May 10, 2015
Executives
Fernando Dasso - Chief Financial Officer Walter Bayly Llona - Chief Operating Officer
Analysts
Carlos Macedo - Goldman Sachs Philip Finch - UBS Saul Martinez - JPMorgan Tito Labarta - Deutsche Bank Boris Molina - Santander Carlos Gomez - HSBC
Operator
Welcome to the Q1 2015 Credicorp Earnings Conference Call. My name is Richard and I will be your operator for today’s call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.
Please note that this conference is being recorded. I will now turn the call over to Mr.
Fernando Dasso, Chief Financial Officer. You may begin.
Fernando Dasso
Good morning and welcome to Credicorp’s conference on our earnings results for the first quarter of 2015. In 2014, we focused our efforts on various fronts, including the acquisition of Mibanco and its preparation for the merger with Edyficar.
The turnaround of our SME business model, the improvement of our operating efficiency, the restructuring of Grupo Pacifico and the consolidation on the investment banking business. As a result, Credicorp reported net income of S/.
305 million in the first quarter of 2015, which reflects good performance in the main business lines. The aforementioned translated in turn ROE and ROA of 22.8% and 2.3% respectively.
Although the result in this first quarter includes extraordinary and non recurring income of S/. 107 after tax due to the joint venture signed between Grupo Pacifico and Banmedica, Credicorp’s profitability, excluding this effect, also translated into a solid ROAE and ROAA of 19.9% and 2%, respectively.
This result was in line with the organization’s objectives despite the weak results, boosted by the Peruvian economy in the first quarter, when the recovery expected by the end of 2014 did not materialize. Serious concerns about the slowdown of the Peruvian economy I would like to look at some of the more relevant macroeconomic indicators before examining Credicorp’s first quarter results in greater depth.
Next slide please. Although our medium and long term outlook remains optimistic, we have revised our focus for real GDP growth in 2015 downwards from 4% to 3.5%.
The reduction in our estimates was based mainly on three factors. First, the global economy performed below expectations during the first quarter of 2015, in particular in China where growth came in at 7%, the country’s weakest growth rate in the last six years.
Second, our investment confidence index, as well as other confidence indicators, continued to decline. According to the latest survey of macroeconomic expectations conducted by the Peruvian Central Bank as the business community waits to see more effective government action and third, public investment fell 29% year-over-year in the first quarter mainly as a result of a larger than expected decline in sub national investment.
Nevertheless there are still positive factors that we will need to consider like, the better performance in this year of the primary sectors where mining would probably expand 5.1% due to an increasing copper production, and agriculture and fishing will expand 1.2% and 16% respectively despite El Niño phenomenon. And the current positive effects of expansionary fiscal and monetary policies.
Next page please. It is very important to remember that Peru still has significant potential when compared to its peers.
Over the last decade, Peru’s GDP growth has outperformed those of –Latin America countries, mainly Brazil, Chile, Colombia and México in 9 out of the last 15 years. The MEF expects that Peru would outperform this year once again.
Economic governance has strengthened over the last 15 years leading to stable inflation and low public debt. The format has usually been within the Central Bank’s target range of 1% to 3% or the latter as you presented around 20% of GDP.
Moreover, the country currently has close to 15% of GDP in fiscal savings. Furthermore, the Central Bank lowered its inflation target range from 1.5% to 2.5% through 1% to 3% in 2016, 2017 implementing one of the most demanding targets in the region.
In addition, fiscal responsibility rules led to surpluses in areas of high growth. Let’s now review Creditcorp’s performance in this first quarter.
Next page please. Credicorp’s main performance indicators have evolved well and have begun to reflect the real potential of the organizations different business lines.
Profitability was excellent even if we exclude non-recurring income, as it is reflected in first, loan book growth of 2.2% quarter over quarter and 15.9% year-over-year that represented real growth of 0.5% quarter over quarter and 10.7% year-over-year. Despite a sluggish economic scenario, loan book expansion is in line with our estimate for the first quarter.
Considering that seasonality of loans, the seasonality of loans, that typically reach the best growth dynamics in the second half of each year. Second, an increase of 4.6% quarter over quarter and 27.8% year-over-year in net interest income despite a low growth in interest income from loans.
Third, a solid net interest margin that reached 5.75% 9 basis points higher than the 5.66% reported in the fourth quarter of last year, 0.55 basis points observed in the first quarter of last year. Fourth, regarding non financial income the significant increase reported in this line which was not only a result of the non-recurring income from the JV with America, but also of growth of 6.7% also in the quarter and 51.6% year-over-year in gains on foreign exchange constructions which represent a core income item that compensated for the low increase in paying.
Fifth, progress the operating efficiency which was reflected in an efficiency ratio of 40.7% this level which was in line with expectations, fell below the 43.3% offset in the fourth quarter of last year and was similar to the 40.8% registered in the first quarter of last year. Sixth, improved performance of the insurance business as shown in its gross ratio that decreased from 63.6% in the fourth quarter of last year to 56.6% in this first quarter.
Seventh, the income generation was more than enough to compensate the higher cost of risk that increased from 2.19% in the fourth quarter of last year to 2.46% in this first quarter, due to a more conservative approach in an economic scenario that was less dynamic than what we anticipated. Next page please.
Credicorp’s total loans expanded 2.2% and 3.9% in quarter end and average daily balances respectively. Both quarter end and average daily balances grew close to 16% year-over-year.
