in this front is also evident with an almost 1% improvement of its efficiency ratio. All this leads to an improvement of 90 basis points in the efficiency ratio of Credicorp which was from the starting the objective around one percent point per year.
Next page please. Though we are focusing this report on Credicorp’s global numbers, it is still worthwhile to look individually at two subsidiaries which [indiscernible] for very different reasons, our recently acquired Mibanco from Pacifico which is undergoing important changes.
Mibanco has had a very good fourth quarter and end of the year, which has shown further improvements in the process to control the situation of our portfolio. There are lots of clients and a sales force turnover.
All these metrics show a leveling out and most importantly of getting that portfolio that should allow Mibanco to go through the merger process next month with less baggage and well prepared to team up with Edyficar and start the growth process to recover all lost market shares. The significant non-recurrent charges made this fourth quarter were undertaken to precisely give the new Mibanco Corporation without the burden of all such costs and focused from start in the real profitability of the business.
Next page please. Pacifico PPS [indiscernible] we released have made great advances in the year that has shown an important turnaround to our adjustments in business strategy and important decisions that are reshaping its business.
With regards to the property and casualty business, results are dominated by the current insurance business, a sector that became a serious loss-making operation and requires drastic changes and adjustments to the business model and pricing structure. Given the more intelligent pricing, more selective underwriting lead to less casualties, so preferred workshops, less structural in the provinces, favoring profitability of growth have helped achieve the important improvement in net earnings reported.
Further, cost structures changes such as those related to the distribution channels, sales force reduction and increasing productivity contributed to such recovery. In the life insurance business, good growth in the annuity business and good results in the investments and sale of securities makes this a very profitable sector.
In the health business, our focus on capitalizing on infrastructure investments of the previous years was the first step followed by the decision to shorten the learning curve by teaming up with a leader in health services in the region, BanMédica, a joint venture we will talk about shortly. All of the business value adjustments were accompanied by a steep decline, cost control applied across the organization with significant success.
Total results and earnings contributions revealed by increasing Pacifico’s contribution to Credicorp – to Credicorp’s bottom line by over 80% from $108 million to $199 million within the year. Next page please.
Before closing up, I would like to take advantage of this conference call to give you some additional information on two transactions that have been already announced and completed, however, subsequent to the close of the year 2014, but are part of the efforts and decisions taken in the course of the past year, the joint venture with BanMédica, Chile and the reallocation of the BCI shares. With regard to the joint venture with BanMédica, teaming up in a 50/50 joint venture for the medical healthcare and insurance business with the leader in the Andean region was a result of careful business evaluation and long negotiations.
The partnership reflects Credicorp’s strategy to capitalize on Pacifico’s in-depth knowledge of the Peruvian market and BanMédica’s extensive know-how and successful experience in the health care business, both in Chile and Colombia. Credicorp has been exploring opportunities to develop associations and/or joint ventures with regional leaders in these businesses.
BanMédica was since identified as a sophisticated and important player in the Latin American market and is therefore a valuable partner for our strategy to offer increasingly higher standards of quality service and efficiency, satisfying the growing demand for health services and insurance nationwide. BanMédica acquires the 50% share of the referred business through the contribution of its Peruvian assets, a high-end Clinic and Laboratory network, plus a cash portion of US$57 million, an amount that will be used to fund future joint operations in the healthcare market of Peru.
This transaction closed on January 1, 2015. We view this partnership as a milestone in the development of the insurance and healthcare business improved and believe adds value to the corporation, more so in light of our future plans to capture the growth potential of this business segment.
Next page please. Now we are going to cover reallocation of the BCI shares from BCP to Credicorp.
Through a public market transaction at the Stock Exchange of Chile approximately 4.2 million shares of Banco de Credito e Inversiones de Chile, BCI held by BCP through its subsidiary in Chile were transferred to Credicorp Limited for a price of $189 million. The sole purpose of this transaction was to realize and capitalize the gain on this investment at BCP to reinforce capital.
