Credicorp Ltd (BAP) 2003 Q3 法說會逐字稿

Good morning, and welcome to Creditcorp's third-quarter financial earnings conference call. Hosting today's call will be Mr. Walter Bayly, Head of Wholesale Banking of Banco de Credito BCP. At the request of the Company, I will mention that if you have not received a copy of their full financial press release or conference call presentation and would like to do so, you can download them from Creditcorp's Website, www.credicorpnet.com. Before we begin, I would like to inform you that this call is being recorded and all participant's are currently in a listen only mode. (OPERATOR INSTRUCTIONS).

Good morning. Thank you for joining us for Creditcorp's third-quarter conference call. As usual, we will follow the outline which is on Page 2 of our presentation. Starting with our presentation, as usual, we will start with the Peruvian economy. During the first nine months of the year, the Peruvian economy grew at an annual rate of 4 percent. After growing at rates that exceeded 5 percent during the second semester of 2002 and the first quarter of this year, the economy has slowed down to a 2.5 growth rate, during the last two quarters, as a result of the lower expansion in domestic demand. During the first nine months of the year, GDP (ph) growth was led by mining, 7.2 percent; domestically-oriented activities, such as services, 4.2 percent; and nonprimary manufacturing, 4.2 percent. Inflation remains under control. During the quarter, it was 0.4 percent as a result of higher oil and fuel price. During the last 12 months, prices have increased by 2 percent, lower than the 2.5 target set by the Central Bank for the year. The exchange rate growth (ph) of 3.48 soles per dollar, 0.4 percent higher than the level attained at the end of the previous quarter. However, the exchange rate remains 0.9 percent below the level attained last December, due to the strength of export activities and increased demand for soles (ph). As a result of higher revenues, the fiscal deficit reached 1.5 percent of GDP during the first nine months, lower than the 1.9 percent deficit in the same period last year.

Tax revenues have improved significantly due to (indiscernible) measures adopted by the government, as well as by higher corporate income tax revenue. A significant part of such increases been used to finance higher public sector wages and transferred to the regional government.

For the near future, we remain cautiously optimistic. In spite of recent progress in tax collections, we are still concerned about the funding of the fiscal deficit in the medium-term and the impact that the announced banking transactions facts (ph) will have on the economy. In addition, recent growth has been mainly driven by higher consumption. Increased investment is needed to sustain high growth rates in the medium-term. We expect that the Comisia (ph) project, higher commodity prices in the mining sector, and the Eventual Use (ph) trade agreement will contribute to an increase in private investment in the future.

Moving onto Page 4 all of the Peruvian banking system, we see that as a result of increased activity by the stock corporate borrowers in the Peruvian capital markets and the low-level of investments in the economy, lows in the banking system curved (ph) slightly during the quarter. Corporate issues, both of commercial paper as well as bonds in the capital markets, have increased this year to 350 million, due to the very attractive interest rates available for such issuers. The rates in this market are sufficiently low in that the capital inflows (ph) into the ASP (ph) systems (indiscernible) the availability of investment opportunities. In contrast, retail loans continued growing during the quarter, particularly in the mortgage, credit card and small-business markets, which grew at 3.5 percent, 4.2 percent, and 5.2 percent, respectively, between September and June of this year.

Reflecting a continued improvement in the quality of the bank's loan portfolios, past due loans as a share of total loans continued falling to 7.7 percent in September, compared to 7.9 three months ago, and 8.2 percent a year ago. The system's coverage ratio reached 125 percent as of September, deteriorating slightly from the 128 percent obtained in last June, but similar to the level of September last year. Deposits fell slightly during the quarter. However, they are still 1.3 percent higher than in September last year. As a result of the continued excess liquidity and the increasing share of corporate funding in the capital markets, interest rates in dollars loans fell sharply during the quarter. At the same time, interest rates in soles continued increasing due to the higher -- the larger share of retail loans in the total loan portfolios of the bank.

Page 5, we expect to have performance of our group. We are satisfied with the a (ph) record (ph) tog (ph) for the third quarter, which were according to plan. During this period, the record (ph) obtained a net income of $26 million, significantly higher than the 3.1 million of paying (ph) during the same period of last year. With this result, Creditcorp's net income for the first nine months of the year reached 56.8 million, almost doubling the 28.8 million registered during the same period last year. The improvement in this core period (ph) results was mainly explained by higher revenues at BCP (ph), as a result of its merger with Santander and the continued increase in its banking services piece. These increased revenues, together with lower loan loss provisions, more than compensated the higher expenses of Pacifico-Peruano Suiza, provisions for contingencies (ph) at Credito (ph), and higher depreciation charges at BCP (ph) on the assets acquired in the merger with Santander.