The aforementioned we presented real growth excluding the effect of exchange rate of 0.5% quarter-over-quarter and 11% year-over-year in quarter end balances and 2.4% quarter-over-quarter and 9% year-over-year in average daily balances. Mild growth quarter-over-quarter was due to seasonality which calculated fourth quarter that registered the positive impact on loan expansion of Christmas campaign and first quarter which incorporate the effect of payment for amortization of loans originated in those four quarters.
The analysis by business segments shows that wholesale banking continued to lead loan expansion with an increase of 4.8% quarter-over-quarter and 20.4% year-over-year, which wasn’t primarily to medium and long term financing. On the other hand, [audio gap] the quarter and 11.8% year-over-year that was attributable to loan expansion [audio gap] segments which offset the construction in the SME-Pyme segment.
The latter reflected the payment and amortization of loans granted in the year-end campaigns. Mibanco’s consolidated loan portfolio measured in average daily balances posted growth of 1.4% quarter-over-quarter and 5.3% year-over-year.
The relative low growth rate include the effect of first the transfer to BCP of leasing loans, second the seasonality explained above for the SME-Pyme segment and third, the merger process that experienced the company. The analysis by currency showed that local currency notes grew 6% quarter-over-quarter and 20% year-over-year, which was in line with higher demand for local currency loans and collective efforts to dollarize our loan books that we began at the end of 2014.
The aforementioned offset the decrease of 3.5% quarter-over-quarter in foreign currency loans but remained flat year-over-year. The chart at the bottom of this slide shows that the allocation of the loan book by business lines on an annual basis.
As you can see we have managed to reduce foreign currency loans across the board, which in turn increases foreign exchange risk on credits. Next slide please.
In terms of portfolio quality, the PDL ratio increased 7 basis points to situate at 2.58% at the end of the first quarter. It was mainly attributable to an increase in the PDL portfolio in SME-Pyme and SME-Business segments within BCP as well as Mibanco and BCP Bolivia as we will explain later on.
In the year-over-year evolution the PDL ratio remain almost flat with a reduction of one basis points. The NPL ratio increased 7 basis points quarter-over-quarter to situate at 3.40%, this was due to the fact that we continued to refinance loans mainly of SME-Pyme clients, nevertheless NPLs grew by 4.6% quarter-over-quarter versus 7.6% in the fourth quarter of last year, which shows a deterioration in the face of growth despite the still sluggish recovery of economic activity.
The coverage ratio for PDL and NPLs remain stable at 165% and 125% respectively due to a 15% increase net provisions for loan losses which in turn is explained by the increase in delinquency for the segments aforementioned as well as the higher provisioning required in line with the duration in the debt service capacity of a few isolated borrowers in corporate banking related to the gas and oil sector and to the Brazilian case that involved construction costs. Next slide please.
This chart shows the evolution of PDL ratio by the business lines. As you can see the increase in Credicorp PDL ratio comes from the duration of first, SME-Pyme, PDL ratio reflects not only the maturity of refinance loans granted in the second half of 2014 but also the construction in its loan book which exacerbated the deterioration of this ratio.
Second, SME-Pyme ratio shows the interest for few large clients that represent isolated datas with a high level of coverage in terms of collateral. Third, mortgage loans also registered an increase in the PDL ratio in line with a maturity of MiVivienda loan book.
The MiVivienda are government supported mortgages. It is important to know that the increase of 630 basis points quarter-over-quarter is smaller than the 12 basis points growth of the fourth quarter.
Fourth Mibanco consolidated PDL ratio showed high delinquency of old vintages that you reach a peak by the end of next quarter. This affects our pay the low growth rate of the loan portfolio as we explained before.
Fifth in the case of BCP Bolivia the higher PDL ratio is explained by some deterioration of the SME-Pyme on consumer loans. It is important to highlight that BCP Bolivia’s PDL ratio is still below the Bolivian system's ratio of 1.79%.
On the other hand, some business segments have shown further improvements in delinquency such as first, auto banking, whose PDL ratio fell 6 basis points quarter-over-quarter even though the PDL portfolio of corporate lines grew it was offset by the significant loan expansion we sought in our reduction of a PDL ratio. Second, the risk profile of the consumer portfolio also improved quarter-over-quarter due to an increase in PDLs and the good growth phase of the loan book.
The lower delinquency reflects the functioning of fixed models and policies implemented in 2014. Third, the credit card segment also continued to improve its PDL ratio and reflects a 14 basis points decline quarter-over-quarter given that loan growth outpaced the slight expansion of the PDL portfolio.
Next slide. As we mentioned before our cost of risks increased above the level we expected, as a result of the significant increase of 14.8% quarter-over-quarter of net provisions for loan losses, that outpaced the expansion of 2.2% quarter-over-quarter in total loans.
The higher level of provisions is explained by first, the increasing delinquency of the segments aforementioned, second the higher provision requirement in line with the deterioration in the debt service capacity of a few isolated borrowers in corporate banking related to the gas and oil sector onto the Brazilian case that involved construction company and third the weak growth of the Brazilian economy in the first quarter of 2015 after a significant slowdown as experimented in 2014. Next slide please.
Net interest income grew 4.6% quarter-over-quarter and 27.8% year-over-year which was mainly due to higher interest income from derivatives and securities and to a lesser extent from interest income on loans and a decrease in the pace of growth of interest expenses due to the increasing use of Central Bank instruments as summed [ph] in not only to expand loan book but also to de-dollarize it at a lower funding cost than that of timely forces. This evolution led the interest margin to increase from 5.66% in the fourth quarter to 5.75% in this first quarter.
