Credicorp Ltd (BAP) 2004 Q3 法說會逐字稿

Good morning, and welcome to Credicorp's third-quarter financial earnings conference call. Hosting today's call will be Mr. Walter Bayly, Chief Financial Officer of Creditcorp. 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 at www.Credicorpnet.com.

Before we begin I'd 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. At this time, I'd like to turn the conference over to Mr. Bayly. Please go ahead, sir.

Thank you very much. Good morning and thank you all for joining us at this Credicorp conference call. As usual, we will follow our normal pattern, briefly reviewing the results for the Peruvian economy, the financial system, and afterwards we will concentrate on Credicorp's numbers and those of its major operating subsidiaries.

Moving on to page number 3, we can see that during the first nine months of the year the Peruvian economy continued showing a good and solid performance. The economy grew 4.4% during the period, with fishing growing at a 24% rate and manufacturing 6% as the leading sectors. Mining experienced high growth rates until the second quarter, but they accelerated thereafter due to lower growth productions. Construction grew at 5%, compensating the decline in agriculture, minus 2%, which was affected by adverse weather conditions.

Prices remained stable during the quarter as a result of a 3.7% appreciation in the exchange rate, which contributed to a reduction in food services prices, compensating higher oil and energy prices. As a result of the above, the 12-month inflation rate declined from 4.3% in the previous quarter to 4%. But it is still above the annual target rate set by the Central Bank of 1.5 to 3.5%.

The Peruvian currency continued strengthening, closing at 3.34 soles per dollar, due to high mining and textile exports as well as by increased remittances from Peruvians living abroad. The appreciation of the domestic currently took place in spite of active Central Bank intervention in the foreign exchange markets, with net purchases of close to 600 million during the quarter.

The fiscal situation has continued improving as a result of higher corporate income and value-added tax revenues due to increased tax rates and additional measures aimed at improving tax collection. Lower capital expenditures have also contributed to the improvement in the fiscal situation. Public finances have been in equilibrium during the first nine months of the year, showing a deficit of 0% (indiscernible) compared to a 1.2% deficit during the same period last year.

As for the future, we remain cautiously optimistic. The economy has recovered during the last two years as a result of higher domestic consumption and commodity prices. But increased private investment is required to maintain high growth rates in the medium term. We hope that the common share (ph) project and the U.S. trade agreement will contribute to an increase in private investment and growth in the coming months.

Page 4. With respect to the Peruvian banking and financial system, competition in the financial system has continued very aggressive during the last month as a result of excess liquidity, the growing importance of domestic (indiscernible) markets and corporate funding, and the increased presence in the retail segment of department stores and smaller regional financial intermediaries, La Cajas Municipales.

Bond issues in the domestic capital market have continued growing. During the quarter the stock of corporate bonds increased close to 400 million, mainly as a result of a $270 million bond issue to finance the transport system of the Commissar (ph) Gas Project. The current stock of corporate bounds amounts to $2.6 billion and is more than $800 million higher than a year ago. The retail segment remains highly competitive with an increased presence of department and large food stores in the consumer banking market as well as more regional and financial intermediaries and specialized banks in the small-business loan market.

During the quarter, loan volumes in the banking system remained stable with respect to June, but are 1.5% higher than in September of last year. Loan growth during the last 12 months was mainly explained by an increase in foreign trade finance, mortgages, credit cards, and small-business loans. Deposits have continued recovery.

Low interest rates and spreads in dollars declined slightly as a result of the continued excess liquidity in the system and the increased competition in the corporate and retail markets. Average loan rates in (indiscernible) system continued increasing due to the larger share in total loans of retail and small-business loans, which have higher-than-average interest rates.

We expect that as a result of recent increases of international interest rates, domestic interest 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 rates, the stable exchange rate, and the growing economy. However, the profitability of the system during the quarter was negatively affected by inflation adjustment losses as a result of the increased inflation rate.

We will now review the results of Credicorp on page 5. We are satisfied with Credicorp results for the quarter, which amounted to $32.9 million and were 27% higher than those achieved in the same period last year. With these results, Credicorp's cumulative earnings during the first nine months amounted to $95.9 million, which is 69% higher than the earnings registered during the same period last year. Which included 17.5 million in extraordinary merger costs with (indiscernible) Peru.

The improvement in this quarter's results was mainly explained by lower loan loss provisions at BCP and higher net interest -- higher net earnings at Pacifico-Peruano Suiza since this quarter's numbers included in its accounts the cumulative results of Novasalud since its acquisition in July. So regarding Pacifico's numbers, this quarter's numbers includes both on the income and expense side seven months of the results of Novasalud. This period's figures registered an increase in income, claim on insurance and activities and expenses as a result of the closing of PPS merger with Novasalud in early August.