And at the same time also improve the capitalization ratios of BCP eliminating an investment that has to be deducted from BCP’s capital base. The realized gain at BCP reaches PEN260 million.
As a result of this transaction BCP’s common equity Tier 1 ratio based on the application of fully compliant...
Operator
We are experiencing technical difficulties, please standby. Your conference will resume.
Please continue to hold. [Technical Difficulty] Thank you for your patience.
You may now resume with your conference.
Fernando Dasso
I will resume the conference the last page of the presentation, it is Page 17. We are looking at our total results in our contribution chart, the total net income attributable to Credicorp for the quarter shows contraction due to the extra organized.
We have extensively explained the significant improvements for the year-to-date reached a total of 12% increase in net income to bring it close to PEN2.4 billion. Furthermore, I have stated in my opening, the year 2014 has been challenging but at the same time extremely successful.
In this year, we have been able to first, digest the cost of the impact of the economic problems added to the learning curve of the SME business, improving the business model and perfecting our credit processes. Second, consolidate our strategies, closing up unprofitable ventures and focusing in the profitability of the core business.
Third, improve our result on certain issues including cost structures, [indiscernible] business model in the insurance and medical businesses, partnering with the leading health services provider in the region at Chile and BanMédica. Fourth, better allocate capital and improve our capitalization ratios with some shift of investments.
Fifth, clean the house, meaning adjusting the evaluation of certain investments to today’s market conditions as well as realizing gains in non-strategic investments to compensate for the latter. Lastly, acquire the most important and leading Pyme & Micro-lending entities with the current growth.
Order which was achieved without sacrificing market profitability in the reported ROE delivered to our shareholders for the year of 18.5% is by all means a good return within a slowing macroeconomic environment. With the above advancement and the two transactions recently announced, we certainly feel better prepared with all contingencies out, a pure business and [indiscernible] and the house ready for further pace of expansion in the core businesses with significantly more solid and natural business strategies to take advantage of the expected reactivation of our economic growth in our markets.
We have great expectations about the expected contribution of the new Mibanco in the coming years and the effect of the most structural efficiency improvements there to come. We also have great expectations about our new joint venture with BanMédica and realignment of the insurance business.
Therefore, if the economy plays along as we hoped, we believe potential for growth and better ROE is significant. With this comment, I would like to open the call for Q&A.
Thank you.
Operator
Thank you. [Operator Instructions] Our first question comes from Thiago Batista from Itau.
Thiago Batista
Yes, hi everyone. Thanks for the opportunity.
I have two questions. The first one related to the asset quality.
We saw during this Q some contraction in the overall delinquency ratio. It was the second quarter in a row that the PDL declined it.
Do you believe this trend will continue or are we expecting any impact of the slowdown of the economy in the asset quality trend? And my second question is about the bank’s margins, we saw some contraction in the margins of Credicorp during this quarter even considering an increase in the loan to deposit ratio.
So, my question is what is our expectation in terms of margins and also loan to deposit ratio in coming quarters?
Fernando Dasso
First, I am going to begin with your first question about the PDL ratio, you should probably go to Page 8 and you can see the trends in our ratios. We believe that ratios are improving – have been improving for the third and fourth quarter and we also believe that next year they will continue to improve.
We have worked extensively last year, especially in the SME segment. With new models, collections, I mentioned, the PDL scores and I think the results are beginning to show.
And you can see the lines are pretty – we can see pretty safe lines on the PDL arena. I don’t know if I have answered your question?
Thiago Batista
Yes, yes.
Fernando Dasso
And then in terms of margins, this year is going to be a different year, because as we said in the presentation, the central bank is really fostering that banks really flip or ship their balances from dollars to Soles. The banks in this country have around – you kind of do a currency and have in reality to our sheets, 50% Soles and 50% dollars, not the Central Bank is really bringing us all the advantages to foster that – our loans become sol loans rather than dollar loans.
And they will bring ample funding to do that. And now for – not only ample funding, but also that funding will be in very good conditions meaning the tenure are no to the interest rates.
