Credicorp Ltd (BAP) 2004 Q1 法說會逐字稿

Good morning and welcome to Credicorp's first quarter financial earnings conference call. Hosting today's call will be Mr. Walter Bayly, Chief Financial Officer of Credicorp. 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 Credicorp's Web site at www.credicorp.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. Bayly will respond to your questions in a question and answer session that will follow the presentation. Please standby, as I turn the conference over to Mr. Bayly.

(Audio gap) As usual, we will briefly review the results for the Peruvian economy and financial system and afterwards we will concentrate on Credicorp's financial result as well as those of its major operating subsidiaries. During the first months of the year, the Peruvian economy continued showing a good performance. The economy grew 3.6% during the first two months and is expected to grow at that rate during the quarter. Miami has been by far the leading sector with a 16% growth during the first two months of the year, mainly driven by increased gold and copper production as a result of higher commodity prices. Consumption and investment also grew, but at a more moderate pace. The inflation increased slightly during the quarter as a result of higher oil and wood prices. But the 2.8% annual rate remains well within the target set by the Central Bank for the year of 1.5% to 3.5% range.

The Peruvian currency remains strong during the quarter closing at 3.46 sol per dollar, due to higher mining and textile export as a result of the third agreement with the United States. So, it is expected to close at 0.3% of GDP during the first quarter, lower than the 1.3% rate in the same period last year. The improvement in the fiscal situation is due to an increase in value-added and corporate income tax revenue as well as from the recently enacted tax from financial transaction. Lower capital expenditures also continued contributing to a reduction in the fiscal

. In spite of these positive figures, we remain cautiously optimistic for the near future. GDP growth has been mainly driven by higher production in the mining sector as a result of higher prices. Increased investment is needed to maintain high growth rates in the medium-term and we are concerned about the effects that the tax and financial transactions will have on investment and on the efficiency in the economy as a whole. In spite of these concerns, we hope that

project, the expected recovery of the US economy and the US Trade Agreement will contribute to an increase in private investment and to stimulate the economy in the coming month.

Next page, with respect to the Peruvian financial system, the development of the local capital market has resulted in stiff competition for the commercial banking system. Total loans declined by 300m since March of last year, while the stock of corporate bond issued increased by 600m during the same period. The current stock of corporate bonds in the market amounts to $2.1b a $100m higher than in December. Retail loans have continued expanding, particularly in the credit card, small business and the mortgage market. Loans in this market have grown by 40%, 20% and 70% respectively, since March 2003. Competition in retail has continued growing significantly due to the increased presence in this market of department stores, and smaller regional financial intermediaries

. The quality of the banking system loan portfolio has continued improving mainly as a result of lower interest rates and stable exchange rates in the growing economy. The lower provisioning requirements together with an increase in non-financial income has contributed to an improvement in the profitability of the banking system. With respect to deposits, the numbers show that they remain stable with respect to December. However, they're $200m lower than in March last year mainly due to the migration of retail customers to mutual funds, which have grown by $500m during the year reaching a total of $2.1b. As a result of the continued excess liquidity in the system and the increased competition in the middle market in the retail segment, interest rates and spreads in dollars have continued falling.

Average loan rates for the system are higher due to the increased share in the total loans of retail and small business loans, which are higher than average interest rates. We'll now review in the next page, the results of Credicorp. We're satisfied with Credicorp's results for the quarter which amounted to $30.1m, and were in line with our expectations. With this quarter's results, the average of Credicorp's net earnings during the last four quarters amounts to $37m per quarter, excluding the extraordinary merger cost incurred in the first quarter of 2003. The improvements in this quarter's results with respect to the same period last year was mainly explained by lower loan loss provisions, and operating expenses mainly at BCP. However, as would be seen in the next page, all of our subsidiaries improved their performance with respect to the first quarter of last year. Page six, during the period, BCP made the largest contribution to our corporate results. The improvements in BCP's numbers was mainly explained by lower loan loss provisions following a continued improvement in its loan portfolio, as well as by lower operating expenses as a result of steady control on personnel and administrative expenditure.