During this quarterly we also agreed to sale our 100% stake in Banco Tequendama to a Colombian (indiscernible) group for $32 million. During the last year, Tequendama had improved its performance and experiencing some growth in the Colombian retail markets. However, with a market share of approximately 1% of this market, it lacked the critical mass required to provide Credicorp with attractive returns. We are satisfied with this transaction, which will allow us to increase our focus in the market where we can profitably exploit our economies of scale.

Page 6. With respect to our subsidiaries, during this quarter all of them improved their results. PCP's contribution to Credicorp benefited from a continued reduction in loan loss provisions, which compensated the decline in revenues due to lower business volumes and spreads, as well as lower recoveries of loans written off.

Atlantic Security Bank continued improving its contribution to Credicorp mainly as a result of lower provisions for market risks, which more than compensated lower realized gains in the sale of securities. Atlantic's non-realized gains increased from 7 million in June to 9.5 million at the end of the quarter. As mentioned earlier, the contribution of Pacifico to Credicorp increased during the quarter mainly as a result of the incorporation of 1.3 million in net earnings generated by Novasalud between March and July of this year, which were registered in PPS accounts during this quarter.

With respect to our Bolivian subsidiary, it's numbers continued improving mainly as a result of lower provisioning requirements. It's figures showed a net income of 1.1 million during the quarter, which compares favorably with the 0.1 million registered during the same period of 2003. With this, our accumulated profits for the year amounted to $2.6 million in Bolivia.

Our operations have improved significantly. The quality of our loan portfolio has recovered substantially, and all of our provisionary requirements have been met. We are successfully implementing BCP's business model at Bolivia, and we feel ready to increase our presence in the Bolivian market.

With respect to our Columbian operations, during the quarter they generated a 2.6 million loss of Credicorp's accounts, which includes 3.5 million in provisions on our Colombian investments, as well as the loan portfolio transferred to Credicorp. This result compared to 2.2 million loss registered last year, which included 2 million in loan loss provisions on Credicorp's accounts.

During the third quarter, the Credicorp and others line contributed a loss of 5.8 million, which included the 3.5 million in loan loss provisions on our Colombian assets mentioned above, as well as 1 million in provisions for contingencies and other general expenses. During the same period last year this line contributed a loss of 5.1 million, which included 2 million in loan loss provisions for Tequendama and 2 million in generic provisions and other expenses.

We will now review BCP's numbers on the next page. BCP's contribution to Credicorp during the quarter amounted to 32 million, 12% higher than the 28.7 contributed during the same period last year. With this result, BCP's contribution to Credicorp during the first nine months of the year accumulated 85.3 million compared to 63.8 during the same period last year. This year's cumulative results for the third quarter include 4 million in merger costs, with Finaciera Solucion, where last year's figures include 18.5 million in merger costs with (indiscernible) Peru.

This quarter's numbers benefited from a reduction in loan loss provisions and operating expenses, which compensated our reduction in net interest and non-interest income. Provisionary requirements declined from 25 million in the third quarter of last year to 4 million this quarter, in line with the continued improvement in the quality of BCP's Peruvian and Bolivian loan portfolios. Excluding extraordinary merger costs with (indiscernible) and Finaciera Solucion, our operating expenses fell 2% due to lower personnel and administrative expense. Personnel expenses declined mainly as a result of savings incurred in the merger with Finaciera Solucion and lower administrative expenses as a result of our reduction in maintenance and consulting services related to the restructuring of our systems units.

BCP's net interest income fell 16% with respect to the third quarter of last year as a result of a reduction in the size and spread of our loan portfolio and the impact of interest rate (indiscernible) made to hedge BCP's exposure to future increases in interest rates. BCP's non-interest income fell 10% during the quarter mainly as a result of a reduction in the recovery of loans written off.

Fees and banking services declined 2 million during the quarter due to lower fees on savings account and debit cards, which reflect the impact on the tax on financial transactions on our business.

During the quarter our efficiency ratio, excluding non-recurring expenses and revenue, amounted to 55.7%. And our return on equity to 19%, measured in terms of our contribution to Credicorp. Cumulative to the third quarter, these ratios were 56.8% and 17%, respective. We're confident that as a result of the improvement in the quality of the loan portfolio, future growth in business volumes and the firmer control on expenditures, BCP will continue improving these ratios in the near future.