Nevertheless it is important to know that the slight expansion in NIM is derived from difficult to sustained sources that have compensated low interest income on loans, which is attributable to a seasonality that affects the expansion of the loan book as explained before and the fact that the growth reported this quarter is mainly concentrated in lower margin loan books. Next slide please.
On the funding side Creditcorp’s banking business slightly decreased its funding cost from 2.10% to 2.03% quarter over quarter. This in turn reflects the strategy of the Peruvian Banking subsidiaries BCP and Mibanco, which have reduced their funding cost by first, including the use of Central banking instruments not only loan expansions but only to de-dollarize the loan book, and second the positive evolution of low cost demand and saving deposits.
Third, low cost funding sources have partially replaced bank deposits in the last quarter. In terms of the loan to deposit ratio for the banking business, it was slightly better than the level registered in the fourth quarter of last year.
This was due to a higher growth rate of deposit as compared to that of total loans. In the particular case of BCP, its total loan to reported ratio also reduced slightly but the local currency ratio deteriorated from 115% at the end of last quarter to 119% at the end of this first quarter.
The latter was explained by the significant expansion of the local currency loan book as compared to the increase in local currency deposits. Local currency loan growth reflects not only the higher demand for local currency loans but also the stronger emphasis put on the de-dollarization process in the first quarter in minimizing the foreign exchange rate on credits.
Next page please. This slide shows the evolution of Credicorp’s non-financial income which registered a significant increase not only as a result of non-recurring income from the JV with America, but also of growth of 7% quarter-over-quarter and 52% year-over-year in gains of foreign exchange constructions of core income items that compensated for the loan increase and fee income.
In terms of fee income which is a key component, it remains stable quarter-over-quarter. The fee income from the asset management business for Prima AFP and ASB increased but it was offset by a decrease in BCPs income level which in turn was to primarily to seasonal factors at year-end when the transaction level peaks.
In the year-over-year comparison, fee income grew 12.6% due to on-going income generation at the different Credicorp’s subsidiaries. Non financial income also includes 147 solid gains from the joint venture between Grupo Pacifico and Banmedica that is registered under net gains from proceeds.
We can break down this income in three items which are non-recurring income due to a positive impact of a transaction which revalues the company’s network of S/.144.2 a contribution of 50% of net income generated by EPS which amounted to 5 million in the first quarter and a reduction of 50% of net income generated by medical services of net S/.2.4 for this quarter. Next page please.
On the insurance business before we explain its performance it is important to note that financial figures mainly reflect the accounting effect of the JV with America. In terms of net earned premiums that increase quarter-over-quarter is completely explained by a deduction of EPSs net earned premiums due to the JV.
This effect was generated by the expansion of expansion of Pacífico Vida’s net earned premiums and the slight increase of Property & Casualty. The improvement in Pacifico Vida’s net earned premiums was a result of higher level of individual annuities and due to the tranche obtained from the tender of disability and survivorship insurance for pension funds.
On the other hand, net claims also fell quarter-over-quarter as a result of PPSs effect and a reduction of net claims of the P&C business, in particular car insurance. However, Pacifico Vida’s registered higher claims as a result of the reserve required for the disability and survivorship insurance business.
An analysis of the underwriting result by subsidiary reveals that the Life business’s result declined due to the need to higher claims that outpaced net earned premiums as explained before. Conversely, Property &Casualty achieved a better underwriting result that showed the positive impact of the strategies implemented in 2014 in terms of pricing, risk assessment and underwriting.
Next page. On the operating efficiency front this quarter results show a significant decrease due to lower administrative and general expenses which was mainly attributable to a seasonality of these items in comparison to fourth quarter when it reached its peak and the high level of non-recurring expenses registered in the last quarter of 2014.
Consequently the efficiency ratio fell to 40.7% which represented a significant contraction quarter-over-quarter. In year-over-year terms the efficiency ratio was flat despite a 14.9% increase in operating expense.
Hello we would assume in page 15. On 2014, we were focused on preparing Mibanco and Edyficar for the merger that took place in March of this year.
[audio gap] chart of this slide shows some figures of the consolidated entity that represents the fifth banking institution in Peru with the market share of 20.9% in the SME-Pyme segment as of February 2015. Its loan book accounts for 7.5% being [Indiscernible] would stand for close to 10% of Creditcorp’s loans at the end of this first quarter.
In the first quarter of this year Mibanco’s net income reached S/. 41.5 million which will set a better performance after the five non-recurring expenses of last [ph] quarter related to the efforts to implement the difficult business for all of Mibanco and to capture the synergies between most institutions.
This translated into an ROE of 14.4% for this first quarter. Next page please.
The contributions chart for this slide shows a better performance achieved across almost both the periods whose ROE start reflecting a level of profitability that the businesses should maintain and in some cases such as Mibanco, Creditcorp [Indiscernible] should improve in the following quarters. Finally, if the economic scenario performs as we expect we will lead the potential for growth will materialize for profitability by current standards.
With this comment, I would like to open for the Q&A
Operator
Thank you. [Operator Instructions] Our first question in the line comes from Gian Costa from Itau [Indiscernible].
Please go ahead.
Unidentified Analyst
Good morning guys, congratulations on the results. I have a few questions.
First, do you expect to see any improvement in the EBITDA ratio of the SME segment going forward? And second, we observed that the loan to deposit ratio in service increased to 122% in First Q 2015, do you believe that the essential bank would stop providing local funding through repos and swaps or you could face an increase in the cost of funding?
Fernando Dasso
Okay, first we will address NPL and ratio question. We just hardly believe that we approximate last year both in terms of the morals, the whole system, elections in the SME arena will be into bring results.