Atlantic Security Bank continued improving its contributions to Credicorp mainly as a result of an increase in the market value of its investment portfolio, which reduced its provisions for market risks, more importantly its unrealized gains at the end of the quarter amounted to $12m compared to $2m unrealized losses a year earlier. The contribution of Pacifico-Peruano Suiza to Credicorp also improved as a result of an increase in retention rates and lower net claims in the property and casualty business, as well as an increase in the profitability of the life insurance business. With respect to our Bolivian subsidiary, its local books and figures showed a net income of $0.4m during the first quarter which compares favorably with $0.1m registered during the same period of 2003. These do not include the $10m in loan losses provisions for BCB's Bolivian loan portfolio registered in Banco De Credito Del Peru's accounts in that period.

In the first quarter of this year loan loss provisions amounted to $0.4m compared to $13.4m jointly registered by BCP and BCB during the same period last year. In spite of the still difficult political conditions in Bolivia, we anticipate that all provisioning requirement has been met and that Bolivia should be able to generate in the future enough income to satisfy additional needs if necessary. Tequendama also experienced a recovery in its results. During the period, it generated $0.4m gain on Credicorp's account, which included $0.2m in provisions on the loan portfolio transfer to Credicorp. These results showed a significant improvement with respect to last year when it registered a loss of $3m in Credicorp's books. We expect that this positive trend will continue in the coming months as Tequendama benefits from the recovery of the Columbian economy. The Credicorp's and other line contributed a loss of $2.1m which included $0.2m in loan loss provisions of Tequendama's loan portfolio mentioned earlier and other general expenses such as amortization of goodwill. During the same period last year, this line contributed a loss of $6.1m, which in addition to $1.9m in loan loss provisions for Tequendama including taxes and other general expense.

We will now review BCP's numbers in the next page. BCP's contribution to Credicorp during the quarter amounted to $25.9m, was more than three times higher the $8m registered in the first quarter of last year which included $16m extraordinary merger cost with Banco Santander, Peru. Excluding this extraordinary merger cost, the improvement in this quarter's numbers was mainly explained by a reduction in loan loss provisions and in operating expenses. Provisioning requirements declined from $34.8m in the first quarter of last year to $13.6m in this quarter, in line with the continued improvement in the quality of BCP's Peruvian and Bolivian loan portfolio. Loan loss provisions represented 18% of BCP's net interest income during the quarter, a level which is closer to international standard. Excluding the extraordinary costs, the merger with Santander, our operating expenses fell 7% as a result of lower personnel and administrative expenses. Personnel expenditures fell 10%, since last year numbers included two months of Santander's expenses which were part of the savings incurred with the merger.

Last year's numbers also included $1.5m in severance payments related to the personnel rationalization measures adopted in BCP during the second half of 2002, and in the first semester of 2003. In addition, administrative expenses decreased 8%, mainly due to a reduction in the marketing and consulting expenses related to a restructuring of our system. The reduction in provisions and operating expenses more than compensated the lower net interest income and non-interest income. BCP's net interest income fell 11% as a result of our reduction in its loan portfolio following a migration of some of its corporate boroughs to the local capital market. BCP's spread remains stable with respect to the first quarter of 2003, as a result of an increase in the share of retail loans in its loan portfolio, particularly mortgages, small business loans, and credit cards. A reduction in BCP's non-interest income was mostly related to a reduction in revenues from the recovery of loans written off.