During the quarter, almost all of our subsidiaries improved their performance. I'm on Page 6 now. BCP (ph) made the largest contribution to our forecast (ph) results. We take (ph) on provision of 28.7 million, which was significantly higher than the 10 million contributed during the same period last year. With these results, BCP's (ph) contribution for the first nine months amounted to 63.8 million compared to 37.3 million last year. The continued improvement in BCP's results was mainly explained by larger business volumes after the merger with Santander, which improved the revenue line, lowered loan loss provisions, following a continuing improvement in the quality of our loan portfolio, and a stricter control on operating expenses. As a result of larger realized gains in the trading activities, Atlantic Security also improved its financial results, increasing its contribution to Creditcorp to 2.5 million during the quarter compared to 0.1 million in the same quarter last year. More importantly, unrealized gains remained at close to 9 million compared to 50 (ph) million unrealized losses a year earlier. The contribution of Pacifico to Creditcorp failed (ph) this quarter, mainly due to the elimination for consolidation purposes of 3.1 million in minority interest of previous periods. In spite of this adjustment, Pacifico's local dose (ph) results continued improving as a result of lower claims and increased premiums and life annuities in (ph) the property and casualty insurance business.

During the third quarter, the results of our Bolivian subsidiary improved. Its local books showed a net income of 0.1 million during the quarter, with loan loss (ph) provisions of 12.1 (ph) million, compared to 8.5 million jointly (ph) registered by BCB (ph) and BCP (ph) and the same period last year. In spite of the still adverse political conditions, we expect that the support provided by BCP (ph) to clean up our Bolivian Bank loan portfolio last year, and BCB's increased concentration in lower risk should provide it with a basis for a healthy recovery in the future.

With respect to Tequendama, during this quarter, it generated 2.2 million in direct and indirect losses from Creditcorp's account, which includes a 0.2 million loss in its books, and 2 million in loan loss provisions in the loans transferred to Creditcorp, included in the Creditcorp and Others lines. With these results, Tequendama overall contribution during the first nine months of the year amounted to a loss of 7.9 million compared to a loss of 13.5 million in the same period last year. In addition, the 2 million loss in provision requirements for Tequendama, the Creditcorp and other line includes a 2 million charge for contingency reserve and other general expenses, such as amortization of goodwill and interest payments of Creditcorp's debt during the quarter.

In the case of BCP (ph), moving on to Page 7, the improvement in this quarter results, as in the previous quarter, was mainly explained by a reduction and loan loss provisions and higher non-interest income, which compensated a reduction in gains on inflation adjustments as a result of depreciation of the Peruvian currency, with respect to September last year. Loan loss provisions fell (ph) 30 percent when compared with respect to the third quarter of last year, and as a result of the improvement in the quality of our loan loss portfolio and lower provisions in our Bolivian subsidiary, which amounted to 4.1 million during the quarter. The increase in BCP's (ph) non-interest income was explained by a 13 percent growth in banking services fees, mainly on credit cards and debit cards, current accounts, mutual funds and transfers from Peruvian living abroad. Our operating expenses, which still include 1.2 million in extraordinary expenses related to the restructuring of our systems, were kept under control during the quarter. Our personnel expenses fell 2 percent with respect to the same period of last year as a result of the rationalization measures adopted in the second half of 2002. In addition, our administrative expenses fell (ph) 7 percent since last year's numbers, including the extraordinary expense incurred in the modernization of our corporate image and larger expenditures on our systems' restructuring progress. The increased business volumes related to the merger with Santander has allowed us to increase our net interest income by 11 percent, compensating the reduction in net interest margin as a result of the continued excess liquidity in the system. As a result of this positive trend, our efficiency ratio, excluding non-recurrent expenses and revenues, improved from 62.9 (ph) in the third quarter of last year to 48.6 this quarter. Our return on equity was 20.5 percent, in line with our expectations for the quarter. On a cumulative basis, during the first nine months of the year, our efficiency ratio improved from 55.2 percent last year to 51.9, and is closer to a 50 percent target.

Our return on equity, currently at 14 percent on an accumulative basis, is still far from our long-term objectives. However, we are confident that as a result of the recent measures adopted, we increase our revenue base, the improvement in the quality of our loan portfolio, and the firmer control of our expenditures, we will obtain these objectives in the near future.