We already are looking at those results. However, part of those delinquencies are really all delinquencies and they are under the tip, they are all loans.
What we are seeing is better delinquency ratios in what we call new delinquencies. So that will probably show in the next month.
Second, you were talking about the Central Bank and on funding in service. Central bank is on the one hand providing ample sources of funding in service to financial institutions but on the other hand restricting the liquidity in solids because of the own policies towards especially the exchange rates.
What they have already told us is they got a very important set of deposits from public institutions from their own institutions that they will begin to auction to the market. Those funds are around S/.
30 million and those will definitely bring new liquidity service to our market and we’ll be in service [Indiscernible] liquidities.
Unidentified Analyst
Okay. Perfect.
Thank you.
Operator
Thank you. Our next question in the line comes from Carlos Macedo from Goldman Sachs.
Please go ahead.
Carlos Macedo
Good morning, Fernando; good morning, gentlemen. A couple of questions, first question on the Mibanco Edyficar merger, we're seeing here PEN40 million in the first quarter, that's stronger than the first quarter last year, certainly stronger than the fourth quarter of 2014.
14% ROE, still increasing NPLs, what is the outlook for this business? Where do you expect it can get in terms of the NPL ratio, ROE going forward and how quickly do you think you can get there?
Second question, going back to the capital ratio, we saw that the fully loaded common equity Tier 1 after the transfer of the BCI shares is now at 7.8% are there other actions that you can take to raise that ratio without issuing capital? We understand that you're still not under Basel III in Peru, but is there anything you can do there to address that capital ratio, which is lower than peers in the region?
Fernando Dasso
Okay Carlos, I will begin with the first question. As you know Mibanco actually renew Mibanco is in our process of transition.
On the one hand it is already institution we have only system, it has only one brand. It operates like one institution, but on the other hand we are still putting together two different cultures of competitors for the last ten year, ten, twenty years.
So that’s still a transition period but what we are looking at is a better results for the month by month. We are actually putting or as you can say [Indiscernible] the company and it will be really functioning as one institution very soon in terms of commercial, in terms of collections, in terms of working as a foreign company and that will definitely bring ROEs to better levels.
However, I cannot promise ROEs but we believe that they will come to very healthy levels in the near future.
Carlos Macedo
So I know you cannot promise, do you think it can go back to the levels where Edyficar was before the merger?
Fernando Dasso
If you see Edyficar was around 30% before the merger. Those levels we can further reach those levels, we have taken into account what we call the synergies, but that will take a while, will probably some months to reach levels of the mid-20s I think.
Carlos Macedo
Okay. And then, on the contribution, in other words, could increase from PEN40 million a quarter to something much -- sorry?
Fernando Dasso
I didn’t listen to your question.
Carlos Macedo
Sorry. So the contribution could increase from something like PEN40 million a quarter to, if you go to 25% ROE level, there is something like PEN60 million or PEN70 million a quarter.
Fernando Dasso
Yes those are the mathematics, yes.
Carlos Macedo
Okay. Thank you.
And now on the capital, please.
Fernando Dasso
On liquidity Tier 1. Yes, we have now reached a low of 7.8% after serving the package we have in BCI our subsidiary, that package was in BCP and it was sold to Creditcorp, so now our renewals are doing better, and we have reached that 7.8%.
As you’ll probably know our BIS the ratio is our regulatory ratio, in Peru in the Basel II and we are fully complying with that, but now you want to talk about Basel III standards, that’s an internal ratio and what we plan to reach is that 10% level in economic to tier 1 at the end of next year, end of 2016. We feel that we will be able to reach it with internal sources because we will continue to grow faster which should probably grow by having loans or loans and interest margins will grow by 30%, 40% and we will attain for around say 20% so we will be able to reach that common equity tier 1 with internal sources.
Carlos Macedo
Okay. Just can you give us, is there an update on the timetable for Basel III in Peru?
Fernando Dasso
There is not really a timetable yet, we are actively talking in a very constructive mood with the regulators and they are very aware of Basel III and the different sets for [Indiscernible] but there is really no timetable yet. As you know we are at the end of this Peru Government Superior potential period.
We believe that will probably change in the next period.
Carlos Macedo
Okay, thank you.
Operator
[Operator Instructions] Our next question in the line comes from Mr. Philip Finch from UBS.
Please go ahead.
Philip Finch
Hi, Fernando. Thank you very much for the presentation.
A couple of questions from me as well. First is the dollarization, the percentage of loan books in dollars.
In the presentation slide 6, you give a very helpful breakdown by the various segments. What is it for the whole bank or for a whole loan book, the percentage of loans in dollars and specifically how much of that book is supported by dollar revenues for the borrower as opposed to those may have local currency income.
So i.e., where is that potential FX credit risk? The second question is regarding your cost of risk which you said was higher than expected in the quarter.
Just going forward, should we assume it to be at this current level at 2.46% or is that artificially high? Thank you very much.
Fernando Dasso
First I’m going to address your first question on dollarization or de-dollarization, which I’ll go back to chart 6, sorry, what did I tell it here that different segment [Indiscernible] especially in corporate and middle market we have many companies, you have to acknowledge that this economy is truly a dual economy and companies and people operate both in dollars and so is our local currency. That effect is more evident in corporate and middle market and we probably have in corporate and middle market around 30% of companies that produce income in dollars rather than in [Indiscernible] and that is the case.
And also in the mortgage arena, we have some individuals, especially the high net individuals that have income and savings in dollars. So if you look at this chart, at the bottom part of the chart where we really have a change I think a bit is especially in what they call the SMS business segment because those are small companies, more fragile because of being smaller and we have really to turn those portfolios into dollar factor.