So our belief is that our margins can widen a little bit this year compared to 2014.
Thiago Batista
Okay. And your view on the loan to deposit ratio?
Fernando Dasso
In terms of loans to deposits, yes we have some stress there especially in sols. And we believe that we will continue to experience some stress in sols though on the other hand dollars, our loans to deposits will be really safe.
In the aggregate, we will probably reach 110% loans to deposits for the aggregate balance sheet. And we are beginning to think about bringing some mortgages off of the balance sheet.
We are working on that project and we will – when we have results we will definitely talk to you further on.
Walter Bayly Llona
Thiago, this is Walter Bayly. This – the rotation of the loan to deposit ratio which is uncomfortable is really a consequence of the government’s decision that all public sector deposits end up at the Central Bank.
And it is the Central Bank that feeds the private banks that necessarily, political goals. So in reality a huge portion of the deposits of the Peruvian economy are withdrawn from the system.
And thus as the system as a whole we have a loan to deposit ratio which doesn’t appear to be very healthy, but it is a direct consequence of the decision as to how to manage monetary policy in the country. We don’t necessarily like it, but it is what it is.
Again, it reflects the fact that the whole banking system, private sector banking system does not have the benefit of receiving any deposits to come from the public sector company.
Thiago Batista
Okay. Thanks a lot.
Operator
The next question comes from Philip Finch from UBS.
Philip Finch
Good morning everyone. Thank you for presentation.
And couple of questions, please. Some regarding your expenses while you showed a sizable increase year-on-year in terms of operating expenses, now obviously you have got Mibanco included in that year-on-year growth of 17.5%, so could you tells us first of all how much it would be without Mibanco.
And obviously there are a number of non-recurring items that you mentioned in the presentation, so going forward looking to 2015 what sort of our growth in expenses should or could we assume for the group in 2015. And the second question is a more broader question regarding an update on Mibanco you talked about how 2014 was very much in terms of trying to clean it up ahead of the merger, was 2015 about what you expect to happen for Mibanco just some color on when you think the merger will happen, how much more provisions will built at Mibanco, when can we expect the Mibanco itself to return to profits and the – in the previous conference call also I think you talked about a turnaround ROE potential of 25% or so, when can we envisage that going forward?
Thank you very much.
Walter Bayly Llona
Its Walter, let me tackle the Mibanco side and I will leave for Fernando the other piece. The merger of Mibanco expected to take place 1 March.
We are working diligently in making this happen which involves of course systems, sales force integration, shutdown of branches, etcetera, etcetera. We expect this year Mibanco to be the second most – the second largest contributor to profits to Credicorp and that target of 25% for the merged entity would probably be halfway there will probably be around 15% return on equity for the combined operation, including all the goodwills involved.
So, this will be a year, in which we will start to see very positive results in terms of contribution – earnings contribution to Credicorp from the combined entity again becoming more selective, the second most important contributor to profits with an estimate or general equity of around 15% for a number of the other pieces. In regard to cost and then the efficiency ratio, what I can tell you is that BCP will continue with our program of efficiency.
We have refinery in this forum for around 15 months and we plan to achieve 100 basis points per year, more or less. This is BCP’s turnaround.
But as Walter said, Mibanco and Edyficar were no longer engaged in great expenses. They have endured a traditional year last year and this year will be a year – is still a challenge, but most of the synergy is cooperating taking into advantage by our house.
When we got a lot in our Pacifico, what I can tell you is that they have also gone through a very important efficiency program last year and they will reap the benefits from that program during the whole 2015. So, those are the most important companies of the series at Credicorp.
And we believe that efficiency ratios in the future should reflect these efforts. We plan at the end of this decade to reach the low 40s, around 40% efficiency.
And that’s really a trend that we want to achieve.
Fernando Dasso
It’s important that on the efficiency ratio at the bank level, we have already finished consolidating all the different initiatives and plans going forward with timelines etcetera, etcetera and our target as Fernando was saying is 40% cost efficiency ratio at the bank and consolidated by 2018. And we think that’s an achievable target.
