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Credicorp Ltd  (NYSE:BAP)
Q4 2018 Earnings Conference Call
Feb. 07, 2019, 9:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, everyone. I would like to welcome all of you to Credicorp Ltd Fourth Quarter 2018 Conference Call. We now have our speakers in conference. Please be aware each of your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. At that time. Instructions will be given to the procedure to follow, if you'd like to ask a question.

With us today is Mr. Walter Bayly, Chief Executive Officer; Mr. Alvaro Correa, Deputy Chief Executive Officer; Mr. Gianfranco Ferrari, Deputy Chief Executive Officer; Mr. Cesar Rios, Chief Financial Officer, Mr. Reynaldo Llosa, Chief Risk Officer; Ms. Francesca Raffo, Head of Transformation at BCP.

Now it is my pleasure to turn the conference over to Credicorps' Chief Financial Officer, Mr. Cesar Rios. Mr. Rios, you may begin.

Cesar Rios -- Chief Financial Officer

Thank you. Good morning and welcome to Credicorp's Conference Call on our earning results for the fourth quarter of 2018. Before we review Credicorp's performance in the fourth quarter of 2018, I would like to highlight some important matters that characterize this scenario in which we have operated in the last few months. Tailwinds for our businesses, first, we expected real GDP growth in the last quarter of 2018 to stand close to 5% year-over-year.

With this result, the economy will have grown around 4% in 2018, one of the best results in the region, an efficient sector, public investment and private mining investment were the main drivers of growth in 2018.

Second, there were important investment announcements in 2018. One of the most notable was the Qullaveco mining project in Moquegua for $5 billion.

Third, the average price of copper is up $2.96 per pound in 2018, which represented a four-year peak. The price ended at $2.7 per pound.

Headwind for our businesses. First, global economic activity decelerated in the last quarter of 2018. Second, through 2018, we observed an escalation of trade tensions between the US and China. This has implied risk for global economic growth. Third, in 2018 we observed several episodes of financial volatility that impacted our trading-related activities. On the local front, Peru registered a slight decrease in corporate output during the second half of 2018.

Lastly, the Lava Jato scandal has had negative effect on economic activity through a paralysis of certain investment projects and political uncertainty. With regard to the political environment, the referendum held on December 9th had no material impact on the business environment. Finally, the most important political event in 2018 was in March 2018 when President Vizcarra took office.

Please let's move to the next page, here I would like to discuss the evolution of the local economy in the fourth quarter.

In chart number one, you can see that GDP growth peaked in the last quarter in the year as mentioned in the previous slide.

In chart number two, you can see that domestic demand is estimated to have recovered in 2018 and reached a five year peak. In chart number three, you can see that local and international interest rates, which affect our funding cost and businesses decreased in the last quarter of the year, in parallel the Peruvian Central Bank reference rate has remained stable at 2.75% since March 2018.

Finally in chart number four, the orange line shows that total loans in the Peruvian banking sector expanded 10.2% in 2018, which represents the highest growth rate in three years.

Consumer loans expanded 12.6% in 2018, which represent a three year peak. It is important to highlight that quarter-end loan balances at Credicorp grew 10.3% in 2018.

Please, next page. Regarding the full year performance. There are important aspects of our lines of businesses I would like to mention. In the case of universal banking. BCP improved its pace of loan growth in all segments after low loan expansion in 2017.

The loan mix in the first half of the year put downward pressure on NIM but toward the end of the year retail banking accelerated its pace of loan growth, leading to a swift recovery in net interest margins.

Moreover, for the fiscal second year, the cost of risk dropped, leading to a subsequent increase in Credicorp's risk-adjusted net interest margin.

However, although income generation improved, the cost to income ratio deteriorated due to acceleration in the pace of growth of operating expenses, which was in turn registered particularly in the last quarter of the year and changed the decreasing trend of the efficiency ratio observed in previous quarters. We will explain this topic in detail later on.

BCP Bolivia reported a good level of loan growth and a reduction in provisions, however the funding costs and operating expenses increased and accordingly profitability for us.

With regard to microfinance. Mibanco posted a good level of loan growth although loan origination slowed down in the third quarter. The cost of risk was relatively stable in comparison to 2017 level even though it deteriorated in the second and third quarter. Mibanco improved its cost of risk during the last quarter. Moreover, Mibanco has improved its funding structure by increasing retail deposit share of total funding.

After significantly improving its operational efficiency in 2017 and 2018, Mibanco has started building capabilities to sustain business growth, which translated in an acceleration of the pace of growth of its operating expense.

