Credicorp Ltd (BAP) 2003 Q4 法說會逐字稿

Good morning and welcome to Creditcorp's fourth-quarter financial earnings conference call. Hosting today's call will be Mr. Raimundo Morales, Chief Operating Officer of Creditcorp.

At the request of the Company, I will mention that if you have not received a copy of this full financial press release or conference call presentation and would like to do so, you can download them from Creditcorp's Web site at www.creditcorp(indiscernible).com.

Before we begin, I would like to inform you that this call is being recorded and that all participants are currently in a listen-only mode. Mr. Morales will respond to your questions in a question-and-answer session that will follow the presentation.

Please stand by as I turn the conference over to Mr. Morales. Please go ahead, sir.

Good morning, all, and thank you for joining us for this Creditcorp conference call. As usual, we will briefly review the results for the economy, the Peruvian financial system and afterwards, I would like to concentrate on Creditcorp's numbers and those of its major operating subsidiaries.

In the Peruvian economy, most of the numbers which we see have been very good for 2003. (indiscernible) has one of the highest growth rates in the region for the second consecutive year, and the major sectors for growth was percented (ph) mining and electricity and commerce.

Inflation, for many years now, has remained under control and largely seems to (indiscernible) by the Central Bank for the year. The Peruvian currency remains strong, and this strength was mainly explained by an increase in the mining and textile exports and also, as a result of higher commodity prices and also the treaties signed with the U.S. helped the additional exports.

The fiscal deficit was lower than anticipated. In fact, revenues improved significantly during the year, basically as a result of administrative measures that were adopted by the government. However, a significant part of such increase has been used to finance our public sector wages and transfers to the regional government.

In spite of these achievements, we remain cautiously optimistic for the near future. This growth has been mainly driven by higher consumption and BCP (ph) growth has diminished during the last two quarters. Increased investment is needed to maintain high growth rates in the (indiscernible). However, we think that increasing taxes has (inaudible) attacks on financials (indiscernible) to fund growing government expenditures will reduce investment, will affect the efficiency of the economy and also its long-term growth potential.

We hope, on the other hand, that (indiscernible) project, which becomes operational by August this year, the higher commodity prices, especially in the mining sector, and the U.S. trade agreement will contribute to an increase in private investment next year and perhaps stimulate the economic growth.

The Peruvian banking system has been partially affected because of stiff competition by the capital markets. While total loans remain constant for the year, these stock of corporate loans (ph) issued during the year increased by $500 million during 2003. According to stock of corporate loans in the market amount now to US$2 billion (sic).

On the other hand, the retail sector, retail loans essentially expanded significantly during the year, particularly in the mortgage, credit cards and small-business market. Loans in these markets grew by 15, 20 and 19 percent respectively.

Additionally, resale has grown significantly due to the increased (indiscernible) these markets of finance companies related to department stores and smaller regional financial intermediaries.

As a result of lower rates and favorable exchange rates, coupled with a growing economy, we continue to see an improvement in the quality of the loan portfolio. The profitability of the banking system has continued improving due to the lower provisional requirements and increased (indiscernible) financialing (sic). This (indiscernible) has also affected the level of deposits, as investors tend to migrate toward mutual funds, which have grown by $500 million during the year, reaching a total of US$2 billion.

As a result of the continued excess liquidity in the system and the increased competition, interest rates as expressed in dollars (inaudible) continued falling during the year.

With respect to our own group and with respect to Creditcorp specifically, we are starting forward with our results which we have had for the year. These results were actually better than planned. After absorbing the costs of the merger with Santander during the first quarter of this year, the last three quarters (indiscernible) at an average of $26 million per quarter. The improvement in this year's results was mainly explained by higher revenues at BCP as a result of its merger with Santander and the increase in its banking services fees. These increased revenues, together with lower loan loss provisions at BCP, more than compensated the extraordinary costs of the merger, as well as higher expenses at Pacifico-Peruano Suiza and Creditcorp.

