Credicorp Ltd (BAP) 2004 Q2 法說會逐字稿

Good day, everyone, and welcome to Credicorp Limited second-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 website, www.Credicorpmet.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 your questions in a question-and-answer session that will follow the presentation. At this time I will turn the conference over to Mr. Bayly. Please go ahead, sir.

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

During the first 6 months of the year the Peruvian economy continued showing a solid performance. The economy during this 6-month period grew 4.3 percent, with mining at 11 percent and fishing at 16 percent being the leading sectors. This as a result of increased gold and copper production mostly. Construction which grew at a 6 percent rate, and manufacturing 6 percent, also expanded, compensating the decline in agriculture, which was affected by weather conditions.

Inflation increased during the quarter as a result of higher international oil and food prices and the effect of the bad weather in domestic agricultural production. As a result the 12-month inflation rate increased to 4.3 percent, which is about the target set by the Central Bank of a band between 1.5 and 3.5 percent.

The Peruvian currency remained strong during the quarter, closing at soles 3.47 per dollar due to a high mining and textile exports and increased remittances from Peruvians living abroad. Lower Central Bank intervention in the foreign exchange market contributed to the strength of the domestic currency. The fiscal situation has continued improving as a result of higher corporate income and value-added tax revenue, as well as from the recently enacted tax on financial transactions. Lower capital expenditures have also contributed to the improvement in the fiscal situation.

A surplus of 0.4 percent of GDP is expected for the first semester, compared to a 1.4 percent deficit during the same period last year. We remain cautiously optimistic for the future. Recent 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. We hope that the Camesia project, the expected recovery of the U.S. economy, and the U.S. trade agreement will contribute to an increase in private investment and to stimulate the economy in the coming months.

With respect to the recent increase in the inflation rate, we're confident that the Central Bank will take the necessary measures to control further price increases and meet its yearly target.

With respect to the Peruvian financial system, page 4. Competition in the financial system among capital markets and banks continued in the corporate sector. The current stock of corporate bonds amounted to 2.2 billion, which is 500 million higher than in June last year and 120 million higher than in March. In the retail segment, competition is equally fierce due to the presence in this market of department stores and smaller regional financial intermediaries, caja municipales.

During this quarter business volumes in the banking system recovered, but remained stable with respect to last year. Low recovery was mainly explained by an increase in foreign trade finance, mortgages, credit cards, and small-business loans. The growth in deposits during the last 3 months was due to the increase in the flow of institutional funds from mutual funds to deposits, due to the uncertainty in the interest rate environment.

Loan interest rate and spreads in dollars have continued falling as a result of the continued excess liquidity in the system and the increased competition in the middle market and retail segment. Average loan rates in soles for the system have increased, mainly due to the larger share in total loans of retail and small-business loans, which have a higher than average interest rate. We expect that as a result of recent increases in international interest rates, domestic rates will start to rise in the coming months.

The quality of the banking system loan portfolio has continued improving mainly as a result of the low interest rate, stable exchange rate, and growing economy. However, the profitability of the system during this quarter was negatively affected by the accounting treatment of inflation. This is a result of the increased inflation rates as well and by a reduction in the market value of the investment portfolios of the banks due to the increase in interest rates.

We will now review the results of Credicorp, page 5. We are satisfied with Credicorp's results for the quarter, which amounted to a $32.9 million and were in line with our expectations. With this quarter's results the average of Credicorp's net earnings during the last 4 quarters amounted to $28.5 million per quarter. The improvement in this quarter's results with respect to the same period of last year was mainly explained by lower loan loss provisions and operating expenses, which compensated the reduction in our net interest income and other income.

With these results, accumulated earnings during the first semester amounted to 62.9 million, more than 2 times higher than the earnings registered during the same period last year, which included a 17.5 million in extraordinary merger costs with Santander Peru. As we will see in the next page, during this quarter most of our subsidiaries continued improving their financial results.

Page 6, during the quarter BCP's numbers benefited from a continued reduction in loan loss provisions and operating expenses, which compensated the reduction in revenues due to lower business volumes and spreads, as well as losses in the market value of its investment portfolio.