Mibanco has started increasing its number of loan officers and building new channels leveraging Its digital capabilities. Regarding the challenges this subsidiary has faced, it is important to mention that the downward pressure in margin is due to competition.

With regard to the insurance and pension funds. The insurance business posted an increase in its contribution to Credicorp due to an improvement in the underwriting results posted by the life insurance business and to the good results of health business from the association with Banmedica, all the aforementioned offset the deterioration in the underwriting results of the P&C business as increasing net claims and acquisition costs were higher than the increase in net earned premiums. The pension fund business also improved its performance after recovering the profitability of its funds under management on those results. However, the tender for new affiliates that was held on December 2018 was not awarded to Prima.

In Investment Banking and Wealth Management, in 2018, wealth management income grew in Peru and Chile offsetting a decrease in income in Colombia. Additionally, total expenses remained stable although the cost to income ratio deteriorated due to a decrease in total income.

In the last quarter of 2018, Credicorp's Capital Chile posted an impairment in goodwill for PEN 38 million, which was mainly due to the adjustment of the discount rate.

Finally, the mark-to-market of proprietary investments deteriorated mainly due to the increase in interest rates.

Next slide, please. In this chart, you can see the most important figures of Credicorp's performance in the fourth quarter. Credicorp reported net income of PEN 957 million solids, which was 5.4% below the third quarter results of the previous year of the previous quarter and 10% below those registered in the fourth quarter of 2017.

The results represent a return on average equity and average assets of 16.3% and 2.2% respectively. The quarter-over-quarter evolution reflects the effect of the significant increase in operating expenses, which offset the favorable evolution posted by the net income, coincident with non-financial income and provision for loan losses.

The year-over-year drop in net income is attributable to three factors, an acceleration in the pace of growth of operating expenses and an impairment of PEN 38 million of Credicorp's Capital Chile, both reported in 2017. And the sale of ENEL shares in the fourth quarter of 2017, we generated income of PEN 163.7 million.

Finally, it is noteworthy, first the acceleration in the pace of loan growth and its positive impact in net interest income, which posted the highest quarterly growth rate in 2018 and second the improvement in cost of risk.

Next page, please. In this chart, you can see the full-year results. Net income reached a level of PEN 3.9 billion solids, which represented a return on to average equity and average assets of 17.5% and 2.3% respectively.

These results were 2.6% below those obtained in 2017 due to, first, the gain of PEN 444.7 million from the sale of two loans and equity investments, BCI and ENEL registered in 2017. And second but to a lesser extent, decreasing operating expenses and impairment at Credicorp Capital Chile.

However, it is important to highlight the significant improvements in core items such as the acceleration in the pace of loan growth, the significant reduction in cost of risk and the recovery of risk-adjusted net interest margins and expansion of fee income and gains on FX transactions.

Finally, in terms of capital ratio with BCP Standalone, the BIS Tier 1 and core equity Tier 1 ratios decreased due to a strong growth in risk-weighted assets in line with loan expansions.

It is important to remember that we keep Credicorp's level a reserve fund of approximately PEN 1.5 billion facilities, which is invested in liquid low-risk assets. This fund has the effect of reducing Credicorp's return on average equity by around 100 basis points.

Let's review the main figures and indicators in more detail. As you can see in chart number one, first, interest-earning assets measured in quarter-end balances remained relatively stable quarter-over-quarter and year-over-year. Second, there was a change in the composition of interest-earning assets in favor of the most profitable asset loans, which increased their share in total interest-earning assets. This trend was observed throughout 2018. Third, as shown in chart number two, average daily loan balances expanded 9.2% in 2018. Furthermore, in terms of loan needs by business segment, loan expansion was mainly driving by wholesale banking followed by retail banking, and Mibanco. It is important to note the loan expansion in retail banking was led by the mortgage loan book. Fourth, in chart number three you can see the loan growth was posted in both local and foreign currency, however, the expansion in local currency loans outpace that of the foreign currency loans.

Next page, please. In terms of funding, first, as you can see in chart number one, Credicorp's funding structure shows an increase in deposit shares of total funding, which is more evident in the year-over-year analysis. This was the trend we observed throughout 2018. Second, in chart two for deposits by type, you can see that the mix in deposits has also favored funding given the low-cost deposits such as savings and demand deposits increased their share. The 13.8% year-over-year increase in saving deposits is noteworthy, and was driven mainly by the initial results posted by saving accounts opened at kiosks, which was the first program launch by BCP's strategic initiative transformation.