Our return on equity considering BCP's contribution to Credicorp's earnings reached 16.9% during the quarter. Even though BCP's returns on equity and efficiency ratios still do not reflect our long-term objectives, we are confident that as a result of the improvement in the quality of its loan portfolio and the firmer control on its expenditures, BCP will obtain these objectives in the near future. Page eight, the quality of BCP's loan portfolio continued improving during the quarter. Our Peruvian portfolio indexes of 5% or

in 46% of coverage ratio are better than the average of The Peruvian Banking System of 5.8% and 143.5% respectively. In the case of Bolivia, the pass through ratio of 19%, is somewhat higher than the system; however, the coverage ratio currently at 76%, is much better than the average. As The Peruvian economy continues to grow, the Peruvian currency remains stable. We foresee a continued improvement in the quality of the portfolio. In the case of Bolivia, we've drilled up the required reserve and we do not anticipate a major deterioration of the existing portfolio. We expect stable provisionary requirement in the following quarter. We'll now turn to Atlantic's result in the next page.

During the first quarter, the contribution of Atlantic Security to Credicorp amounted to $2.9m, close to five times, $0.6m contributed during the same period last year. In addition, its non-realized gains at the end of the first quarter amounted to $12m compared to a $2m loss a year earlier. This, as a result of their recovery of their market value of its investments portfolio. The improvement in Atlantic Security's first quarter results was mainly explained by a $3.1m reduction in provisions or market risk as a result of the recovery of the market value of its investment portfolio, which more than compensate a $0.6m reduction in its net interest income. In 2003, Atlantic's focus is concentrated on increasing its wealth management business and maintaining a lower risk profile in its proprietary investment. As a result of this strategy in the low interest rate environment, administered funds have increase from $520m in December 2002 to $705m in March 2004, generating higher fees with lower risk. During the quarter, ease of funds administration and brokerage services amounted to $1.1m, 12% higher during the same period last year.

Provisions for market risk, loans amounted to $1m during the quarter compared to $4.2m in the first quarter last year. The reduction in provisions was mainly explained by the $3.1m reduction in provisions for market risk mentioned above. Loan loss provisions amounted to $0.6m similar to the amount registered in the first three months of 2003. Non-interest income, which includes realized gains in the sale of securities and commissions remains stable during the quarter. We're confident that as a result of the increased focus on 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 in the following quarter. We'll now turn to Pacifico Peruano Suiza in the next page.

During the quarter, the contribution of PPS to Credicorp amounted to $2.8m. It was 2.5 times the amount contributed in the same period last year. The improvement in Pacifico's numbers was mainly explained by an increase in net premiums earned as a result of higher retention rate in the property and casualty business, and an improvement in net claims as well as the business volume. Pacifico's Life Insurance business also improved its profitability mainly as a result of a reduction in net claims and an increase in the return of its investment portfolio. This results to net include the figures of

Pacifico's recent purchase in the health insurance business. This merger is expected to take place within the next three months. Pacifico paid $6.5m to acquire the full ownership of this company, an amount, which represents a priced book of 1.6 times. With this acquisition, we expect to consolidate our presence in the health insurance business combining our 27% market share in this market with Navasoloose 39% market share, and exploit the synergies in operations to improve our cross-selling opportunities and efficiency. Going back to PPS numbers this quarter.

Total premiums fell 3% mainly as a result of lower sales in the property and casualty business. Any private pension fund insurance, which were partly compensated by an increase in health insurance volume. This reduction in property and casualty sales was explained by delays in renewing two large contract, which will take place in the coming months. However, net premiums earned, which exclude the premium paid to insurance companies and the increase in reserves, increased 15% as a result of higher retention rates in property and casualty, and a 13% growth in the health insurance line. Reserves continued growing at a 20% rate compared to the first quarter in the last years as a result of the continued growth in the life insurance. Net claims increased by 12% during the quarter, however, the net loss ratio which compares net claims with net premiums improved from 64% to 62%. Contributing to the increased profitability in Pacifico's operation. The reduction in the net loss ratio was mainly explained by an improvement in net claims in marine hull, automobile, and life insurance. The combined ratio in the property and casualty business and health insurance business remained stable at 92.6%. As for the future, we expect that the life insurance business will continue growing and increasing 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. Finally, we expect to consolidate our presence in the health insurance business with respect to our recent purchase of Novasalud, and improve our operating margins in the profitability of this business. In summary, moving to page 11, we are satisfied with Credicorp's result for the quarter which are in line with our expectations. We have seen positive strength in all of our subsidiaries and we are confident that this positive strength will continue during the following quarters. Banco de Credito de Bolivia has improved its results with lower provisioning requirement. Its loan portfolio has been cleaned up and its operations are being restructured following Banco de Credito del Peru's business model. We expect that once economic and political conditions in Bolivia stabilize, our Bolivian operations should provide us with more attractive return.