Page 8. The quality of BCP's loan portfolio continued improving during the quarter. Our consolidated pass-through loan ratio, which includes our Bolivian loan portfolio, continued declining during the quarter from 5.1 to 5%, and is much lower than the 8.1 registered a year ago. Our consolidated average ratio of 134 % was slightly lower than the 137% registered at the end the previous quarter, but higher than the 118% a year ago. Both our Bolivian and Peruvian loan portfolios remain healthier than the banking system average in each of these countries.

Our Peruvian portfolio pass-through loan ratio is 4.3%, lower than the system's 4.6%. In the case of Bolivia, the pass-through loan ratio of 14.2% is now lower than the 16.9% of the system. And the coverage ratio currently at 85.3% is higher than the system's 76.5 % ratio. As the Peruvian economy continues to grow and the Peruvian currency remains stable, we foresee a continued improvement in the quality of the portfolios. In the case of Bolivia, we have built up the required reserves, and we do not anticipate a deterioration of the portfolio. We expect stable provisioning requirements in the following quarters.

We will now turn to Atlantic's results on the next page. During the third quarter the contribution of Atlantic to Credicorp amounted to 2.8 million compared to 2.5 million registered during the same period last year. With these results, Atlantic's contribution to Credicorp during the first nine months of the year amounted to $9.3 million compared to 4.7 million during the same period 2003. In addition, non-realized gains increased from 7.1 million in June to 9.5 million at the end of the quarter as a result of a recovering of the market value of the investment portfolio.

The improvement in Atlantic's performance reflects its increase focus on the wealth management business and the lower risk profile of its proprietary investment portfolio. As a result of this strategy, funds under administration have increased close to 200 million since December of 2003, generating higher fees with lower risks. The larger contribution of Atlantic to Credicorp's results this quarter was mainly explained by a 1.9 million reduction in the provisions for market risks, which more than compensated a 1.3 million decline in realized gains and the sale of securities.

During the third quarter Atlantic did not register provisions for market (indiscernible), where last year's numbers included a 1.9 million in generic and other provisions to reflect losses in the market value of high yield bonds. Non-interest income, which includes realized gains in the sale of securities and commissions, declined by 1 million during the quarter, mainly as a result of a 1.3 million reduction in realized gains in the sale of securities. Fees on funds under administration and brokerage services amounted to $1 million, 51% higher than those registered in the same period of last year. With these results, Atlantic's return on equity during the quarter and the first nine months of the year reached 12% and 13%, respectively. We're confident that as a result of this increased focus on the wealth management of the business and the reduction in the risk profile of its investment portfolio; Atlantic will continue improving the probability of its operations in the following quarters.

We will now turn to Pacifico-Peruano Suiza on the next page. During the quarter, the contribution of PPS to Credicorp amounted to 3 million compared to 0.1 million contributed during the same period of last year, which included a 4 million in minority interest adjustment. PPS results for the quarter included 1.3 million in net earnings generated by Novasalud between March and July of this year, which were incorporated into PPS accounts this quarter. These results also include 1.6 million in extraordinary merger costs. With these numbers, PPS's contribution to Credicorp during the semester amounted to 7.7 million, which compares favorably with the 6.9 million contributed a year earlier.

During the quarter Pacifico's premiums increased 23% mainly as a result of the incorporation of Novasalud's business volumes since March and higher premiums in the life insurance business, both of which compensated a reduction in sales in the property and casualty line. Pacifico's property and casualty premiums have been negatively affected by a general reduction in market prices and delays in the renewal of some important public sector accounts. With this result, Pacifico's consolidated share in the insurance market as of the end of August was 31%, which is higher than the 30% attained during the same period last year.

During the quarter net premiums earned increased 65%. This in addition to higher business volumes in the health and life insurance business, retention rates in property and casualty, were higher than last year. The net loss ratio in property and casualty and health insurance increased from 58 to 67% with respect to the third quarter of last year. The increase in this ratio was mainly explained by higher net claims in marine hull, which compensated a declined 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 and health insurance business increased to 94% during the quarter compared to 87% 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 and casualty business will continue 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 the profitability of this business.

Moving on to page 11. In summary, we are satisfied with Credicorp's results for the quarters, which are in line with our expectations. We have seen positive trends in all of our subsidiaries, and we're confident that this positive trend will continue during the following quarters as we increase our focus in the markets where we can exploit economies of scale.

Banco de Credito de Bolivia has significantly improved its results. Its loan portfolio has been cleaned up and its operations have been restructured successfully, borrowing BCP's business model. We believe we are now prepared to increase our business volumes in that country to continue improving the profitability of our operations. In the case of Atlantic, the reduction in the risk profile of the investment portfolio and its increased concentration in the wealth management and brokerage business, have started to pay off. We're confident that this new structure should allow Atlantic to increase the value added to its customers and have a more stable revenue growth.