Third, as shown in chart number three, Credicorp's funding cost has remained relatively stable despite the upward trend in international rates, mainly due to a more favorable funding mix both by currency and by funding source.

Next page, net interest income grew 4.9% quarter-over-quarter, 8.6% year-over-year, and 5.2% in 2018, which represents an improvement compared to the results posted in the previous quarter, and in 2017. Performance shows, first, the positive effect of loan growth from interest income, where all segments of BCP and Mibanco expanded their portfolios. Second, the moderate increase in interest expenses, which was attributable to a more favorable funding structure than in previous years as we explained clearly.

Next page, please. With regard to risk quality in chart number one, you can see the quarter-over-quarter evolution of the total cost of risk, which decreased 20 basis points due to, first, the decrease in the provisions required for BCP due to the improvement of the risk quality of the portfolio and the provision due to reduction in the exposure to clients related to the Lava Jato Case.

Second, the decrease in the provision required at Mibanco after the adjustments made at the end of the second quarter of 2018 to recover risk quality. The analysis of full-year results are shown in chart number two. The contraction of 40 basis points in the total cost of risk is noteworthy and due mainly to, first, the reduction of BCP's provisions requirement due to the improvement in the risk quality of the portfolio in particular in the consumer and credit card segments and to the reversal of provisions from Lava Jato Case clients and second, the effect of 2017 of the provisional requirements for the El Nino Phenomenon and the Lava Jato Case. It is important to remember that on January 1st, 2018, Credicorp adopted the requirements of IFRS9 for loan provisions, who's first effect was a one-off increase of PEN 320 million loans, and off balance sheet exposures, due to methodology changes.

Next page please. As we discussed in previous slides, Credicorp's net interest margin was relatively stable in 2018, reaching a level of 5.26%. Furthermore, for the fourth consecutive year, the cost of risk improved and reach a level of 1.38%, 44 points below the level posted in 2012. As a result, Credicorp's risk-adjusted net interest margin increased 20 basis points and reached a level of 4.31%, the highest in six years. These results represent clear evidence of the (inaudible) challenging year in terms of risk quality and loan growth, risk-adjusted NIM has reached a healthy level.

Next page, please. From this page, we will discuss evolution of non-financial income. As you can see in chart number one, non-financial income expanded 6% quarter-over-quarter due to good performance for core items, fee income, net gains in foreign exchange transactions, and the net gain from associates, which refer to the health business from association with Banmedica. On a full year basis, as you can see in chart number two, the core items of non-financial income that we mentioned before also posted good performance. However, total non-financial income contracted 5.9% compared to the level in 2017. This was mainly attributable to, first, the income of PEN 444.7 million generated in 2017 from the sale of equity investments in BCI and ENEL and second, to a lesser extent the effect of market volatility throughout the year, that resulted in a decrease in the net gain in sales of securities and net gain in derivatives.

Next page, please. In the year-over-year analysis of operating efficiency, which eliminates seasonality, and in the full year analysis, you can see that the cost to income ratio deteriorated due to an acceleration in the pace of growth of operating expenses. This was mainly due to an increase in salary and employee benefits, administrative and general expenses, and acquisition costs of the insurance business. In 2018, approximately 50% of the increase in operating expenses was registered in BCP stand-alone, 30% in Pacifico and 10% in Mibanco. If we start with Mibanco, the expansion in operating expenses was mainly due to the developing of new capabilities to support the growth of our traditional businesses, international expansion, and the creation of digital products.

In the case of Pacifico, approximately 60% of this increase was mainly related to the expansion of sales in life insurance businesses, and the remaining 40% was mainly due to a change in the accounting of property and casualty of underwriting fees that previously were booked upfront, and from 2018 and on are accrued over the life on insurance policy. In the case of BCP as stand-alone, a third of the increase is due to the strategic initiative transformation, who's budget execution was accelerated at the end of the year. The remaining two-thirds were mainly due to three different drivers. First, expansion of transactional activity. Second, the increase in incentive for productivity on variable compensation, which were mainly explained due to sales volume above target and the outperformance in unaudited KPIs such as customer satisfaction. And third, at BCP stand-alone, net income surpassed budget, so we provisioned an additional profit sharing for employees.

Now, I would like to hand over this call to Francesca Raffo, Head of Transformation at BCP, who will talk about the strategic initiative transformation that we are executing at BCP.