Atlantic Security continued improving its contribution to Credicorp, mainly as a result of lower provisions for market risk compared to last year, when it registered higher provisions to reflect losses in the market value of equities and high-yield bonds. Atlantic's nonrealized gains decreased this quarter from 12 million last March to 7 million, due to the impact of higher interest rates on its portfolio.

The contribution of PPS to Credicorp declined during the quarter, mainly as a result of higher claims in the property and casualty business and a reduction in premiums in life annuities, due to an increasingly competitive pricing in this market. The results were partly compensated by an increase in the profitability of the health insurance business, as a result of higher business volumes and lower claims.

With respect to our Bolivian subsidiary, which is consolidated within Banco de Credito, its numbers continued improving. Its local book showed a net income of 1.1 million during the quarter, which compares favorably with the $400,000 registered during the same period 2003. During this quarter, loan loss provisions amounted to 0.3 million, compared to 1.2 million a year earlier. Our operations in Bolivia have improved significantly this year. All our provisionary requirements have been met. We have successfully implemented BCP's business model at Bolivia, and we feel that we are now ready to grow profitably in our Bolivian operations.

Tequendama also continued experiencing a recovery in its results. During the period it generated a 0.3 million loss on Credicorp's accounts, which included a 0.7 million in provisions and translation losses on the portfolio transferred to Credicorp in previous years. These results compared favorably with respect to last year, when it registered a loss of 0.5 million in Credicorp's books. We expect that this positive trend will continue in the coming months, as Tequendama benefits from the recovery of the Colombian economy.

During the quarter Credicorp in Others line contributed a loss of 0.4 million, which included the 0.7 million in loan losses provisions on Tequendama's loan portfolio mentioned above. During the same period last year, this line contributed a loss of 7 million, which included 1.4 million in loan loss provisions for Tequendama and 4.5 million engineering (ph) provisions and other general expenses.

We will now go on to page 7 to review BCP's numbers. BCP's contribution to Credicorp during the quarter amounted to 27.4 million and was roughly similar to the 27.2 million contributed during the same period last year. This quarter's numbers benefited from a reduction in loan loss provisions and operating expenses, which compensated a reduction in net interest and noninterest income. With these results, BCP's contribution to Credicorp during the first semester amounted to 53.2 million, compared to 35.2 million during the same period last year, which included 18.5 million in merger costs with Santander. Provisionary requirements declined from 20.3 million in the second quarter of last year to 5.9 this quarter, in line with the continued improvement in the quality of BCP's Peruvian and Bolivian loan portfolios.

Excluding extraordinary merger costs with Santander and Financiera Solucion, our operating expenses fell 2.3 percent as a result of lower administrative and personnel expenses. Administrative expenses declined 8 percent, mainly due to lower communications, maintenance, and consulting services related to the restructuring of our systems. Personnel expenses declined slightly, mainly as a result of savings incurred in the merger with Financiera Solucion.

BCP's net interest income totaled 13 percent with respect to the second quarter of last year, as a result of the reduction in the size and spread of its loan portfolio and the impact of a 100 million interest rate swap made to hedge BCP's exposure to future increases on interest rates.

Even though loans and deposits are still lower than a year ago, business volumes increased with respect to March by $120 million in loans and $50 million in deposits. Loan volume growth was concentrated in foreign trade finance, mortgages, and credit cards. Our expectations are that in the next months our business volumes should continue growing.

BCP's noninterest income fell 2.6 percent during the quarter, mainly as a result of a 2.5 million loss in the market value of our investments in mining stocks and fixed-income securities, due to a reduction in mining commodity prices and the increase in interest rates, respectively. Likewise our fees on banking services declined 2.9 percent, mainly as a result of lower fees on savings accounts, credit, and debit cards, which partially reflected the impact of the tax on financial transactions on our business.

During the quarter our efficiency ratio, excluding nonrecurrent expenses and revenue, amounted to 57.8 percent and our return on equity to 15 percent. Even though BCP's return on equity and efficiency ratios are far from our long-term objectives, we're confident that as a result of the improvement in the quality of our loan portfolio, the firmer control of our expenditures, and some expected growth, we will attain these objectives in the near future.