We have moved substantially forward, if I recall correctly at the end of 2012, we were close to 49%, we are down to almost 42.3%. And clearly, the first tranche of that reduction was the easiest part, but again, our target is 40% coverage at the bank level and consolidated for 2018.
Philip Finch
That’s very clear. Thank you, Walter.
Thank you, Fernando.
Operator
The next question comes from Carlos Macedo from Goldman Sachs.
Carlos Macedo
Good morning, Walter and Fernando. Thanks for taking questions.
I have a question with loan growth, you have mentioned in the beginning how we expect economy to pick up 2 percentage points potentially stronger than this year. Historically, we have given guidance that loan growth is three times real GDP growth, this year, loan growth 12%, if you take away the dollar and Mibanco.
Could you give us some color on what you expect for loan growth in 2015, where they are going to come from and what kind of mix are you going to generate and how that could affect your margins? Thanks.
Fernando Dasso
This year, this past year – the country grew 2.4%. This year we are supposed to roll around say 3.5% to 4% for the country.
Therefore, we believe that we will continue to grow at the same pace that we did last year around 12%, 13%. We are beginning to see that in our numbers even this month.
The segment that will grow better as we said last year, wholesale grew by 30% and retail grew by around 13%. We feel that this year retail will pickup a little bit especially on the [indiscernible] arena.
So, we will see that growth happening, but on the other hand, we have to say that at the beginning of next year, we have general elections here in Peru. So, from the middle – second half of this year, it will be a pre-electoral period.
And there can be some volatility on typically investments lower a little bit during that period. So, we will achieve that 13%.
There are some clouds that we will have to really fight against.
Carlos Macedo
Thanks. Just following up then, it would be reasonable to say then because you are moving into retail growing faster than wholesale and presumably that the mix will continue to shift over due to Soles that you will see margins improve during the year as a result of the mix shift?
Fernando Dasso
Yes. In Soles, we not only have better margins, but as you know we have talked about it in the past, we mismatch a little bit to balance sheet.
So, that mismatch between funding and lending gives us a further margin. It can engage us in more risk, but it gives us a wider market.
Carlos Macedo
Okay, thank you.
Operator
The next question comes from Saul Martinez from JPMorgan.
Saul Martinez
Hi, good morning guys. I hope this question doesn’t come across as antagonistic or confrontational.
And I realized that the economic backdrop has been troubling, but if I go back even to 2008, there have been various missteps, whether it’s made off of corporate bond write-downs, for example, your SME book deteriorated more than some of your peers – your credit card book deteriorated more than some of your peers couple of years ago. The IM Trust write-downs have been meaningfully greater than I would have thought.
Insurance has taken a while to turnaround. Obviously, it’s better now, but it took a while to turn around and get better underwriting margins.
My question is, is there a risk issue at the company and how do you respond to questions about whether you are properly assessing how to get good risk – risk adjusted returns on your investment, whether it be from credit activity or from M&A activity? And my second question is on the loan to deposit ratio, I know it’s been mentioned and you guys have talked about the funding coming from the Central Bank.
But in local currency, it’s 115%, 116% and I get the de-dollarization policy, but does that leave you vulnerable? For example, in a situation where the Fed starts to raise rates leading to currency weakness and even leading to a lesser propensity of depositors to provide funding in local currency?
And in a related question, does that leave you vulnerable in that situation to liquidity issues and a related question is how much of your funding actually does come now from the Central Bank and how much can that go to in going forward?
Fernando Dasso
Okay. Good questions.
Let me tackle that. First, the second piece associated to the cost of income ratio, I think I already mentioned in the prior question why we are here?
It is a decision of the Central Bank of which we have very little to say about. We have conversations about it, but they are very firm and that they believe they need to impress policy that allows them to keep control and try to force the de-dollarization of the portfolios which is something that they worry about a lot.