Francesca Raffo -- BCP

Thank you. I'd like to show a couple slides today, the slide with the purpose and BCP's north star. We have established two north star goals for 2021. One of them being number one in customer experience in Peru and the next one having the best efficiency ratio in the region. To describe how those look like in more concrete terms, we have set six key results for 2021 and we have really challenged ourselves significantly to define them and we know we might not achieve all of them, but the purpose is to inspire and give sight to our ambition and to move the organization toward key results. The key results are a cost to income ratio around mid-30s, to duplicate the cross-sell ratio for our customers, to be able to pre-approve 50% of the economically active population, to be number one in employee experience, to serve 70% of our sales digitally and also a non-disclosed net income growth.

The next slide shows the way we approach the transformation. We started some years ago and we described it as we are on-board of a small -- of a large space ship on our way to planet XF(ph), the planet of experience and efficiency. Our program is currently organized in (inaudible), these we refer to as engines of the transformation and I will briefly comment on some of them. The first one, for digital journeys, this is focused in improving our customer experience through digital (Technical Difficulty) in our digital strategy as we are focused on increasing its use(ph). It helps us to (Technical Difficulty). 33% were served via digital and self-service channels. If we look at December (Technical Difficulty) and 34.6 respectively. (Technical Difficulty)

Operator

Excuse me, ladies and gentlemen, thank you for your patience. We are reconnecting, please remain (Technical Difficulty), we are connecting the presenter line, please remain on the line.

Francesca Raffo -- BCP

Okay, perfect. So we're going to start again, looking at the key results. Slide number 16, so our main achievement for 2018 is as follows. Looking at our digital results by the end of 2018, 31% of our customers are digital customers growing from 21 two years ago. Considering our customer base has grown 30% in the same period, it means that the number of digital customers has grown more than 90% in the last two years. In terms of transactions, the transactions performed as a percentage of digital channels continues to grow and the percentage of total(ph) branches decreases. In December, 2018. 48 of our transactions were done via digital channels, that number turns into 59 when we include POS transactions and only 4% of the transactions are executed through branches.

Next slide, digital sales, regarding digital sales, in 2018 (Technical Difficulty) were served digitally. and 33% were served via digital and self-service channels. If you look at December alone, those numbers are 8.3% and 54.6%(ph) respectively. (Technical Difficulty) via digital channels. (Technical Difficulty) continues to grow. (Technical Difficulty) digital channel in December 2018 and in the first month of operation (Technical Difficulty), all the accounts openings were done via this channel. An additional 39% accounts with opened via our self-service kiosks. Regarding time deposits, 21% of them are now sold digitally. Finally regarding the loan portfolio, we launched credit card applications via web(ph) in December of 2018 and in the first month also it has contributed 2% of the total credit cards sold. Regarding our payroll advances product, one-third of them are served digitally. We continue to work on delivering new products via digital as we are convinced this brings both, better experience for our customers and more efficiency. The cost of opening a savings account is nine times lower than compared to that of digital channels. The next slide we look at satisfaction. Finally in terms of customer satisfaction, we remain as the market leader in our private banking, Enalta, affluent, small and mid-sized business and middle market corporate banking and institutional segment and we have achieved to grow from fourth to third place in our Consumer segment market, which is the biggest market in terms of number of customers. Thank you.

Cesar Rios -- Chief Financial Officer

Thank you, Francesca. Finally, in slide 19, we present our guidance, 2019 for reference for what we expect in terms of results. We perceive that the macro-economic context will be very similar to that same in 2017, and we estimate that first, loan growth will be in the range of 8% and 10%. Second, the cost of risk should remain within the range between 1.3% and 1.5%. Third, net interest margin should post at levels between 5.4% and 5.7%, which represent a slight increase. Fourth, risk-adjusted net interest margin should recover slightly. Fifth, the efficiency ratio should remain stable in comparison to the level posted in 2018; Six, the return on average equity should be between 17.5% and 18.5%.

Finally, it's important to mention that we are in the process in which we significantly build digital and self-service capabilities and at the same time, we are very prudent for serving the traditional distribution capabilities while we transition from one predominantly(ph).

Thank you. With these comments, I would like to open the Q&A, please.

Questions and Answers:

Operator

Thank you, sir. (Operator Instructions) Our first question comes from Gabriel Nobrega with Citi.

Gabriel Nobrega -- Citi -- Analyst

Hi, everyone. Thank you for the opportunity to ask questions. I actually have a question on your loan growth guidance -- hello? Are you listening? Okay. So I'll just go on. Just very quickly. I just want to understand here, why you are expecting a loan growth of around 8% to 10%, which is what you already delivered in 2018, given that the Peruvian economy could improve further during the year? And also here, if I you can may be give us some more color on what segments you are expecting to grow more? That would be very helpful? Thank you.