Page 8, the quality of BCP's loan portfolio continued improvement during this quarter. Our consolidated past-due loan ratio, which includes our Bolivian loan portfolio, continued declining from 6 to 5.1 percent between March and June of this year. Likewise our consolidated coverage ratio increased from 130 percent to 138 percent during the same period. Both our Peruvian and Bolivian loan portfolios remained healthier than the banking system average in each of these countries.

Our Peruvian portfolio indices of 4.2 percent for past due loans and 155 percent for coverage ratio are better than the average for the Peruvian banking system of 5.1 and 149 percent, respectively. In the case of Bolivia the past due loan ratio of 16.5 is now lower than the 17.6 of the system; and the coverage ratio, currently at 78 percent, is higher than the system's 71 percent ratio.

As the Peruvian economy continues to grow and the Peruvian currency 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 deterioration of the portfolio. Therefore we expect stable provisionary requirements in the following quarters.

We will now turn to Atlantic's results on the next page. During the second quarter the contribution of Atlantic to Credicorp amounted to 3.6 million compared to the 1.6 million contributed during the same period last year. With this result, Atlantic's contribution to Credicorp during the first semester amounted to 6.5 million compared to 2.2 million during the same period last year. The improvement in Atlantic's numbers during the quarter was mainly explained by a $4 million reduction in provisionings for market risk and loan losses with respect to the second quarter of 2003, which more than compensated a $2 million reduction in realized gains in the sale of securities.

Since 2003 Atlantic's focus has concentrated on increasing its wealth management business and maintaining a lower risk profile in its proprietary investments. As a result of this strategy and the low-interest rate environment, administered funds have increase from 520 million as of December 2002 to 694 million in June 2004, generating higher fees with lower risk. During the quarter fees on fund administration and brokerage services amounted to 1.1 million, 29 percent higher during the same period last year.

Provisions for market risk and loans amounted to 0.5 million during the quarter compared to 4.5 million in the second quarter last year. The reduction in provisions was mainly explained by a 3.1 million reduction in provisions for market risk. During the second quarter of last year Atlantic registered higher provisions to reflect losses in the value of high-yield bonds and stocks in the U.S. and Latin America. In addition, loan loss provisions amounted to 0.1 during the quarter, compared to 0.9 in the same period last year.

Noninterest income, which includes realized gains in the sales of securities and commissions, remained stable during the quarter. During this quarter Atlantic's net equity was increased by 20 million. The objective of this was to fund its purchase from Pacifico of 33.5 million in Credicorp's treasury shares. These shares were booked in Pacifico and have now been transferred to Atlantic. Future dividends or capital gains from the holding of this asset will not add to Atlantic's contribution to Credicorp, since they are eliminated in the accounting consolidation process.

We are confident that as a result of its increased focus on wealth management business and the reduction in the risk profile of its investment portfolio Atlantic will continue improving the profitability of its operation in the following quarters.

We will now turn to Pacifico-Peruano Suiza in the next page. During the quarter the contribution of PPS to Credicorp amounted to a 1.9 million compared to the 5.6 million contributed during the same period last year. This 5.6 million included a 3 million extraordinary gain in the sale of a long-term investment in the Backus and Johnston Group.

Pacifico's numbers during the quarter were affected by lower premiums and increased reserves in life annuities, as well as higher claims in the property and casualty business. These results were partially compensated by increased business volumes and lower claims in the health insurance business. With these numbers, Pacifico's contribution to Credicorp during the semester amounted to a 4.7 million, which compares favorably with the 6.7 contributed last year earlier, since the latter includes US$3 million of the extraordinary gain mentioned above.

This quarter's results do not include yet the figures of Novasalud, Pacifico's recent purchase in the health insurance business, since the merger took place in early August. As I mentioned before, with this acquisition we expect to consolidate our presence in the health insurance business, combining our 27 percent share in this market with Novasalud's 39 percent market share and exploit synergies in operations to improve our efficiency.

Going back to PPS numbers this quarter, total premiums fell 7 percent, mainly as a result of lower premiums in the property and casualty and in the life insurance business, which were partially compensated by an increase in health insurance volumes. The reduction in property and casualty sales was explained by delays in renewing contracts with 2 large state entities, while the lower premiums in life insurance business were due to lower prices in the life annuities as a result of increased competition in this market. Growth in the health insurance was mainly explained by acquisition of a new account with a large pay-in (ph).