So, yes, we don’t like it, but that is life. Is it a problem?
No, it’s not. We believe that it would be absolutely countered to the Central Bank’s intentions to allow the private sector banks, all the banking systems reality – in reality not to have access to funding to continue growing.
One of the drivers of the Central Bank policy is growth clearly providing enough liquidity is a necessary element. So, do we like it?
No. Can we do something about it?
We have talked to a Central Bank about it, but that’s about as far as we can get. Do we think it’s a problem – sustainable problem in the future?
No, we do not. At a certain point in time, all the funds deposited from the public sector into the Central Bank will, as development starts to run deficits start to flow back into the economy and we will have the more normalized loans to income – loan to income ratio, loan to deposit ratio for the whole banking system.
So that it is what it is. Regarding the other questions, yes, we have had a lot of – we have had our share of missteps, but we have had our share of successes.
At the end of the day, the return on equity is something I recall has been quite healthy for the past 15 years. The evaluation of our stock has proven to be quite interesting.
So, as they would say, the proof is in the pudding or something, in the eating or something. So, yes, we have had our share of mistakes, but we have had more than our share of successes and the end result is probably a positive one.
Saul Martinez
Okay, fair enough. What proportion of your funding is coming from the Central Bank, do you share that?
Fernando Dasso
Yes. I can elaborate a little bit on that part of the question.
We were looking at our numbers yesterday and [indiscernible] funding in dollars. At the end of this year, we will probably be around 8% funding from the Central Bank and deposits will be around 70%, while the other piece we will be borrowing and bought.
Saul Martinez
Okay. 70% of the local currency deposits, is that okay?
Fernando Dasso
Yes, yes, we still have local currency now, because that’s where the Central Bank operates.
Saul Martinez
Okay. And final quick question, you had a small loss on Petrobras exposure at Atlantic Security, is that the only exposure that you have for Petrobras related suppliers or Petrobras related issues, whether it be at BCP or at Atlantic?
Does that something that we should be aware of?
Fernando Dasso
We had a little bit more solid faith and the maturities were in two weeks ago, that’s the breakdown. I think we have got a little bit more, nothing material.
Saul Martinez
Nothing material. Okay, thank you very much.
Operator
The next question comes from Jose Barria from Bank of America.
Jose Barria
Thank you for taking my question. Actually I have two, the first one is on asset quality, looking at your NPL ratio, which includes PDL’s post-restructuring and finance, that ratio has increased in the quarter and looking at the stock refinance loans, it’s gone up by about 28% in the quarter, can you tell us what is driving such a high level of refinance activity at BCP?
Fernando Dasso
What I see here in the PDL ratio chart number 8, you see the numbers there and I don’t see a variety actually it’s an improvement.
Jose Barria
Yes. I am talking about the NPL ratio which includes restructuring and finance it went from 2.9% at the end of 2013 to 3.4%.
So, it looks like there has been refinancing or restructuring activity in the fourth quarter. So, I just – I am wondering if that is I guess a result of you guys being more active and why that’s the case if it’s marking some sort of deterioration that you guys fixing by refinancing and restructured loans?
Fernando Dasso
Yes. There are really two factors here.
First, yes, we have our refinance a little bit more, nothing special, but also we have been slower on charging of loans this last quarter, so that’s why it shows in a ratio. If we need to refinance, it will only refinancing.
Jose Barria
I see. So, you wouldn’t say that this is a trend that shows maybe some deterioration in the portfolio?
Fernando Dasso
What we have been seeing is that on the other hand to the country, our portfolio is really improving, especially in the retail sector. And I am talking about SMEs and consumers.
It really has improved. Hello?
Jose Barria
Yes. Okay.
I thought you were going to say something. Okay, that’s fine.
That’s clear on the asset quality. When I am looking at the operating expense line, obviously there is a big increase in the quarter, some of that is seasonal, some of that is non-recurring.
I want to get if you can, because it wasn’t clear from the release maybe an idea of what exactly is the recurring level of expenses that we should see on a quarterly basis, because just giving the amount of sort of one-offs that we saw in the quarter, I couldn’t really make that out?