During the year, almost all of our subsidiaries improved their performance. BCP made the largest contribution to our corporate results. The improvement in BCP's results was mainly explained by larger business volumes, which improved the revenue line, lower loan loss provisions following a continued improvement in the quality of our loan portfolio, and a stricter control of operating expenses. (indiscernible) also improved its financial results. Increasing the value of its investment portfolio, as well as a decrease in non-interest expense were the major factors behind this improvement. More importantly, its unrealized gains closed the year at $11 million from 37.4 million unrealized loss the year earlier.

Contribution of PPS, Pacifico-Peruano Suiza, to Creditcorp fell this year. This is mainly due to a reversal of prior years' income for consolidation purposes amounting to approximately $5 million. In spite of this adjustment, Pacifico-Peruano Suiza local (ph) Group results continued improving due to better margins in the underwriting business and capital gains in the sale of our minority interest in a subsidiary of Banco Santander Group.

During the year, our Bolivian subsidiary continued to report (indiscernible) from BCP and Creditcorp. This local (ph) group showed a net income of 1.5 million during 2003. However, BCP and Creditcorp assume, for their accounts, provisions of $15 million. Our loss provisions amounted to $23.8 million during the (indiscernible) by BCP and Banco de Credito de Bolivia, compared to the $30 million for the previous year. In spite of these still adverse political (ph) conditions, we anticipate that all provisionary requirements have been met and that Banco de Credito de Bolivia should be able to generate, in the future, sufficient income to satisfy additional needs if necessary.

Tequendama generated a $5.5 million loss on Creditcorp's accounts. These results saw a significant improvement with respect to 2002, where they (indiscernible) a loss of close of to $17 million in Creditcorp's accounts. We do not anticipate a loss for next year.

In addition to the support provided to Tequendama mentioned above, Creditcorp and others lines included during 2003 an extraordinary charge of 6.5 million for continued (indiscernible) and other general expenses related to amortization of goodwill in the amount of $2.9 million, income tax on dividends, $1.3 million, and interest payments of Creditcorp's debt of $1.5 million.

When we look at BCP's numbers, its contribution to Creditcorp increased by more than 50 percent when compared with the previous year. Improvement was mainly explained by a reduction in loan loss provisions and higher noninterest income, which more than compensated the extraordinary costs incurred in the merger with Santander-Peru (indiscernible). (indiscernible) requirements declined in line with the improvements in the quality of our loan portfolio.

As a result of our stated strategies to become a professional bank for our customers, we have been successful in improving our noninterest income over the last four years. During 2003, banking services fees grew again by 12 percent, mainly originated on fees for (indiscernible) and credit cards (indiscernible) accounts, mutual funds and transfers from Peruvians living abroad. A recovery of loans previously written off, which amounted to 31 million during 2003 compared to 15 million in 2002, also contributed in a significant manner to the growth in BCP's noninterest income.

Our operating costs remain under control. General and Administrative Expenses grew 3 percent due to the higher maintenance and rental costs related to real estate assets (indiscernible) in the merger with Santander and the expansion of our branch network. In addition, the (indiscernible) affected our depreciation expense, which grew by 14 percent. However, these higher expenditures were compensated with a 4 percent reduction in personnel expenses mainly as a result of the rationalization measures adopted during 2002 in BCP and Banco de Credito de Bolivia.

The increased business volumes was related to the merger with Santander allowed BCP to increase its net income by 3 percent, compensating the reduction in interest rate expense as a result of the continued excess liquidity in the market and the increased competition in the retail sector.

Our return on equity currently is 15 percent and our efficiency ratio is still far from our long-term objective. However, I am confident that, as a result of the recent measures adopted to increase our revenue base, the improvement in the quality of our loan portfolio and the (indiscernible) control our expenditures, will obtain these objectives in the near future.

The quality of BCP's loan portfolio continued improving during the year. Our Peruvians portfolio indices are better than the average for the Peruvian banking system of 5.9 percent for past dues and 141 percent for the published rate.

In the case of Bolivia, the (indiscernible) ratio of 20.7 percent is somewhat higher than the system. However, the cover ratio currently at 78 percent is much better than average.

As the Peruvian economy continues to grow and interest rates and devaluation remain 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. We expect provisionary requirements to continue falling in the following quarter.