Operator

Ladies and gentlemen, please hold on the line while we reconnect the speakers again. Please hold on the line. Questioner, we will allow you to reask your question when the presenters have rejoined. Please remain on the line. Again, ladies and gentlemen, thank you for your patience. We are reconnecting the speakers now, it would be just a moment. Please remain on the line.

Cesar Rios -- Chief Financial Officer

Please continue with the Q&A recording(ph) here previously due to the communication issue.

Operator

Thank you. (Operator Instructions) Our first question is on the line. Gabriel Nobrega with Citi. Please repeat your question.

Gabriel Nobrega -- Citi -- Analyst

Thank you for the opportunity to ask questions. I actually have a question regarding your loan growth guidance. I've been just (inaudible) on what you're expecting and what are you seeing in terms of loan demand and why do you expect maybe loan growth to remain in the same levels given that the Peruvian economy could improve further in 2018? And also here if I could ask may be, some more color on what segments you expect to grow the most? Thank you.

Cesar Rios -- Chief Financial Officer

Yes. First, we expect that the economy grow at a similar pace in 2019 and in 2018. We expect that in 2018, the growth is going to be around 4% and in 2019, we expect 3.7%, that is very similar. In terms of growth, our guidance is in sync with the level at the previous year between 8% and 10%, but probably with a different composition. During 2018, we have had significant growth in Wholesale Banking and we expect a slight difference in 2019, probably with higher levels of growth in consumer, credit cards, mid(ph) market and probably (inaudible) in Wholesale Banking.

Operator

Thank you. Again as a quick reminder, we ask that you please ask one question at a time. Our next question comes from Philip Finch with UBS.

Philip Finch -- UBS -- Analyst

Thank you for the presentation. I've got two questions, and I'll ask one question at a time. The first question is regarding your costs, your operating expenses. We saw this grow by around 11% year-on-year, which is significantly above inflation. Now you've given us efficiency guidelines for 2019. So really what I'd like to ask is, what sort of cost growth should we assume for 2019? At the same level that we saw in 2018? And what are the drivers for that? And I'll come back to my second question later. Thank you.

Cesar Rios -- Chief Financial Officer

Okay. Probably, it will be more wise to review the drivers of the cost increase during 2018. As we mentioned previously, around 50% of the increase was produced in BCP Standalone. In case of BCP Standalone, we have probably have one-third of the cost increase due to the transformation efforts. The transformation is investing heavily in people, advisory, IT product, but is registered as new assets, and are experiments that we charge in the P&L. Two-thirds of the increase in BCP Standalone were in the traditional business and in this, we have two many drivers; one driver is due to the increased volumes and transactional levels, that drive IT expenses, marketing, loyalty programs and so on. And another important charge is due to the variable compensation, that was linked to commissions and incentives to pay to the sales forces.

Through the year, the productivity of the sale forces increased and especially in the last quarter, we fell well above targets and this caused two different things. One is, you have actually more volume than U.S. bank, so the level of payments goes above the target level. And additionally, we include in some key aspects, for example, customer satisfaction, the three-year additional bonuses. Down the road, we expect to have a increasing in sales efficiency, but probably we're doing to recalibrate the payment in a shorter period of time from quarterly to monthly.

(inaudible). We see that as a positive result. As a whole, at BCP Standalone, we excelled our budget, so we set aside more funds for profit sharing. Another important driver in the cost was in Pacifico. In Pacifico, we grew significantly in terms of sales in life insurance business, in the product Renta Flex and similar growth to that. And we paid significant commissions upfront. This explains probably 60% of the increase in Pacifico and the remaining is due to an accounting change that moves mainly from in-time recognition throughout the life of the policy.

The rest of increase was mainly in Mibanco who has basic capabilities also. For the next year, we expect that the efficiency ratio as a whole is going to maintain a similar level than 2018, because we are going to have overlapping capabilities increased in the transformational efforts. In BCP, more expenses in Mibanco and Pacifico and at the same time, we are very prudent maintaining the distribution capabilities.

Later on probably, we are going to reduce cost. Probably, I could give you one example. For example, in the reduction of branches that Francesca mentioned, we reduced a number of branches from the 125 first(ph) mentioned, but the cost structure was only equivalent to one-third because we translate the selling and distribution people to other branches. We're going monitor this very carefully and we feel comfortable that we're not going to sacrifice $1 of sales to save $0.20, of course, we're going to manage this cost accordingly.

Operator

Thank you. Our next question comes from Ernesto Gabilondo with Bank of America.