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 has started to payoff. We are confident that this new strategy should allow Atlantic to increase the value-added to its customers and have a more stabled revenue stream. With respect to Tequendama, it has benefited from a more stable Columbian economy and the portfolio clean up made in previous years, improving its financial results. During the last year, Tequendama has been refocusing its business over its lower risk operations in the retail segment which are contributing to improve the profitability of its operations. Pacifico-Peruano Suiza has benefit from increased retention rates and an adequate management of its loss ratios in the property and casualty business, and from an increased profitability in life insurance. The purchase of Novasalud will allow it to consolidate its presence in the health insurance market and attain operational efficiencies which will boost the profitability of this business. With respect Banco de Credito del Peru, the lower provisioning requirement, the reduction in operating expenses has allowed it to continue improving its financial results, in spite the continued pressure of the business volumes as a result of the increased competition from the capital market and the impact of the tax cum financial transaction. And for the future, we have a positive outlook with respect to Banco de Credito del Peru based on its lower provisionary requirements and its Peruvian and Bolivian portfolio, and its increased focus on expense control.

In the following months, BCP will remain focused in increasing its long volumes particularly in the retail and wealth, and small business segment, where it should be able to exploit more efficiently in an extensive batch network and in increasing the efficiency of its operations. All of this effort should allow us to continue increasing the profitability of this business in the following quarters. In summary, the Creditcorp's operating units today refer to sustained profitable growth. Their portfolios are very adequately covered. All the units have clearly defined objectives, efficiency levels will continue to improve. 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 should give us a competitive advantage in the markets where we operate. Thank you very much. With this I conclude the presentation. We can now do the question and answer period.

Thank you sir. The question and answer session will begin at this time. If you're using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your push button telephone. If you wish to withdraw your question, please press star two. Questions will be taken in the order received. Please stand by for your first question. Our first question comes from Carlos Gomez with Citigroup. Please state your question.

Hi, good morning. I have two questions. The first one refers to your capital ratio, which is increasing, now 13.8% and your dividend payout demands are actively modest. And would you expect to make any acquisitions or how would you expect to use that capital, whether through buybacks or through any other mechanism in the near future? And the second question would be on the pricing of loans in Peru after your purchase off Santander. Did you think that the purchase you have taken out of a large competitor out of the market has modified the prices and if so, where -- more incorporated in the groups?

Okay Carlos. Thank you very much. First starting on the second question. I don't think our acquisitions of Santander, which had about a 6% market share has had any significant impact on the pricing of the loans in the domestic market. The loans in the top corporate are mostly governed by the competition offered by the capital market. And thus, those have remained very tight and the pricing is very competitive. Regarding the pricing in the middle market, there are several competitors. Small and medium-size banks are equally competitive, and we -- whole of the system, we have in excess liquidity. So the pricing in the middle market has remained tight. In the retail side, there are whole series of competitors, in the credit cards we've competed with the retail stores. Some of the -- and in those small businesses, we compete with the Regional

Municipality. So there are whole series of competitors in each of the market, and the whole system continues to have liquidity. Thus, we are pricing the loans very competitive.

Regarding the dividend pay out, this year we have transferred some liquidity from Banco de Credito, particularly to Creditcorp, and we have extensive Calzone's debt, which we had at the holding company level. Thus, we have increased our dividend pay out, but we have concentrated this first year on paying down debt at the holding company level. If in the future we do not have any acquisition, opportunities will clearly increase our dividend pay out going forward. Regarding the capital structure, yes, we do have in most of our subsidies a certain level of excess capital. In the markets in which we operate, we believe that a certain level of excess capital is required. The markets in which we operate and the banks have provided a lot of volatility and we feel that it is a -- we need to have that excess capital. Of course, we are always interested in looking at investment opportunities if both should arrive.