Atlantic Security Bank -- during 2003, it's contribution to Creditcorp improved significantly. In addition, as mentioned previously, the unrealized gains amounted to $11 million, compared to 7.4 million unrealized losses at the end of 2002.

Improvement in this year's results was mainly explained by an increase in realized gains in the sale of securities as a result of our recovery in the market value of the investment portfolio -- more than compensated the reduction in net interest margin and higher provisions for market risks.

In 2003, the focus has concentrated on increasing the Wealth Management business and maintaining a lower risk profile in proprietary investments. The results of this strategy (indiscernible) funds increased from 520 million in December of 2002 to 664 million at the end of 2003, generating higher fees with lower risk. During 2003, fees on foreign administration and brokerage services amounted to 5.3 million, a 17 percent increase with respect to 2002.

Also as a result of the more conservative investment strategy, our net interest margin fell from 17 million to 14.6 million in 2003. However, in spite of our reduction in (indiscernible), we're confident that this strategy, together with its increased focus on the Wealth Management business, will provide Atlantic with a more stable income stream.

Provisions for market risks and loans amount to 12.4 million during the year, compared to 9.4 million in the previous year. Higher provisions were explained by a 1.6 million increase in generic provisions for loan losses and higher provisions for market risks in the investment portfolio.

(indiscernible) interest income improved during the year, mainly as a result of a $6.8 million net gain in the sale of securities, compared to a $4 million loss in the same period last year. In addition, partly as a result of the closing of its Miami agency and the transfer of some of its operations to Creditcorp's securities, Atlantic's operating expenses fell from 9.3 million in 2002 to 6.8 million this year. We are confident that, as a result of this increased focus on the Wealth Management business and 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 -- during 2003, it's contribution to Creditcorp was lower than that of the previous year. The reduction is primarily explained by adjustments for minority interest and (indiscernible) related to previous years which had not been registered in Creditcorp's books amounted to approximately $6.6 million.

Pacifico's local groups, which do not include these adjustments, saw a net income of $11 million similar to that of the previous year. These results reflect better margins in the Property and Casualty business and extraordinary income related to sale of an investment, mostly offset by an extraordinary expense related to additional reserves for the Property and Casualty business.

With respect to its main figures, we see that total premiums increased by 14 percent, mainly as a result of higher business volumes in the Life insurance lane, which grew 45 percent for the year. In particular, the life annuities business grew by 137 percent as a result of changes in the early retirement (indiscernible).

Net premiums earned declined 2 percent as a result of a 90 percent increase in reserves for life annuities -- the extraordinary increase in reserves in the Property and Casualty business mentioned above and higher premiums paid to reinsurance companies. Net claims fell 14 percent during the year due to lower casualties in the automobile and health insurance lines. The net loss ratio improved from 69 percent in 2002 to 67 percent. The combined ratio in the Property and Casualty and health insurance business increased from 96 percent in 2002 to 100 percent. The higher combined ratio was explained by the extraordinary increase in the reserves in the Property and Casualty business, which more than compensated for the reduction in net claims. Excluding this extraordinary increase in reserves, the combined ratio would have remained at 96 percent.

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 a reduction in commercial margins as a result of increased competition. Our health insurance business (indiscernible) have a (indiscernible) 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.

Concluding, we are satisfied with Creditcorp's reports for the year. They were somewhat better than our expectations. We have seen positive trends in all of our subsidiaries, and we're confident that these positive trends will continue this year. Banco de Credito de Bolivia has improved its results with lower provisionary requirements. The loan portfolio has been cleaned up and its operations have been restructured following BCP's business model. We expect that once the economic and political conditions in Bolivia stabilize, Banco de Credito de Bolivia should provide us with more effective returns.

In the case of Atlantic, the reduction in the risk profile of its investment portfolio and its increased concentration in the Wealth Management and brokerage business have started to pay off. We are confident that this (indiscernible) strategy to allow Atlantic to increase the value added to its customers and to have a more stable revenue growth.

Banco Tequendama benefited from a more stable Colombian currency and the portfolio clean-up made it previous years, improving its financial results. During the last year, Tequendama has been refocusing its business toward low risk operations in the retail segment, which we believe will improve its margins and the profitability of its operations.