On the other hand if you look in solid spectrum, on the other hand if you look at the other portfolios we are worry about the mortgage portfolio which is already two-third solid and those in dollars are old loans where loan to value are really low and especially given to high net worth individuals. So that’s not a problem.
It will continue to de-dollarize but our most important segment will need change in the SME business. Corporate and middle market, if the dollar continues to strengthen against the sol, they have the pressures.
If you noted they know especially corporate [ph] guidance and they will turn slower but to getting to turn to some of this in their norms. That's in regards to the first question.
Philip Finch
Okay. Can I just follow up on that, please?
So just on that basis, looking at your chart, is it fair to say that around 40% of your loans are in dollars and maybe 15% of total loans are unsecured in the sense that you don't have dollar revenues backing that?
Fernando Dasso
Yes. That is true.
But some of those loans if you talk about Credicorp, already $19, we consider them to be foreign currency, but they are in petro [Indiscernible] and. If you look at BCP standalone, it’s probably around 39% dollars and 61% soles already.
And we are in the phase [Indiscernible] moving into the system or depolarizing into these loans. However, I have to you that in corporate and middle market many of these loans have collateral.
We are very conservative in situation and ask for collateral, a high collateral I would say 9 or even other types of collateral and that some more component over this business.
Philip Finch
Okay. Thank you.
And you're going to answer that second question.
Fernando Dasso
Second question on the cost of risk, as you know we are in the process of extending our business into more risky segments. We were in the past a very traditional used to work, especially in the corporate arena and now we are extending our business into retail.
These last quarter’s have not been a reflection of the first quarter has grown more than retail. But we feel that in the future we will need to get more into retail and that will involve probably occasions and more cost of risk.
But next part of the business we are in. Second, we have very important emerging population and consumer loans, anatomy loans is concept continues to grow will be more important in our portfolio.
So we will, I mean, at the end what we are looking at if the net income and ROE, however in that process, cost of risk may drop a bit.
Philip Finch
Thank you very much, Fernando.
Operator
Thank you. Our question will come from Mr.
Saul Martinez from JPMorgan. Please go ahead.
Saul Martinez
Thank you. I have two questions.
First, I wanted to follow up on your response on the auctions. I believe you said PEN30 billion of soles, can you elaborate on that?
Has that been decided, what is the timing? Do you expect to gain your fair share of that?
What do you expect in terms of prices? Will it increase cost of funding or not?
Just it seems like a very relevant point. So I just want to get more color as to whether this is actual public policies at this point or whether this is something that is being discussed and still in the process of occurring.
So that's my first question. Secondly, on your cost of – it's just a follow-up.
I'm sorry for following up, maybe I didn't hear it very well, but when I look at your cost of risk, it did increase a bit this quarter as you've mentioned, for the reasons you've mentioned, but that was in spite of very high loan loss recoveries, your recoveries more than doubled quarter-on-quarter and in fact gross loan loss provisions grew 26% sequentially and 54% year-on-year. Can you comment on that, what's the sustainable level of recoveries one, but also what you expect for your cost of risk in the coming quarters?
Given the high level of recoveries I may have without those high level of recoveries, your cost risk would have gone up even further. Should we expect your cost of risk to at least stay at these levels, improve, go up a little bit?
Just, I apologize if you answered it, I didn’t rose in the previous question, but I had a hard time really following what exactly was the point?
Fernando Dasso
Okay. I’ll begin with [Indiscernible].
I will now – I have to make some statements, like eight years ago the government decided the funds from the state-owned companies had to be reported at the Central Bank, for many different political reasons. Before those funds were released in the different financial institutions.
So what is the problem now? The problem now is that its financial situations need more sort of funding because loans are already given in soles, while the deposits are beginning to grow in dollars.
This is because of the exchange with the dynamics that we’re leaving [Indiscernible]. On the other hand the Central Bank once this exchange rate that much to be controlled this exchange rate.
So, what it's doing really bringing solid liquidity to the market really bit by bit, so there is scarcity of liquidity and solidity in the market and that’s why we are having this situation in our balance sheet. However many of these institutions, financial institutions may talk to the Central Bank and they said we have a very constructive relationship with them and they haven’t acknowledged that they need to send some more funds, solid funds into the market.
My belief is that they have really decided that and they are putting together the logistics to make the options. While we feel we had at the end of this month, at the end of May destructions will be in to be put in place.
But that’s really where those funds will really important for the system and also for the government and the Central Bank because they are trying to bring in an expansionary and monetary policy and this is really a way to do it. So we feel confident that they will do it.
Saul Martinez
Has this been announced or is this or have you just gotten strong signals that this will occur very soon?
Fernando Dasso
We feel very strong it will occur soon.
Saul Martinez
And the PEN30 billion that you mentioned, is that based on -- because I think in the release you said there's PEN80 billion in the system, the PEN30 billion that you mentioned?
Fernando Dasso
Yes. But part of it is in dollar – in dollar currency.
Saul Martinez
Okay.
Fernando Dasso
So we release that qualities [ph] also remain little more on that, but we one are really conservative until around 30.
Saul Martinez
Okay. And you would expect to gain some share of the PEN30 billion based on your market share or you said it would be an auction process.
How would that auction process work do you think?
Fernando Dasso
Our natural share in market is around a third or maybe 30%. We probably would try to get better.
Saul Martinez
Okay, great. All right.