Thank you very much.

Thank you. Once again ladies and gentlemen, if you do have a question please press star one on your push-button telephone at this time. Again, if you do have a question please press star one at this time. We do have the question again from Carlos Gomez. Please state your question.

I think there are no other questions I would like to ask you what is your current position versus the? At this point would you continue to keep it? Do you think you contain a sale by merging with another company? What do you think is going to be the result?

Sure. As we have mentioned in the past couple of, maybe, year-and-a-half analyze a series of opportunities as to how to obtain value from our investments in the Tequendama, and we have analyzed a whole series of different alternatives. At this stage, the conclusion that we have arrived is that it is the most viable alternative for us is to refocus the business of the Tequendama in a segment that we have found in each, which are loans in the retail segment that are deducted directly from payroll. We have a nice product and in each that we are exploding in a profitable fashion. We believe that focusing the bank on certain niches allows us to have a profitable operation that will allow us if we want in the future to dispose of it to be able to attain a moderate adequate pricing. The positioning that the Tequendama had in the past made it very difficult to obtain any kind of business combination. So, we are focusing on our strength to have a profitable operation in order to make a more definite decision as to what future of Tequendama.

Thank you very much.

You are welcome.

Thank you. Our next question comes from Adrian

with JP Morgan. Please state your question.

Hi, good morning everyone. My question has to do with margins. If you can elaborate a little bit more on the outlook that you have for rest of this year? And also a little bit just on growth vis-a-vis loan portfolio also for the rest of the year? Thank you.

Okay. And I guess that in order to address this question more properly, probably, we have to break down into a different market segment. Overall, in each of the market segments, we do not anticipate an increased margin. There continues to be excess liquidity in all the system, as well as in the capital markets and we do not anticipate an increase in the margin. But having said that, the growth in our portfolio, we are growing more on the retail segment, and thus we are trying to -- this shift in the composition of our portfolio is allowing us to maintain, hopefully, our overall net interest margin. Thus as we grow, the retail segment of the portfolio and our top corporate portfolio comes down, the overall margin should remain -- our objective is to have that margin remain stable. But, it is not an easy proposition due to the staff reductions in our top corporate portfolio.

Thank you.

Welcome.

Thank you. Our next question comes from Karla Valverde with Centura. Please state your question.

Good morning sir. I would like to know if you have

for settling for acquiring the resolute, if you have to estimate another cost for the merger?

Yes. There are two preliminary estimates, but there were merger cost of $1.2m that we estimated relating to that operation.

Another question, if I could ask you. Do you think now that the conditions of higher interest rates, international higher interest rates, you were saying that the bank will face with lower deposits, mutual funds, or other institutional investments?

Both the domestic market interest rate should follow international interest rates eventually. And we do not anticipate that -- I'm not sure I understood your question, but we do not anticipate any volumes of funds leading the domestic economy and eventually, domestic rates will reflect international domestic rates.

Okay.

As a final reminder, ladies and gentlemen, if you do have a question, please press star one on your push button telephone at this time. If there are no further questions, I will turn the conference back to Mr. Bayly for his final comment.

Well. Thank you very much. As we have mentioned, we are satisfied with the level of result that we have achieved. And not only that, but we see that all of our subsidiaries are now in a very positive trend. All the businesses are now profitable and we have over the past years dedicated a lot of time to obtain the profitability of our subsidiaries. We are now positioned to continue growing in our profitability and we expect that to happen in the future. Thank you very much for your attention and joining us in this conference call. And with this, we will conclude the conference call. Thank you very much.

Ladies and gentlemen, the conference call replay will be available for seven days starting today at 12 PM Eastern Time through May 10, 11:59 PM Eastern after

phone number 1-800-428-6051 for participants from within the United States and 973-709-2089 for international participants with pass code ID number 350760. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.