Ernesto Gabilondo -- Bank of America -- Analyst

Hi, good morning and thanks for the opportunity. Two questions from my side, The first one is a follow-up in terms of expenses. So can you repeat the expenses growth for this year? And given your transformation process, should we expect OpEx role to start going down after 2021. And my second question is after incorporating your 2019 guidance, if it's reasonable to expect net income to perform low to mid-teens growth? Thank you.

Cesar Rios -- Chief Financial Officer

We have a target base on cost-to-income, what we expect down the road is that the income is going to grow faster than the cost and as a result of that, we're going to improve efficiency.

Gianfranco Ferrari -- Deputy Chief Executive Officer & Head of Universal Banking

Just to add on -- this is Ferrari, just to add on Cesar's comment, as he mentioned before, at this time we're having sort of an overlap between the traditional distribution strategy with the new distribution strategy which Francesca mentioned early on. So what we foresee going forward is that at some point in time maybe the expenses of our digital world will stay stable. However, the operating cost in the traditional way of distribution is going to decrease. So overall, the aspiration we have at BCP and I stress the word, the word aspiration is to have a cost of income in (inaudible). However, we do see that it's achievable to be below 40 in three more years.

Operator

Thank you. (Operator instruction) Our next question comes from Andres Soto with Santander.

Andres Soto -- Santander -- Analyst

We saw a normalization in cost of risk this quarter, but are we going to remain below circa levels? This is due to a weak AI performance, increase in expenses and higher tax burden. I'd like to understand if these trends reflect a change in Mibanco's operating model as you're probably prioritizing growth in less profitable segments and employing people on the collection stage of the process. In the end, I would like to get a sense of what is the structural profitability that we can expect from Mibanco looking ahead? Thank you.

Cesar Rios -- Chief Financial Officer

Okay. Thank you for your question. If you compare 2018 with 2017, (inaudible) Mibanco improved, it's a matter of the last quarter, basically Mibanco the portfolio quality deteriorated over the last actually two quarters. However, what we've seen in the new vintages, all of them are within bridge capital. Going forward in 2019 -- sorry, going back to 2018 as compared to '17, net cost to income in Mibanco, has improved dramatically and if you compare net cost of income to Mibanco's main competitor, it's significantly better than those of our competitors. Going forward, we do see a slight deterioration in cost to income, because you have to bear in mind that the Mibanco distribution model, which by the way we're not changing it yet, is based on people, or hiring people and training people. And therefore, the vintage of bringing in new people cost you a lot at the beginning. Since we expect to increase sales forces by 2019, there's going to be a short-term impact in this year.

Operator

Thank you. Our next question comes from Jason Mollin with Scotiabank.

Jason Mollin -- Scotiabank -- Analyst

My first question is on the impairment charge that you mentioned, the Credicorp Capital. We saw this subsidiary go from a gain to a large loss. If you can quantify the charge? And what this was attributed to? And if we should see other charges like this in the future, if you're anticipating any others? Thank you.

Cesar Rios -- Chief Financial Officer

Yes. The impairment was for PEN 38 million. As we mentioned during the presentation, a key factor in this impairment was the increase in the discount rate and then in a lesser extent, adjustment in growth(ph) expectations. We don't envision an additional 'charge-off actually. We are confident with the book value levels at this point.

Operator

Thank you. (Operator Instructions). Our next question comes from Carlos Gomez with HSBC.

Carlos Gomez Lopez -- HSBC -- Analyst

Hello, good morning. I wonder if you could comment on the competitive landscape. In the past, you have mentioned how, in particular, in corporate you were seeing increasing competition. But now you're expecting higher margins for next year? Should we understand that competition has lessened somewhat? And if not, which areas do you see under more pressure? Thank you.

Cesar Rios -- Chief Financial Officer

Yes. Competition has been very harsh here, especially, in the corporate segment. Thus at that point in time, gross margins very low. However, the last quarter margins in that segment picked up. Having said that, I would say that we do see that the corporate business, a lot of our lending business, has gone up, and overall business where lending is the commodity side of the business. We make new market sharing in the lending side at that point in time. However, what we follow very tightly is our market share in terms of payments, savings, payrolls and things like that. The fee income businesses where we still gain market share. So even though, we see that maybe -- as a matter of fact, today we're seeing again competition in the corporate banking segment in terms of net interest margin. We see the business in an overall sense. If we go to the next level, to the midsized midmarket which gained market share, we had market gains last year, and at the same time, we improved the gain in that segment. So in the overall wholesale business, we basically are stable in terms of market share. And at the same time, improving NIM.