That's very helpful. And I’m sorry, on the cost of risk if you could just elaborate on your views there in light of the high gross loan loss provisions that you had this quarter?
Fernando Dasso
In terms of we just told – in terms of cost of risk, we believe that we will continue to improve in some segments. However, as I said we are extending our business and being more focused in retail and retail requires more risk.
However, we do get vintages, especially to very early events we’ll be chasing a different retail segments, we see better numbers. I don't know if I’m answering your question, but what we see is that in the next month, in the next quarter this will really begin to show in the numbers.
Saul Martinez
Okay. What is the more normalized level of recoveries because it seems like you had a very big number this quarter of about PEN122 million?
Fernando Dasso
We feel that if you see our provisions loans recoveries were like PEN57 billion service.
Saul Martinez
Okay.
Fernando Dasso
Yet, PEN57 million last quarter and PEN102 this earlier quarter. We believe that PEN132 is and out layer.
You got a great, I would say a great quarter, very cyclical, did at least say here, there is more money in the streets in fourth quarter especially in December, people receive more money in their payrolls, in their payments. And also in March when people [Indiscernible] for payments.
However we feel that Peru will be around say from PEN60 million to PEN70 million...
Saul Martinez
Great. Thank you so much.
Operator
Thank you. Our question comes from Tito Labarta from Deutsche Bank.
Please go ahead.
Tito Labarta
Hi. Good morning.
[Indiscernible] Couple of questions. First on your net interest margin, we saw a spike because of some derivatives income that you mentioned.
Just want to get a little bit more color on that? And also on the loan margins which fell in the quarter, you mentioned I think it's a little bit because of the loan mix.
But if you could just give a little bit some more color on how you see that evolving going forward because it seems to have fallen about 30 basis points, 40 basis points? Is it just a mix or are you feeling some pressure on spreads?
If you can give a little more color on the margin, what happened with the derivatives, the loan margins, and how you see that evolving? And then my second question, I guess just following up on the asset quality and provision.
With SME NPL, we've begun to see some stabilization there the last couple of quarters, so I was a bit surprised that that picked up again. Was that just some seasonality or what really makes you feel comfortable that this time is the peak?
I mean we've heard that before so just want to get a little bit more comfort that can improve going forward? And then an up provisions, you mentioned there were some provisions I guess with some Brazil corporates improve, so could you quantify how much of the provisions this quarter were related to that and is it safe to assume those are like one times and we wouldn't expect those going forward?
Thank you.
Fernando Dasso
[Indiscernible] Next about net interest margins and the derivative income. In reality the derivative income is really income and I will tell you how to meet our goal [Indiscernible].
This is potentially because some of our especially investors, foreign investors that have papers, derivative papers with soles make forwards to follow those papers. We actually sale sell those foreign contracts and we want to cover those foreign contracts and to cover them the Central Bank because of these policy of trying to control exchange rate is selling what they call exchange slots, this is a word in Spanish called swaps cambiarios or exchange soles and these swaps, those exchange swaps so we cover our position.
But we go them with the market, because we are – the sale of those like 200, 250 basis points less than what we sell to our clients, so that’s really the business. We have a window there.
We are taking advantage of that window, but each release not as speculative derivative interest but rather coverage business which we are [Indiscernible] Central Bank. That’s the reason we are doing in derivatives.
Your question was really talking about net interest margins, the interest income. What I’ll tell you there, the first quarter of the year, each year is not great quarter compared to the others in terms of interest income, especially because its summer time here and it also because those loans really we gave in the fourth quarter of that year Christmas campaign or this campaign at the end of the year for many companies are they during this first quarter.
So this is not a great quarter to talk about interest income. We should definitely improve this next quarter.
Tito Labarta
Okay. So, then would you expect the derivatives income will go away, but the loan interest income will come back so should we assume stable margins from this going forward, is that a fair assumption?
Fernando Dasso
I mean, at one point derivative income will diminish, we don’t when. It will be when things change especially in terms of the exchange rates.
We don’t know yet what’s going to happen there. Interest income on loans should continue to improve, especially if the country grows a little better than we have expected.
However that’s not situation now. Last year we grew about 2.4% as a country, the GDP of this country and this year it will be probably around to 3.5%.
This first quarter has 1.5% and [Indiscernible] a little bit in the foreign policy.
Tito Labarta
So then the derivative income may not completely go away in the next couple of quarters so margin can actually expand at least in the short term?
Fernando Dasso
Yes. We should – you know the mix should be changing in the next quarter.
Tito Labarta
Okay. Fair enough.
And then the second question which I don’t think you heard that well you mentioned was in terms of the SME NPLs because we have begun to see some stabilization and you had mentioned this is a segment you’ve been working on. Was the deterioration this quarter mainly due to seasonality or how comfortable you are, that this is the peak trend because we've heard that before and it hasn't happened so could there be more surprises there?
And then on the provisions, how much were related to the Brazilian corporates in Peru because I imagine that would be sort of a one-time provision and can go away?
Fernando Dasso
First we have to divide it between wholesale and retail. In the wholesale banking, we have someone isolated pieces, some of them are improving.
We feel very comfortable at that portfolio. We performed well.
In terms of retail, what we are looking at [Indiscernible] numbers. We are aware that this country is not growing as it should and also that we will be in to [Indiscernible] process, so, investment, private investment in Peru to diminish a bit.
We've worked for many months now in this area with all the different segments and numbers are beginning to show. But we don’t want to promise anything especially in the very traditional in terms of second half.
Tito Labarta
Okay, fair enough. Thank you.
Fernando Dasso
Sure.