Fernando Dasso
What happened during the last quarter, I think that’s really usual, for example, we will receive the invoices from our suppliers and we will receive them after a month. But in December we will receive the invoices of November and December at the same time.
So that’s difficult and it’s also difficult to make some more expenses at the end of the year. But that’s really what happens in terms of accretive expenses.
Walter Bayly Llona
Now there is a flipside to it which is that on the first quarter they are usually the low. More reporting numbers if you focus on the first quarter and multiply that’s where actually a little growth and that’s probably be what we have this year.
Jose Barria
Okay, perfect. And lastly going back to your slide on efficiency which is Slide 12 of your presentation, just wondering what is happening at Edyficar which is the only – first of all congratulations on the trend on improving efficiency here.
The only one that’s not really improving is Edyficar and I guess my question is this because of any non-recurring items in 2014 or is it something else happening there that is leading to rising efficiency ratio?
Fernando Dasso
No, it basically non-recurring items that we have incur because we were preparing Edyficar for the merger that is going to take place in 3 weeks. So it’s nothing special with the operation by itself.
Jose Barria
Okay. Thank you very much.
Fernando Dasso
It is around PEN25 million in one-time items.
Jose Barria
Okay, got it. And that’s included here in the expenses.
Okay. Thank you.
Operator
Your next question comes from Carlos Gomez from HSBC.
Carlos Gomez
Hello, good morning. I have two questions.
The first one refers to capital, we saw the capital increase and we went on December 1, there was a change in the goodwill of Mibanco, I see it in the reports – we would like to see how much effect that had on the capitalization. Second, we had [indiscernible] 7.45 we are hoping to have another 47 basis points from BCI sale do you have any additional plans and are you stick to your target to reach a 10% core equity Tier 1 ratio, by the end of 2016?
Fernando Dasso
Yes, that’s our target and that’s the target for BCP which is – as you know it’s a rate related entity. We have to now reach around 8% in core equity Tier 1 for BCP.
We still plan to reach 10% by the end of 2016. And that is in our plan.
And you had another question in terms of the goodwill of Mibanco that we really have get back to you because we haven’t made any change in Mibanco.
Carlos Gomez
I think from the press release, I mean you got some of the – I think you got the Mibanco brand consider an asset and therefore is no longer part of the intangible and it may not be deducted from capital?
Fernando Dasso
I will try to get back to you and have a more detailed conversation about this. What we have done in Mibanco you have charged systems and there also we are incurring cost – one-time costs for example branches that we are closing, but not in terms of the goodwill.
What we have amortized is the Mibanco is difficult for us. We will - the merged entity will be called Mibanco [indiscernible] branch is being written off – was written off throughout the last quarter last year.
And it is in the books BCP because BCP is the owner of Edyficar.
Carlos Gomez
Going back to the target and the 10% target, do you expect to get to it organically or are there any other ways in which you are going to do it because when you look at your returns and your expected growth, there isn’t a lot of room for capital accretion if my number are correct?
Fernando Dasso
The return on equity at the bank level should be around 34, 55. We will be conservative in the dividends we pay out of the bank.
And we will have 12% growth approximately in assets. So yes, there is a space for accretion.
Carlos Gomez
Okay. And dividends at the – last question, dividends at the holding company level, what’s your expectation for the coming years?
Fernando Dasso
We have not taken that to our Board yet. We expect some marginal growth.
Carlos Gomez
Okay, thank you very much.
Fernando Dasso
Thank you.
Operator
The next question comes from Boris Molina from Santander.
Boris Molina
Yes. Could you please give us a little bit of idea of by how much you expect your ROE to expand in 2015 and what the big drivers would be?
I would suppose that given that you have gone through the process of riding off and restructuring the integration of Mibanco etcetera, you should see a significant pickup given that Mibanco is always going to be 50%. So, what would be affected the consolidated level?