Gianfranco Ferrari -- Deputy Chief Executive Officer & Head of Universal Banking

This approach, I think, is very important because we have the lending business that enforces on the transactional services and they later are gaining relative importance with the time and it strengthened the relationship.

Operator

Thank you. (Operator Instructions). Our next question comes from Jason Mollin with Scotiabank.

Jason Mollin -- Scotiabank -- Analyst

Hi. I just wanted to understand better as a follow-up on the Credicorp Capital impairment. You mentioned the increase in discount rate and potentially -- and lower growth projections. What was this? Was this a project? Were these projects that you're analyzing? Or was it just -- what kind of assets were these? Or what kind of investment was this that you had to take the charge on?

Cesar Rios -- Chief Financial Officer

If I understood well, now we have two different thinking that one data -- the business that we bought, we have goodwill in this business. So each year we measure the net production value with the current value. And we have a significant project to develop the wealth management business. The potential gains of this wealth management business has not been incorporated in the calculation that I mentioned previously. We see it as two different things for this regard.

Walter Bayly -- Chief Executive Officer

Hi. Jason. This is Walter Bayly. Being very specific what we have written down in the last quarter is related to the acquisition of IAF Trust achievement which has some remaining goodwill attached to the evaluation. And we have completely eliminated any remaining goodwill of that acquisition. As Cesar mentioned, the main reason for that was an increase in the discount rate of achieving an asset. We do not any further goodwill that can be impaired in Chile anymore with what (inaudible) over the past couple of years have required a certain level of yearly review and impairments. So this is done and overviewed and related specifically to one transaction, the acquisition of an investment bank focusing n each year.

Operator

Thank you. Our next question comes from Alonso Aramburu with BTG.

Alonso Aramburu -- BTG Pactua -- Analyst

Hi, good morning and thank you for the call. I wanted to follow up on the expenses questions. If we look at your guidance of loan growth, 8% to 10%, with margins improving between 15 and 45 basis points and stable efficiency. It would seem that expenses will grow double digits in 2019? So I'm just wondering if that's the ballpark figure that you have of expenses growth this year?

Walter Bayly -- Chief Executive Officer

The expenses are -- when we consider the NIM, we need to also the consider the other income, fee income, that growth is slightly below the pace of NIM. So, the expenses are going to grow similarly to the combined effect of the NIM and the other income.

Operator

Thank you. (Operator Instructions). Our next question comes from Carlos Gomez with HSBC.

Carlos Gomez Lopez -- HSBC -- Analyst

Yes. Thank you again. And sorry to come back to expenses, but obviously, it is the focus here. Could you explain to us if you have a particular budget? If you have a certain amount that you're willing to spend in the transformation process? How long it's going to take one year, two years, five years, 10 years? And what are the key elements that take you from the current 44% cost to income ratio? It's expected mid-30s, it's a big, big change. So what are the keys? Is it the reduction in branches? Is it to increase electronically and what brings that from here to there? Thank you.

Cesar Rios -- Chief Financial Officer

Just to be very specific, the mid-30 subdivision is at BCP level, not at Credit Card level. Probably, for the repo, at BCP level cost to income close (inaudible). We do have a plan on inventing the in digital and the overall being sold (inaudible) can help us -- should help us reduce the important way to the cost to income ratio. I don't know, Francesca, if it's ensured specifically but you can give them a flavor of how much we're spending on the deal approximately.

Francesca Raffo -- BCP

The way we look at the transformation expense, it's difficult to separate a few transformation to improving the way we search customers in a digital world. So the way we look at it -- about a third of the investment we have is related to making our current business better. And that's investing in technology, in channels et cetera. The other two-thirds is investing in disruptive technology, disruptive data process and so forth. And we do have budget we set a target annually, we discuss with the rest of the bank, the appetite that the bank wants to include in the transformation and we also set these engines that we talked about in the conference relating to engines focused on achieving cost reduction are also new income sources. The channels, i.e. the distribution channel, the IT engine, the data engine are very much focused on reducing the cost to profit and serve our customers.

Cesar Rios -- Chief Financial Officer

Probably to add, we've announced framework to classify the costs and investment in run, grow and transform and we have the specific methodologies to approve project and to set up expectations for each of these categories.

Operator

Thank you. Our next question comes from Diego Lucio with Wells Fargo.

Diego Lucio -- Wells Fargo -- Analyst

Hi. Thanks for the opportunity. My question comes from the funding cost. We have seen -- sorry, you said that there's going to be a pressure of margins because of competition at Mibanco. I want some guidance of funding cost by subsidiary for the next couple of years and also we have seen a reduction in the loan and deposit ratio in Mibanco for the quarter-over-quarter and year-over-year ratios, what's your guidance for the next year on this ratio? Thanks.