Operator
Thank you. [Operator Instructions] We have question from line of Boris Molina from Santander.
Please go ahead.
Boris Molina
I would like to go back to the issue of capital because there is this perception about this headline 7% Tier 1 capital ratio being low. Now, when you try to make an estimation of your capital under fully loaded Basel III, your capital ratio is obviously not that low.
But you mentioned you’d have an internal number that your target is to achieve around if I’m not wrong you said 10.5% by the end of next year. What is the current number now because we think that there is no capital deficit that it's the Peruvian regulator that imposes additional capital ratios that increases risk weighted assets to almost 100% of total assets and this is obviously not the case or will not be the case if the country goes to Basel III?
So our experience tells us that regulators are overly keen in being very conservative, it's very difficult to see them changing their policy and going to an environment where your capital ratios not 7% [ph], but closer to 10% right now. So what is the current level of your estimate of a fully loaded common equity Tier 1 under Basel III and do you really expect that the Central Bank is going to – the regulator is going to go into this type of environment basically which is more relaxed than what they have today?
Fernando Dasso
We are following I’d say internally Basel III fully loaded ratios. As you know for 2015 Basel III only requires 40%.
But if you – and if you fully loaded, a 100% loaded in 2018. If you look at our number on a fully loaded basis, we look at 7.84% now.
But if you look at in say with a low, with a 40% it will be around 4.18% versus 41%. So we feel pretty comfortable that we’ll able to reach 10% fully loaded at the end of next year or maybe at the beginning of 2017.
Boris Molina
Okay. Sorry, there was some noise in the line and I couldn't hear those two numbers that you mentioned.
Could you please repeat it?
Fernando Dasso
Yes. Sure.
We are really working under Basel III fully loaded standard internally and that number right now for us 7.84%, but you would be working under partially loaded and the current load is around 40%, our number would be with reductions, yes, our number would be 8.41% right now. Now turn to next question.
Boris Molina
Yes. And what about the regulator because at the end of the day the tool that they would have if they were to scrap their current policy, they would have to go to a maximum of around 200 basis points or 250 basis points for you as a domestic CC institution.
So that would take the target probably towards closer to -- and it's the minimum for you guys closer to 11% or something more. So is this something that you think is probably going to be the case or how do you think about it?
Fernando Dasso
We feel that they are relate to I’d say 2015 or prior question, we feel like I really won’t change regulation during this government. As you probably know this government is changing in July next year, so since one change until that time.
However they are fully aware of Basel III and it difference with Basel II and they are working with us. They will probably issue some secondary relation to bring all the financial institutions closer to Basel III.
But if you want to change to Basel III standard they will need to change the banking law that implies going to Congress and we feel that this is not a political time to do it.
Boris Molina
Wonderful. Thank you.
And one follow-up on these auctions that you mentioned on these funds. What would you expect would be the relative cost of these trade lines that you're getting from the Central Bank versus the expected rate that you would get with these funds?
Is that going to be something that is going to expand your margins meaning that it is actually going to be lowering your cost of funds or do you expect that competition is going to take these costs higher than the current rate what you're financing from the Central Bank?
Fernando Dasso
When we refer -- the reference rate, which is an overnight rate that you know is 3.25%. we are actually right now getting some funding from the Central Bank two years, three years, four years, the rates overrun 350 to 4% with us.
So, that will be the current state of the market. We believe that they will be willing to because they are in this expansion policy so they would be only coming to five financial institutions rate that really is – let them implement the policy.
I can’t talk about this specifically on numbers because auctions are not in place now.
Boris Molina
Okay. I understand.
Thank you so much.
Operator
And our next question comes from Mr. Carlos Gomez from HSBC.
Please go ahead.
Carlos Gomez
Thank you very much, two questions. The first one refers to the joint venture with Banmedica.
This has taken care of one of the life insurance. Are there any plans to consider joint ventures or disposals in the other lines of insurance as part of the restructuring of the business and is there a timeline for that?
The second, going back to the capital question, you mentioned that you are sticking to your target of reaching 10% by the end of 2016. I have to say you do the numbers and it's not easy to get to that number.
Is there something inorganic that we are not considering, disposals or any other measure, and why does it have to be in the present existing -- why not take more time if you require more time to do it organically? Thank you.
Fernando Dasso
I’ll begin with the second question and I’ll let [Indiscernible] Head of Insurance and Health business talking there. On the first question we – as you know, it’s internal.
If we don’t reach at 10% at the end of next year we will reach it by the end of 2017 [ph] that’s really not – we have something you’re listing there. On the other hand, how will we reach it.
Our ROE in DCP is around say 20% to 25%, our growth in loan, the growth in capital and [Indiscernible] will be among 12% to 30%. So you can figure out that you have some excess capital if we continue to have that ROE in the coming months.
And that will be funds that we will need to raise sort of capital to those standards. On the second question, maybe if you can repeat it a bit because I don't hear exactly [Indiscernible] please.
Carlos Gomez
Yes. Sure.
It's very simple. You have reached an agreement with Banmedica for the health insurance business.
We know that as part of their restructuring of the insurance business you are considering changes; would you consider taking partners in other parts of the insurance business?
Fernando Dasso
Okay. Now currently the only area where we were looking for partner within the health insurance business and basically because we have done in to the provider side of the business, which is a business in which Credicorp had little or no experience.
The other lines of business we've been running them for while, actually in that regard we bought the partner we had, the original partner was AIG during the crisis and we took advantage of that and we'll continue to run those business well as part of Credicorp.
Carlos Gomez
Okay. Thank you.