On page 12. Pacifico is facing an increasing competitive environment in the property and casualty business, which have been affecting its commercial margins. We expect that 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're confident in the purchase of Novasalud, will allow us to consolidate its presence in the health insurance markets and attain operational efficiencies which will boost the profitability of this business.

With respect to BCP, the lower provisionary requirements and the reduction in operating expenses has allowed it to continue improving its financial results in spite of the continued pressure on business volumes as a result of the increased competition from capital markets and 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 volume, particularly in the retail and small business segments, where it should be able to exploit more efficiently its extensive (indiscernible) networks and increasing the efficiency of its operation. All of this effort 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. Our portfolios are very adequately covered, all the units have clearly-defined objectives, efficiency levels should 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 should give us competitive advantages in the markets in which we operate.

Thank you very much. And with this, I conclude my presentation and are ready now to go into the question-and-answer period. Thank you very much.

(OPERATOR INSTRUCTIONS). Carlos Gomez Lopez.

From Citigroup. I have two questions. The first one is your comments about the growth of the (indiscernible). Is that a segment that you see as a potential problem for this system? Or do you think it is adequately regulated? My second question is whether you could give us a target ROE for the coming two years? Thank you.

Okay, regarding the Cajas Municipales, yes, it is not a matter of regulation. They are competing aggressively with us, with a very good looking at niches, geographical niches. They are good at reaching a customer base which maybe we have not been appropriately focusing on. They have grown in some of these regional markets. They are good competitors. We are revisiting our strategy, our distribution channels and our products to be able to compete more effectively against them. It's not a matter of regulation; it's a matter of being efficient and effective in competing in the marketplace. Since they are very focused on their markets, they are maybe being more efficient than us in those particular niches.

Regarding projections -- it is not a policy to provide projections. But clearly our medium-term objectives for Credicorp going forward is on the 20% range return on equity.

Is that something you expect to achieve in the next two or three years?

I would say in the near future, in the medium-term, we expect to be there in the three to four-year range.

(OPERATOR INSTRUCTIONS). Jorge Luis Rodriguez.

I have two questions, one is regarding Banco Tequendama, and the other one is regarding the profits obtained by the selling of Banco Tequendama. In the first case, when do you expect Banco Tequendama's results to go out from Credicorp's consolidated balance sheets. And the second question is -- besides any further consolidation in the other businesses of Credicorp, are there any plans to expand in any sort of new business lines after going out from Banco Tequendama? Thank you very much.

Regarding our Colombian operations, from the end of September we have stopped consolidating the numbers. We are now in the process of doing a detailed due diligence with the buyers -- in process of doing a due diligence process. The price is what we have mentioned, $32 million. There could be some minor adjustments regarding the results of the due diligence process, but until that is finalized we do not expect to show any results from this operation. But mostly we expect that going forward there will be no impact on our P&L. We think that we have provisioned at the price at which the assets will be sold. With the end of this quarter, we do not expect our P&L to be impacted neither positively nor negatively with respect to our Colombian (indiscernible) operations going forward. Could you repeat the second question again?

Yes, the second question is -- regarding if there are any plans after the selling of Banco Tequendama to expand maybe in any of the other markets that Credicorp is in?

At this stage we do not envision entering any new markets. We're focused on the markets in which we have today our presence. Now having said that, in the markets in which we do have a presence today, we are constantly looking and being aware of any growth opportunities. But we do not envision at this stage entering any new markets.

(OPERATOR INSTRUCTIONS). At this time, it appears there are no further questions. At this time, I'll turn the conference back over to Mr. Bayly for his final comments.

Thank you very much for joining us in this quarter. As mentioned, we now have had a couple of very solid quarters of performance. We now continue to focus on the markets in which we do have a presence, and continue looking for growth opportunities in those markets. And we are confident we can achieve that going forward, to be able to obtain the return on equities that have been mentioned in this conversation. We thank you very much for being with us, and with this, I am leaving the conference call. Thank you very much.

Thank you. Ladies and gentlemen, the conference call replay will be available for seven days starting today at 12 noon p.m. Eastern Time through November 15th at 11:59 PM Central Time at the following phone number -- 1-888-203-1112 for participants within the United States and 719-457-0820 for international participants. Please use passcode i.d. 879292. This concludes our conference for today. Thank you all for participating and have a great day. All parties may disconnect.