The reduction in premiums in property and casualty was compensated by an increase in retention rates, as a result of which net premiums in this business remained stable with respect to the second quarter of last year. We expect that this policy will increase the profitability of operations, since it will allow us to retain risks Pacifico can manage profitably. Net premiums earned decreased 4 percent as a result of the combined effect of the large insurance business of more competitive pricing with higher reserves due to increased volumes, as well as higher reserves in property and casualty explained by the increased retention rates.

During the second quarter the net loss ratio, which compares net claims with net premiums earned, increased from 68.7 to 71.6 percent with respect to the same period of last year. The increase in this ratio was mainly explained by higher net claims in marine hulls, which compensated a decline in the net loss ratio in the health insurance business. As a result of the increase in net claims with respect to business volumes, the combined ratio in the property and casualty business and health insurance business increased to 102 during the quarter compared to 99.5 during the same period last year.

As for the future, we expect that the life insurance business will continue growing and increasing its contribution to our profitability. The property (ph) 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 our recent purchase of Novasalud, and improve our operating margins and profitability in this business.

In summary, page 11, we are satisfied with Credicorp's results for the quarter, which are in line with our expectations for this year. We have seen positive trends in most of our subsidiaries, and we are confident that these positive trends will continue during the following quarters.

Banco de Credito de Bolivia has significantly improved its results. Its loan portfolio has been cleaned up, and its operations are already restructured following BCP's successful business model. We believe we're now prepared to increase our business volumes in that country and to continue improving the profitability of our operations.

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 strategy should allow BCP to increase the value added to its customers and to have a more stable revenue growth.

With respect to Tequendama, it has benefited from a more stable Colombian economy and the portfolio cleanup made during the previous years, improving its financial results. During the last year Tequendama has been refocusing its business towards lower risk operations in the retail segment, which are contributing to improve the profitability of its operations.

Page 12, Pacifico is facing an increasingly competitive environment in the property and casualty, as well as in the life insurance business, which has been affecting its commercial margins. We expect that the domestic economic recovery and softer conditions in the international reinsurance market will allow it to improve the profitability of its operations in these markets. We are confident that 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 to BCP, the lower provisioning requirements and the reduction in operating expenses have allowed it to continue improving its financial results in spite of the continued pressure on business volume as a result of the increased competition from capital markets as well as the impact of the tax on financial transactions. As for the future, we do have a positive outlook with respect to BCP based on its lower provision requirements in its Peruvian and Bolivian portfolio and its increased focus on expense control. In the following months BCP will remain focused on increasing its loan volumes, particularly in the retail and small business segments, where it should be able to exploit more efficiently its extensive branch network, and in increasing the efficiency of its operations. All of these efforts should allow us to continue increasing the profitability of this business in the following quarters.

In summary Credicorp's operating units are today prepared to sustain profitable growth. Their portfolios are very adequately covered. All the units have clearly defined objectives. Efficiency levels have continued to improve, and we do not envision any extraordinary expense in the near future. We're now positioned to take advantage of a stable economy with adequate economies of scale that, with the exception of Bolivia, should give us a competitive advantage in the markets where we operate. With this, I finish the presentation and would like to move on to the question-and-answer period. Thank you very much.

(OPERATOR INSTRUCTIONS) We have no names in the queue at this time. Carlos Gomez (ph) of Citigroup.

You may have mentioned this before, but now that Columbia is doing better and Tequendama has stabilized, would you consider going back to the Columbian market for further acquisitions? Thank you.

No, at this stage we do not envision any continued expansion in our Columbian operations nor in any international operations to that regard. For the time being we will not enter any new country or continue expanding in our Colombian business.

Are you comfortable with your covering capitalization ratio? Or would you consider either some form of either buyback or increased dividend?

We have started a comprehensive review of the capitalization in each of our subsidiaries. We probably have an estimation that, yes, we do have a certain level of excess capital. But I think, as I have mentioned before, because of the volatility of the markets in which we operate, we have to live with a certain level of excess capitalization. But again we are in the process of reviewing that; and maybe for the next conference call we will have something more concrete as to that regard.

Thank you very much.