BCP's loan portfolio. The loan portfolio continued improving, both with respect to the past due and the coverage ratios. After a slight deterioration that took place in December as a result of the acquisition of Santander-Peru, the trend (ph) of both of these indices (ph) has improved continuously during the year. Both of these indices are now healthier than before our acquisition of Santander-Peru. Our consolidated past due ratio in September was 8.1 percent, lower than the 8.4 percent of the previous quarter, and the 8.2 percent obtained in September of last year. Similarly, our coverage ratio at the end of the quarter was 117.8 percent, similar to the level obtained in the previous quarter, but somewhat larger than the 107.8 (ph) percent ratio of September last year. These ratios improved significantly in our Peruvian portfolio 87 (ph) percent for the past due ratio and 157 (ph) percent for the coverage (ph) ratio (ph). Our Peruvian portfolio indices are better than the average for the Peruvian banking system of 7.7 percent for the past due and 135 (ph) percent for the coverage ratio. In the case of Bolivia, the past-due ratio is somewhat higher than the system, however, the coverage ratio is much better and healthier than the average. As the Peruvian economy continues to grow and interest rates and the valuation remains stable, we foresee a continued improvement in the quality of the portfolio. In the case of Bolivia, we have built up the required reserves, and we do not anticipate a major deterioration of the existing portfolio. Consequently, provision and requirements have continued diminishing in the following quarter.

Moving on to Atlantic Security, Page 9. During the third quarter, Atlantic Security obtained a net income of 2.5 million, significantly higher than the 76,000 registered during the same period last year. On a cumulative basis, Atlantic's net income during the first nine months of the year amounted to 4.7 million, more than 3 times the amount earned during the same period last year. In addition, it's nonrealized gains amounted to 9 million compared, as mentioned previously, to a 15 million loss as of September last year. The improvement in this quarter's results was mainly explained by an increase in realized gains in the sale of securities, which more than compensated the reduction in net interest margins and the higher provisions for market risk, to reflect permanent reductions in the value of the investment portfolio. During the last year, Atlantic Security's focus has concentrated on increasing its wealth management business and reducing the risk profile of its proprietary investments. As a result of this strategy, administered funds (ph) have increased in September of last year from 510 (ph) million to 600 million, generating higher fees with lower risk. In addition, as a result of its more conservative investment strategy since June of last year, its proprietary positions on investment-grade bonds increased from 108 million to 140 million. At the same time, its position in high-yield bonds fell (ph) from 67 million to 30 million, in an emerging market from 50 million to 38 million during the same period. In addition, its whole (ph) position in bonds with split rates and investment-grade bonds that create high-yield and vice versa of 75 (ph) million as of the end of September. As a result of this more conservative strategy, net interest margins have obviously fallen from 4.3 million in the third quarter of 2002 to 3.6 million in the same period for this year; and the interest margin from 3 to 2.3 percent. In spite of a reduction in spreads, we're confident that this strategy, together with its increased focus on the wealth management business, will reduce the volatility of its revenue stream. Provisions for market risk amounted to 1.9 million during the quarter, compared to 1 million in the same period last year. Such increase includes a 1 million generic provision for market risk, and other provisions to cover the taxes (ph) in the value of high-yield bonds. Noninterest income improved during the quarter, mainly as a result of our 1.6 million net gain in the sale of securities compared to a 1.7 loss in the same period last year. This quarter's gains was mainly concentrated in high-yields in emerging market's corporate bonds. In addition, as a result of the closing of its Miami agency, Atlantic Security's operating expense fell from 2.5 million in the third quarter of last year to 1.7 million this year. We are confident that as a result of its increased focus on the wealth management business, and in the reduction in the risk profile of its investment portfolio, Atlantic will reduce the volatility of its income stream and will continue improving the profitability of its operation.

Pacifico-Peruano Suiza, Page 10. During the third quarter, the contribution of Pacifico to Creditcorp amounted to 0.1 million. The reduction in Pacifico's contribution was explained by the elimination of 3.1 million in minority interest of previous periods. On an cumulative basis, its contribution during the first nine months of the year reached 6.9 million, 10 percent higher than the 6.3 million contributed in the same period this last year. Excluding this affect, the results of its continued operations were improved. During the quarter, Pacificos benefited from a reduction in net claims and a slight increase in net premiums earned, as a result of which, its combined ratio improved from 88.5 in the third quarter of last year to 87.1 this quarter. With respect to its main figures, total premiums increased 17 percent during the quarter, mainly as a result of higher business volumes in the life and property and casualty insurance business, both of which grew 13 percent and 15 percent, respectively, compared to the third one of last year. In particular, the life annuities business grew 118 percent, as a result of changes in the early (ph) retirement regulations.