Cesar Rios -- Chief Financial Officer

We don't provide specific guidance for these figures, but we can you give some comments. In general, we expect that the short-term rates are going to increase slightly at the end of the year and we are improving our funding structure both in BCP and in Mibanco. In the case of Mibanco, they are working actively in creating distribution and transactional capabilities. So they're going to improve the need probably at a higher rate pace than the previous years. As a result, they are probably going to improve the cost of funding but there are significant pressures in terms of interest rates, it's a very competitive market.

Walter Bayly -- Chief Executive Officer

Mainly just to compliment what Cesar just mentioned. At the Mibanco level, may be the most -- the weakest strategic part of the business at Mibanco is the funding structure and this comes from the previous Mibanco. Because Mibanco has most of the -- like the finest institutions get the bulk of their funding through the local capital market or professional investors. So Mibanco is investing on developing the whole transactional value proposition for their clients, so that they can get funding from those clients. You'll have to bear in mind that Mibanco already have 2 million clients. So we do see an opportunity to get a very low cost funding going forward. Obviously, in any retail business it's a long-term strategy.

Francesca Raffo -- BCP

The group itself had a a very big profit last year.

Walter Bayly -- Chief Executive Officer

Yes. But just to be specific, lower funding cost at Mibanco for last year was mainly because Mibanco have launched very successful campaigns for tangible profits. Going forward, what we're planning to do and what we're doing actually is to being a provider of the right value proposition in order to get trading account, current account, funds, which are even at lower costs.

Operator

Thank you. There are no additional questions at this time, I would like to now turn the conference back to Mr.Walter Bayly for closing remarks.

Walter Bayly -- Chief Executive Officer

Thank you very much, Stephanie. During 2018, the main characteristics were clearly an event of political volatility during the first half, it's not very often that we go through such level of political change without major disruptions in the economic side of the economy fortunately. We've also suffered mainly as a consequence of this political volatility, slow growth. Both of these events created a certain deterioration of the cost of risk particularly due to the sale and of Lava Jato at BCP. Some very specific issue at Mibanco, which have already been addressed. The fundamentals during this last quarter have been very encouraging. The result, nevertheless, has been impacted by an increase in operating expense. I think that has been well explained already. We are not concerned, but it is very important to give the market the confidence that we continue to have a very strict discipline in cost control.

After many years of a very successful efficiency program at BCP, we are probably going to lunch and going to a second stage of that, our cost discipline is a necessary item going forward and we have not lost, and we'll not lose that very strict discipline that has proven to be very successful for us in the past couple of years. And we believe and are confident that we are very well directed toward continuing to improve the efficiency ratio, particularly at BCP. As Gianfranco explained, at Mibanco on the other hand, we have decided to pursue further growth and expect to deteriorate somewhat our short-term efficiency ratio because of the expense of hiring and training sales force. We have already corrected the statistic risk issues and, again, are ready to pursue growth at Mibanco.

Overall, at Credicorp, we're confident that our short, medium and long-term strategies are well defined, well executed and have the appropriate confidence to monitor development, deviations and timely equations to market and technology developments. We continue to see growth opportunities in the markets in which we operate through the continued existence of our bank and bank segments of the populations and grow in the economies in which we operate. And we're very confident that our different subsidiaries and initiatives are very well-positioned to continue to capture the growth. We are optimistic regarding the future results of Credicorp both in the short and medium term.

With this, I really want to thank your continued presence in the conference calls and look forward to meeting you one-on-one and (inaudible) to be with you in the end of the results -- in showing of the results of the first quarter of this year. Thank you very much, and with this we finalize this conference call.

Operator

Thank you, ladies and gentlemen, this concludes today's presentation and you may now disconnect.

Duration: 85 minutes

Call participants:

Cesar Rios -- Chief Financial Officer

Francesca Raffo -- BCP

Gabriel Nobrega -- Citi -- Analyst

Philip Finch -- UBS -- Analyst

Ernesto Gabilondo -- Bank of America -- Analyst

Gianfranco Ferrari -- Deputy Chief Executive Officer & Head of Universal Banking

Andres Soto -- Santander -- Analyst

Jason Mollin -- Scotiabank -- Analyst

Carlos Gomez Lopez -- HSBC -- Analyst

Walter Bayly -- Chief Executive Officer

Alonso Aramburu -- BTG Pactua -- Analyst

Diego Lucio -- Wells Fargo -- Analyst

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