Pacifico-Peruano Suiza has been adequately managing its loss ratios in the Property in Casualty business and has experienced an interest in growth in life annuities. In the following quarters, it will concentrate on maintaining its leadership in the insurance market and increasing its efficiency levels to support the lower margins it is facing as a result of the increased competition.

With respect to BCP, we have had a good year. Our merger with Santander-Peru and our efforts to develop our transactional business have contributed to a strengthening of our revenue line. Our expenditures have also decreased due to improvement in the quality of our loan portfolio and rationalization measures adopted during 2002.

The future of BCP will remain focused on pursuing the synergies from the merger with Santander (indiscernible). I will continue improving the efficiencies of this operation. Additional efforts will be made to increase loan volumes, particularly in the retail and small business sectors, where BCP should be able to support more efficiently its extensive branch network. All of these efforts, accompanies by the reduction of provisionary requirements, should provide us with an increased profitability in the following quarters.

In summary, Creditcorp's operating units are today prepared to sustain profitable growth. The portfolios are very adequately covered, all the units have clearly defined objectives, efficiency levels continue to improve, and we do not envision any extraordinary expenses 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, give us a competitive advantages in the markets where we operate.

With this, I conclude the presentation. I would like to open the conference to a question and answer period. Operator?

Thank you, sir. The question-and-answer session will begin at this time. (OPERATOR INSTRUCTIONS). Adrian Huerta with JP Morgan.

How are you? I have three questions. My first question has to do with provisions. You show provisions down this quarter to 60 million, down from levels of like 24 million in the past few quarters. What is basically your expectation, going forward, in terms of provisions?

Second, with regards to your net interest margin, we've also seen (indiscernible) risks on this line (indiscernible). Do we expect margins to stay at these levels during this year? How do you see the impact from an increase in interest rates in the U.S. at the end of this year?

Finally, what is your target area this year for Creditcorp?

Okay, thank you for your questions. On the provisions, we are very, very much satisfied that the provisioning levels which we have today are more than adequate to cover the requirements of our loan portfolio. We've seen, in the last few years, continued improvement and also, we have been fairly aggressive in terms of write-offs in our loan portfolio. You can see this in terms of the recovery of loans written off that appear in our other income line, which last year amounted to about $31 million. We are confident that the requirement provision, during the course of the year, barring anything extraordinary, which we don't foresee will happen, will be lower than what we have had in previous years.

We are starting, this year, with -- actually, in addition to the provisions required by the Superintendency of Banks, which are fairly aggressive, we have an extra margin in terms of general provisions amounting to around $13 million as of year-end last year. So, we really don't anticipate any major requirements in provisioning.

Last year also, as mentioned in the conference call, we (indiscernible) Banco (indiscernible) Peru made a provision for Bolivia amounting to approximately $12 million to cover their provisioning requirement, which we don't think is going to be required this year. So, all the numbers which we see tend to indicate that we are pretty adequately covered.

On the net interest margin, we do not anticipate any major growth in the loan portfolio. We feel the loan portfolio might slow, starting with BCP (ph) at around 3.5 percent per year, 4 percent per year, and we continue to anticipate a reduction in expense. We don't think that the spreads will drop as they did last year; last year, they dropped in the overall portfolio (indiscernible) about .5 percent. This year, we are anticipating that the spread will be reduced at around 0.2 percent. This is basically because we are changing, gradually, the composition of the loan portfolio. We are losing to the capital markets most of our large corporate loans through the bonds issuance and commercial papers issuance. We are growing basically in the retail sector and the middle market has stayed fairly stable during the year and varies according to the (indiscernible) system. So, we anticipate that there will be a small reduction of probably 0.2 percent for the spreads this year.

Increasingly, we're not that concerned. Most of our assets are basically on variable rates. We have also a substantial portion of our funding related to core deposits that are basically the savings accounts and the (indiscernible) accounts, which are not that sensitive to fluctuations in interest rates. So any movement in increasing rates I think will help us gradually to compete with the capital markets and be able to recover a little bit more of our deposit funding and perhaps loose a little bit on the mutual fund business.

By the way, on the mutual fund business, we have now a 50 percent market-share of the total mutual funds that are being managed in the market.