What do we expect in terms of earnings growth for the year? What are you thinking about?
Fernando Dasso
Well, it depends on return on equity for Credicorp is all within our target and we should get this year.
Boris Molina
Only, 20%, okay.
Fernando Dasso
Yes, because we will retain more equity as we mentioned at the bank level.
Boris Molina
Okay, thank you.
Operator
The next question comes from Jordan Hymowitz from Philadelphia Financial.
Jordan Hymowitz
Thanks guys. I was wondering if you could help me understand how you think about loan loss reserves, especially as a percent of non-performing loans including restructured loans, because the reserve coverage has been coming down after several years and I was just wondering is there a line in the sand where you don’t want that reserve coverage to go any lower?
Fernando Dasso
Yes. I mean, we have done our reserves to stay at basically the same levels.
During the last years, we have remained at the same levels. We don’t see any further stress at PDLs or NPLs for next year.
So, we will continue with a conservative session that we have had for many years.
Jordan Hymowitz
Do you look at the reserve level when you use that ratio, excluding or not excluding restructured loans?
Fernando Dasso
Yes, PDL is without the restructured loans and the NPL includes the restructured loans.
Jordan Hymowitz
Right, so if you look at on just the PDLs, the numbers stayed flat, but with the restructured loans, the coverage keeps coming down to a certain extent, you know what I am saying?
Fernando Dasso
I didn’t understand what the question is, maybe we can prepare some charts and give you a detail how the regulatory and the IFRS provisions are calculated in our policies. So, I am not sure I quite understand the question, sir.
Jordan Hymowitz
Okay, that would be great. Maybe we can do it offline, but basically my question is the level of loan loss reserve coverage ratio, should we be considering restructured loans in that ratio into this net NPLs and why or why not?
Fernando Dasso
Okay, great. We will prepare something and send it over to you.
We do calculate both, our [indiscernible] ratio with restructured loans and without restructured loans. So, I am not expecting to share which of the one you were looking at in which charts, because we do publish both.
Jordan Hymowitz
Okay, thank you.
Fernando Dasso
You’re welcome.
Walter Bayly Llona
Yes. Just to give you a number for example, the coverage of NPLs, the last quarter of 2013 was 135%.
And this last quarter was 134%, so without – with the NPLs, the NPLs covering.
Fernando Dasso
Okay, thank you.
Operator
The next question comes from Amit Mehta from PIMCO.
Amit Mehta
Hi, afternoon. Thank you very much for the call.
I wanted to ask a question just to understand your dollar exposure and how you hedge for rising dollar risk against the currency, I mean, you mentioned briefly how you are running a mismatch position and that obviously gives you better margin, but can you just kind of talk us through how you manage that risk going forward? And what kind of exposures or net exposures you are running?
Fernando Dasso
What we do is that was the same in previous question is without – in reality to our sheets, one is in dollars and one is in Soles, where we do the mismatch is inserted in our Soles balance sheet. In the dollars balance sheet, we [indiscernible] because people want to really run the business that you are talking about.
So in that sense what we have is combined balance sheet which currently we have a long dollar position equivalent of about $200 million we have established today a minimum of $150 million position. Where as in class we are the way around, so we kind of think a view on where you would think the exchange rate is moving and based on maximum amounts to minimize volatility but also be able to get some profits we play in a position.
As I mentioned today we have 150 long dollar.
Amit Mehta
Okay. So you are long dollars banks.
And then can you – the mismatch in sol is the LDR ratio that you refer to basically?
Fernando Dasso
The loans to deposits, well, we always actually we land on the longer term basis. Yes there is – it is [indiscernible] mismatch.
We land on our longer term – it’s tenue.
Amit Mehta
Right, okay, it’s tenure. Okay.
And what’s the mismatch in terms of tenure what kind of duration mismatch are you running?
Fernando Dasso
In dollar terms we are matched in tenure as well and in local currency we must have a long – we must be long assets for the on the average a duration of 2 years, 3 years. And liabilities must be very short 900 days – 180 days.