Operator
At this time I see we have no further question in queue. I would now like to turn the call over to Mr.
Walter Bayly, COO for any closing remarks.
Walter Bayly Llona
Thank you all for joining us in this call. I just want to go over some of the recurring things that we have heard from you.
And unfortunately the quality of the communications is quite poor. So I hope we have appropriately understood your questions and you have been able to understand our responses and if that have been the case, please look out us so we can pursue your enquiries.
And again, I apologize for the quality of the communications. There are couple of subjects, as I mentioned, that have been recurrent that I would like to comment on.
One is the loan to deposit ratio, the loan to deposit of the bank has improved. The loan to deposit in local currency has deteriorated that something we do not like and something we are watching very closely, that is something that really does not keep me awake at night.
Actually the situation a couple of years ago in my mind was more destabilized. What I mean is that a couple of years ago the deposits, our loans in dollars were growing and we have to fund those in the international capital markets.
Today the situation is that our local currency loans are growing and we have to fund them today through the central bank. I’d rather depend on the Central Bank to give me local currency that depends on the international capital markets to give me dollars.
So clearly as I mentioned again this is something we do not like, it does not keep awake at night and this is something that is less worsen than we were a couple of years ago. The Central Bank have given us very clear indicative signs through several channels that they are gong embark on this option process that Fernando has mentioned.
Clearly they would not do all at the long time. They will slowly steadily going into the system and we expect to start seeing this in the next couple of weeks.
The prices of which those funds will be auctions obviously will depend on supply and demand. But clearly the Central Bank having a inflation targeting policy and a reference rate of 3.25% is obviously that they will manage liquidity so as to keep the stronger cost of funds relatively close to the reference rate otherwise inflation targeting does not make sense.
The second topic I wanted to mention is Mibanco. We are working well with the merger.
This is a year of transition. The target return on entity for that new entity as Fernando has obviously mentioned is in the mid 20s.
We expect to be there next year. We’re very enthusiastic about this investment and will expect to become the second most important subsidiary of Credicorp next year.
This year we still expect the volatility of results, as the portfolio continues to adjust, as we start slowly growing and as we start to digest some of the cost of the margins, the shutting down our branches, personal reductions et cetera. So, this year will still be a year of transition.
We're very satisfied that we are ahead of our old budget, but really this is still a year transition. We expect to provide more stable results now maybe the luck [Indiscernible] this year and clearly next year.
The third issue, cost of risk and quality of the portfolio. As Fernando rightly mentioned, we see the bank to launch the new loans that we are providing and they are clearly of a much better quality.
What has happened in this first quarter? And let me take a step back and how do we manage provisions.
Provisions, you can imagine, is a control panel in which you have several indicators. One, we do have to apply with provision requirements established by world growth local regulator.
We feel that the provisions required by the local regulator by the weight more than what are required on the wholesale part of portfolio but less that what should be provision in the retail side of the portfolio. In balance it does not affect us because we have a balance portfolio.
But again regardless of that we do have to comply with what the local regulator requires us to do and that is dare minimum that we have to keep. Second we utilize the provision methodologies stipulated under the National Financial Reporting Standard.
Both provision requirements do not provide a number but a range. And we had for a couple of years been at the middle of the range which those methodologies allow you to do.
The third is we do look expected losses which is a forward looking provision, but again as an indicator we got accounting standard today still do not allow for forward looking majors to be incorporated, but never the less that resulting that we to keep in our control panel. And finally, we compare ourselves with our competition.
What has happened in the first quarter are several things, one is that the quality of the retail portfolio is continue to improve and requiring this regulatory provisions and the quality of the wholesale portfolio was heard by some very specific wholesale because of what has been mentioned. Also those who expect would not be loss [ph] than most likely some of that could either start to revert in the next couple of months, because this are related to short term exposures.
What we did in the first quarter is that as we will see regulatory provisions coming down we decided to move in international financial reporting standards general provision from the mid range to the top end. Why did we decide to do that, it explains couple of panels that could affect that qualities of portfolio.
One the devaluation of local currency; two, the deceleration of the of the economy; and potential equity impact from [Indiscernible]. So we decided to do more provisions, that would have otherwise still in the range of what is accept by the National Financial Reporting Standard, but I think a little bit more conservative stand.
We will see progressions for coming down in the next quarter. The issue with Tier 1, again, local regulation as Fernando mentioned will most likely not change in the short term, but we are more concern and we are and we are re-commissioning [ph] ourselves with more international standards to the extent that rating agencies now focus not exclusively on local regulatory capital which we will leave probably [ph] but more on international quality capital.
And again, the issue, but we do have some lag is on the core equity Tier 1. We haven’t built it, we still have some assets that we can move around within corporation as we did with the BCI shares that will give us another boost and having a 20 plus or channel will be at the back level growing risk weighted assets at 12% still give up the margin.
We are confident that we will reach the numbers that we have stipulated at percent at the end of 2015 or the middle of 2016 without having issue new shares. We have been very firm about this.
We mentioned in every call that the pricing continues to be there. Again we are very confident, I have not seen the quality of our portfolio and the fundamentals of our business related to risks and costs I think good shape for many years.
Our subsidiaries are providing very good results and we continue to see upside there. Again we are very confident that this will be a very good year for Credicorp and we hope that we will be able demonstrate that in the quarters coming forward.
Again, we thank you all very much for joining us in this call. And we will hopefully see you at the end of the next quarter.
Thank you very much.
Operator
Thank you. Ladies and gentlemen, this we conclude today’s conference.
Thank you for your participation. You may now disconnect.