Business in the health insurance business increased 16 percent this quarter. However, in spite of a large increase in premiums, net premiums earned, which exclude the premiums paid to reinsurance companies and the increase in reserves, experienced only a 2 percent growth during the same period, mainly as a result of a 15.7 million increase in reserves compared to 7.7 in the same period last year, explained by the fast growth in the life annuities business. Net claims amounted to 24 million during the quarter, and were 9 percent lower than the level registered in the same period last year. The reduction in net claims was mainly explained by lower cash (indiscernible) in the fire, automobiles and health insurance line. As a result, the net loss ratio, which is net claims as a share of net premiums earned, improved from 64 percent in the third quarter of 2002 to 59 -- 57.9 this quarter.

As for the future, we expect that the life insurance business will continue growing significantly, and will gradually increase its contribution to our profitability. The property and casualty business will continue growing with the economy and experiencing other reductions (ph) in commercial margins as a result of increased competition. Our health insurance business should have attractive growth opportunities in the future, to the extent that the government foresees a larger role for the private sector in the health and Social Security system.

Creditcorp's overview for same quarter this year. During the third quarter, we have seen positive results in Creditcorp, mostly driven by a significant increase in BCP's (ph) revenues, full control in our operating costs, but also a positive trend in most of our subsidiaries. We feel that the substantial advantage has been made with respect to improving the quality and reserve coverage of both Atlantic's investment portfolio and our Bolivian loan portfolio, which will allow these two entities to focus on future development of their core. Businesses however we remain concerned over the outcome of the current political situation in Bolivia. In Tequendama, we're gradually refocusing our businesses through the retail segments and searching for alternatives to provide viability to the business.

Pacifico-Peruano Suiza has been adequately managing its loss ratios. It will concentrate on increasing its efficiency levels to support the lower margins, and would also continue growing in the life insurance business and with an increased profitability. With respect to BCP (ph), we remain concerned about the effects of the tax for banking perfection (ph) and the impact this tax can have on the economy and the banking system. In the coming months, BCP will remain focused on pursuing the synergies resulting from the merger with Santander and the acquisition of Financiera Solucion. Additional effort has to be made towards increasing loan volumes in an increasingly competitive environment, as well as in lowering noninterest expense. All of these results, accompanied by a reduction of provisioning requirements, should result in an increased profitability in the following quarters.

In summary Creditcorp's operating units are today prepared to sustain profitable growth. The portfolios of the different entities are to a large extent very adequately covered. All the units have clearly defined objectives, efficiency levels should continue to improve, and we do not envision any extraordinary expense in the near future. We are now positioned to take advantage of a stable economy with adequate economies of scale, that, with the exception of Columbia, should give us a competitive advantage in the markets where we operate.

Thank you, very much, and we are now ready to go into the question-and-answer period.

(OPERATOR INSTRUCTIONS). Karla Valverde with Sentura (ph).

Good morning, sir. I was looking at the numbers, and I can see that Banco de Credito's loans and deposits are declining on a quarterly basis. I would like to know if you have an explanation for these declines, and if you have any strategy for this?

Sure. As I mentioned previously, regarding our loan portfolio, there are two dynamics which are currently in place. The first is that due to the availability of relatively cheap bonds (ph) in the Peruvian capital market, our corporate clients aren't disintermediating (ph) the banking system as a whole. As you might be aware, the Peruvian ASPs continue receiving large amounts of bonds (ph) from the individual pensioners (ph), and they have severe restrictions on their ability to invest abroad. Thus, they continue having a substantial amount of bonds (ph) which they cannot invest at adequate rates. So all our corporate customers are disintermediating not only us but our banking system. On the other hand, our retail portfolios are growing at a healthy rate. The overall growth in the credit card mortgages and consumer finance of our portfolios are growing nicely. The net effect of both of these is that, indeed, the loan portfolio, all in all, has decreased slightly. We do not expect further decreases. But on the other hand, our expectations are that our portfolio will basically remain flat.

Okay. So do you have an estimate for the loan portfolio for the year?

For the end of the year -- (multiple speakers) -- for the end of the year, we expect it to remain flat. For next year, a small growth maybe 2 to 3 percent, very close in line with the growth of the economy.

Okay. One last question, please. You mentioned that you're searching for an alternative in Banco Tequendama. Does this alternative include finding a partner or something?

We are open to all possibilities.

(OPERATOR INSTRUCTIONS). If there are no further questions, I will turn the conference back to Mr. Bayly for final comments.

Thank you, very much, for being with us in this conference. As we mentioned, we are satisfied with the results. And we expect to be delivering results similar to this quarter for the next couple of quarters. Thank you, very much, for your time, and good bye.

Ladies and gentlemen, a conference call will be available for seven days starting today at 1 PM through November 21st at 11:59 PM, at the following phone number, 1800-428-6051 for participants from within the United States, and 973-709-2089 for international participants. Pass code I.D., 310781. This concludes our conference for today. Thank you, all, for participating, and have a nice day. All parties may now disconnect.