In terms of ROE, what we look for on a medium-term basis is an ROE of 20 percent. We don't think we'll obtain it during the course of the year, but we think it is attainable in three years down the road.

Thank you very much.

(OPERATOR INSTRUCTIONS). Gustavo Teran with BBVA.

Good morning. That last statement, the 20 percent ROE, what will be the main drivers of that? That's quite an improvement. Would that entail some sale of foreign operations? I mean, the ones that are contributing zero? What would be very main movers to that level of profitability?

What we are anticipating is essentially an improvement in our efficiency ratios. We're not anticipating any major increase in market-share in our operations in Peru; we do not anticipate -- we anticipate improvement in our Bolivian operations, in terms of additional income, and Colombian operations, even though it will not generate substantial interest income, will probably not generate any major expenses in terms of supporting their operations.

As for the case of Peru, what we are expecting is that if we can control our noninterest expense and reduce it by around 2 percent per year for the next three to four years and increase our noninterest income by about 3 percent per year while we maintain the net interest margin without growing, we should be able to reach the 20 percent ROE.

What will be the implicit profitability in Bolivia? Because I think that's probably your biggest foreign asset.

Bolivia, we are expecting that it will reach around 15 percent around three years down the road.

Fifteen percent ROE?

Yes. There, what we need to reach that amount is actually (indiscernible) an increase in earning assets, which are very low right now in relation to the equity which we have invested there. What we are anticipating is that within the next, I would say, 12 to 18 months, we hope there will be some opportunities to buy some loan portfolios and deposits from other banks in Bolivia, which would leave us a little more leverage without increasing our (indiscernible) exposures (indiscernible) in the country. (multiple speakers) -- the 15 percent ROE is attainable.

Okay, thank you.

Karla Valverde with Centura.

Good morning, sir. I have three questions. I would like to know if you have an estimate of how much it will cost Banco de Credito to adapt their systems for the new tax -- the banking tax.

The next question is if you have a number for the savings that you are going to have after the merger with Financiera Solucion? I have seen in that, in the last two or three quarters, you have made, in Creditcorp and others, reserves or contingencies. I would like to know if you have a program for this? I mean, if this year, you are planning to make more reserves?

Okay. On the IPS (ph) systems, the estimates which we have is we're going to be investing in additional capacity in our equipment around $4 million and the cost of (indiscernible) the tax and maintaining our quality standards in terms of service is going to be around $1.8 million per year during the time that the tax is in effect. This includes not only the maintenance costs of the equipment but also, we're going to need additional teller windows; we're going to need some additional people to explain claims that might arise from our customers. The overall cost of that will be around $1.8 million per year.

We're trying but I don't think we're going to be very successful to get (indiscernible) reinvestment from the tax authorities. I don't know. We will work with that.

On the merger with Financiera Solucion, what we are anticipating is that we'll have a reduction in noninterest expense of around $4.5 million per year. This year, we will have some costs of the merger because -- due to the fact that we are eliminating all the personnel in Financiera Solucion and those costs I think this year will be around $3 million in terms of merger costs.

Overall, on an annual basis, we will be saving $4.5 million.

On this $6.5 million reserve for contingencies, in effect, what we decided last year is that we wanted to refuse (ph) the current value of our Colombian subsidiary in Creditcorp (inaudible). We created this 6.5 million reserve, which, in effect, is our reserve for an adjustment of our investment in Colombia. We do not anticipate that we will need anything in addition to that during the course of this year.

Thank you very much.

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

Yes, thank you again for listening in. We feel that last year was a successful year for Creditcorp in the sense that we have overcome, I think, all the major structural problems which we had in both Bolivia and Colombia. We feel that the merger we had with Santander-Peru was very well-executed and successfully run and that we anticipate this year 2004 will probably be a better year than 2003.

Thank you again, and we will be in touch for the next quarterly conference call. Thank you and have a good day.

The conference call replay will be available for seven days starting today at 11 AM Eastern time through February 13th at 11:59 PM Eastern time at the following phone number -- 1-800-428-6051 for participants from the United States and 973-709-2089 for international participants. Please enter passcode ID number of 329763.

This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.