Amit Mehta
And I mean how far are you comfortable stretching that tenure mismatch from here?
Fernando Dasso
We do have some measures, which are sub-listed by our Board as to how much risk we can take in tenure and so it’s a certain amount which is just obviously a smaller [indiscernible]. It’s difficult to measure the amount of risk you can take in duration.
We do on the right local currency mortgages that go – have an average life of 7 years and we don’t necessarily match fund them. But the overall duration of our assets in local currency is closer to 3 years and the average duration of liabilities in local currency is closer to 90 days, 180 days.
Amit Mehta
Okay. Thank you very much.
And can I just one last quick – one quick follow-up question in terms of the capital build, if – how will you balance the growth rates versus the capital build I mean which one do you think about there is a minimum capital accumulation you want to do a year that caps your growth rate in terms of asset growth for – how do you strike that balance?
Fernando Dasso
Well, no. We will not sacrifice growth for capitalization.
If we have established it we want to reach core equity Tier 1 of 10% in 2016 give or take a couple of months. And if we are unable to reach that with our own resources which we think we can we would find capital from other sources.
We would not sacrifice market share of growth because of lack of capital.
Amit Mehta
Okay. Many thanks.
Thank you.
Operator
We have no future questions at this time. I would like to turn the call over the Mr.
Walter Bayly, Chief Operating Officer of Credicorp for final remarks.
Walter Bayly Llona
Sure. Thank you very much for your patience and for joining in this the call.
Just a quick summary, in about the middle of 2013 it became obvious to us that there were a couple of elements that required us to change or to adjust our policies. It became very clear that the country was going to grow less and the financial system was going to grow less.
The country is going to grow less because of the reasons we know. And also it’s important to take into account is the level of bank activation or penetration of the banking system in Peru has increased in the past decade.
So we are now at levels close to Mexico and almost reaching Colombia. So even though there is still room to grow, we have advanced a lot in level of penetration of the banking system.
Throughout this period we have gone through very, very large growth periods in which year after year after, our assets were growing 25% 20%. And it’s clear that, that would not be the case going forward.
Thus in 2013, we decided to adjust and refocus the bank and Credicorp through several initiatives. Throughout this period of growth, we have been very focused in capturing all the growth that has happened in making sure we have presence in every market, in every product, in every each.
We decided to take a step back and look at all those different initiatives that we have started and really reevaluate each of those initiatives market segments and product and we have started to scale down what that have been less profitable. Clearly, Tarjeta Naranja is one of them.
We also have the brokerage released, which we are in the process of finalizing the sale. We had an agreement with Mobistar to provide charts for low-income population, which we have scaled back.
We decided to do the joint venture with BanMédica to faster the management skills required to run health services. That was the learning curve.
It was not going to be hard for us. So, we have scaled back lending in sub-segment, for instance, in the low-income our non-payroll below PEN1000, we have scaled back our efforts.
So, we are in the process of readjusting the bank and Credicorp for this new reality. Throughout the period of growth, we have not paid a lot of attention to efficiency.
And we have lost some competitiveness vis-à-vis our competitors. We have started an initiative, which has proven to be very successful.
So, we are refocusing the bank to be successful in this new environment as it was in the past environment. This is we are way into the second year of adjustments.
We think we will start to see a lot of benefits this year, particularly as efficiency starts to materialize, as our risk management tools become more better utilized in the day-to-day operations. So, we have had a big effort in cleaning up our balance sheet throughout last year and refocusing our organization.
We think we are all very well positioned to capture this new area of more subdued growth, but we are very confident that we can maintain the 20 plus return on equity at the Credicorp level and 24 plus return on equity at the BCP level. Those are the two drivers that we think are within our reach and we have been working diligently to achieve those objectives.
Again, we thank you very much for your patience and for joining us in the conference call. And with this, we say goodbye.
Operator
Thank you. Ladies and gentlemen, with this we conclude today’s conference.
We thank you for your participation. You may now disconnect.