(OPERATOR INSTRUCTIONS) Karla Valverde, Centura.

I have 3 questions. I would like to know if the contracts of the casualty and property business in Pacifico have been renewed already.

The second is that in Peru we have expectations that there will be an appreciation of local currency. I would like to know if you have any perspective of how it would affect Banco de Credito's results.

And the other is that Atlantic has been benefited for the low interest rates. Now that it is expected that interest rates are going to grow, do you have any idea how it is going to affect Atlantic's results also?

On Pacifico's property and casualty, yes; those two large state customers that have not reviewed their contracts have already reviewed them on the same terms as they were previously.

Regarding Atlantic's portfolio, yes; Atlantic has a portfolio which does not have a relatively large duration. So increases in interest rates will undoubtedly affect it, but not in any significant fashion. Those increases in interest rates are reflected directly into the equity and do not go through the profit and loss. They are reflected in the unrealized gains of losses.

We have already seen some adjustment. Those unrealized gains of losses were $12 million, I think -- from 12 to 7 million, exactly. As I mentioned, those unrealized gains went from 12 to 7. We have adjusted the duration of the portfolio; and we do not expect any significant impact on the value of that portfolio going forward. Which again, if there were any impact, does not go through P&L but directly into the equity.

As regard to the appreciation of local currency, the appreciation of local currency does not have any significant impact on BCP according to Credicorp's accounting, which is really what we are focusing on, on giving the results. I think that in the future we should focus on Credicorp's accounting of BCP's results more than the local books of BCP. The numbers which will reflect the value of our stock should be the ones reported under international accounting for Credicorp.

In respect to the activities in the market, volatilities in the local currency always give us further benefits in our trading business. But I see no other significant impact.

Okay, thank you.

Adrian Huerta, J.P. Morgan.

I have 2 quick questions. One is related to expenses. I just wanted to know what are your expectations for the rest of this year and for next year? We saw a nice decline in the first quarter and also in the second quarter.

Second question is with regards to your net interest margin. What are your expectations also for the rest of this year and for next year, given expecting interest rates raise a little bit during this year? Thank you.

With respect to expenses we have achieved a good level of savings. We expect those savings to be maintained. We do not have any major cost reduction projects going along at this time. We're most focused now on increasing our revenue, so that the savings we have achieved -- our objective would be to maintain them going forward.

Regarding net interest margin, we have the expectation that an increase in interest rates in the worldwide environment of interest rates will allow us to marginally improve our margins, to the effect that there continues to be a lot of liquidity. We might be able to maintain the cost of liabilities while marginally increasing the cost of our (inaudible). But again there is fierce competition in every segment in which we're operating and this will not be easily achieved.

We're very encouraged by the growth in the volumes of our portfolio we have seen in the last quarter. These volumes as I mentioned were led by growth in trade finance, which was related to a certain expense with the prices of our imports and exports. It was also related to the fishing, which was a good fishing season. But also there was growth in the mortgage and in the consumer loans. So maybe our expectation is that that growth will continue throughout the year and help increase our net interest margin.

Just to clarify, those are expenses you are basically expecting to remain flat from the level you achieved in this quarter, right?

Correct.

Finally one more question. Just on loans (ph), you were talking a little bit about that. What is the growth that you expecting right now for the second half of this year? Are you expecting to see a sequential increase over the coming quarters?

No, this quarter's increase was extremely good. Again there was a combination of several factors. A couple of them will not necessarily be repeated in the second half, which is the increase in the commodity prices, which increased the volume overall of the trade finance; and the cyclicality of the fishing. So, yes, we contain to expect a growth in the second half of the year, but maybe not as large as we've seen in the first half.

Great, thank you so much.

(OPERATOR INSTRUCTIONS) We have no further questions, sir. I will turn the teleconference back over to you for any closing remarks.

Thank you very much also for joining us in this conference call. We hope to continue delivering consistent results in the near future; and again, thank you very much. Goodbye.

Ladies and gentlemen, the conference call replay will be available for 7 days starting today at 1:00 PM Eastern Time through August 19 at 11:59 PM Central Time at the following phone number, 1-888-203-1112 for participants from within the United States. And for international participants, dial 719-457-0820. Enter pass code 296095. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.