Credicorp Ltd (BAP) 2004 Q4 法說會逐字稿

Good day, everyone. And welcome to this Credicorp, LTD fourth quarter and year-end 2004 earnings release conference call. As a reminder, today's conference is being recorded. At this time, I'd like to turn the conference over to Walter Bayly, Chief Financial Officer. Please go ahead, sir.

Good morning, and thank you all for joining us at the Credicorp's year-end conference call. As usual, we will briefly review the results for the economy, the Peruvian financial system and afterwards, we will concentrate on Credicorp's number as well as those of its major operating subsidiaries. On Page 3, the Peruvian economy, most of the Peruvian economy numbers showed good performance during 2004. The economy had one of the highest growth rates in the region for a third consecutive year. All sectors showed positive year-over-year growth with the exception of agriculture, which was effected by weather conditions. The growth was driven by higher production of copper, fish mill and natural gas. Mining sector grew at a 5.5 percent rate with a slight downward trend due to lower production in gold, which was compensated with an increase in copper production. The manufacturing sec -- sector showed strong growth, not only in the production of primary process goods, but also in the non-primary category with a 6.8 percent growth rate. This growth was driven by textile production for exports, as well as a production of household goods for domestic consumption. Fishing sector grew 22.3 percent in spite of financially ban in October. Services grew at 5.5 percent rate and the construction sector grew at 4.5 percent rate.

Inflation remained under control during the year, reaching 3.48 percent by year end. Although this was the highest rate of the past 4 years, it brought the index to just below the ceiling of the target inflation set by the Central Bank. The inflation -- the fattening (ph) inflation range is between 1.5 and 3.5 percent. The expectation for the year 2005 are 2.5 percent of inflation according to the Peruvian authorities. The Peruvian currency continued strengthening closing at 3.28 per dollar. The exchange rate experienced a decrease of 5.2 percent year-over-year. The strength of the local currency was mainly explained by an increase in mining and textile exports, as well as by an increase in remittances for Peruvians living abroad. The acquisition of the domestic currency took place in spite of active Central Bank intervention in the foreign exchange market with net purchases of close to 2.3 billion during the year. The fiscal deficit is expected to close at 1.5 percent of GDP.

The fiscal situation was benefited by higher income tax revenues and the increase in the value-added tax as well as administrative measures adopted by the government to improve tax collection. However, a significant part of such increases has been used to finance higher public sector wages and transfers to the regional governments. As for the future, we are optimistic. The economy has recovered during the last 3 years as the result of higher domestic consumption, higher commodity prices, as well as an increase in private investments. We estimate that the cost production of Comisea (ph) project, the high commodity prices in the future use trade agreement expected to be signed in July 2005 will contribute to stimulate the economy during the current year.

Going on to the next page, regarding the Peruvian banking system. The development of the Peruvian capital market, the increased presence in the retail segment of department stores and smaller regional financial intermediaries, [INAUDIBLE] have resulted in stiff competition for the commercial banking system. Bond issues in the domestic capital market have continued showing a positive trend. The stock of corporate bonds issued increased by almost 500 million during the 2004. The current stock of corporate bonds in the market reached -- or amounted to $2.3 billion. Retail loans expanded significantly during the year, particularly in the mortgage, consumer and small business markets. Loans in this markets grew year-over-year by 18 percent, 24 percent and 57 percent respectively. During 2004, loan volumes in the banking system increased during the last quarter, 2.9 percent with respect to September 2004 and 4.9 percent with respect to December 2003. Loan growth was mainly explained by an increase in mortgages, credit cards, small business loans, and foreign trade finance. Deposits have continued recovering this as well.

Loan interest rates and spreads in dollars increased as a result of recent rises on international interest rates led by the fed. Average loan rates [INAUDIBLE] for the system continued increasing due to the larger share of total loans of retail and small business loans denominated in local currency, which have higher than average interest rates. Loan interest rates expressed in dollars, oh sorry, Finally it should be mentioned that the profitability of the system during this year was negatively effected by the inflation adjustment losses as a result of the increased inflation rate. However, this profitability was higher than in the previous year.

We will now review the results of Credicorp. We are satisfied with Credicorp's results for the quarter, which amounted to $34.9 million and was 47 percent higher than in the same period last year. With this results, Credicorp's cumulative earnings during the year reached $130.8 million, 62 percent higher than the earnings registered during the same period last year, which included 18.6 million in extraordinary merger costs with [INAUDIBLE] Peru. The improvement in this year's results was mainly explained by lower loan loss provisions, lower merge costs of BCP-11 and an overall improvement in the performance of all of the subsidiaries of Credicorp. As of December 2004, Credicorp's figures registered an increase in premiums and held fees, claim on insurance activities and health costs and expenses as a itself a result of the acquisition and subsequent merger of Na -- Novasalud into PPS. Other income was 134 million in the fourth quarter of 2004, 50 percent higher than 89.6 million the same period last year.

This increase was mainly due to the merger mentioned above with the effect of increase in both the revenue and cost items. Due to this effect, premiums and health fees reached $57 million in this quarter, 110 percent over fourth quarter 2003. Likewise, claims and health costs grew to 44 million, 88 percent higher when compared to 2003s last quarter. Other expenses amounted to 137.9 million in the fourth quarter 2004. This is 19.9 percent over expenses in the same period of the previous year. Part -- partially due to increased transactions brought by the merger. Additionally, Credicorp registered in the last quarter of 2004 higher provisions for foreclosed assets amounting to 4 million and provisions for Banco Tequendama [INAUDIBLE], which has already been sold, amounting to $3.9 million. In January 2005, BCP acquired the loan portfolio of Bank Boston's Peru branch of approximately 400 million. This loan portfolio includes short and mid-term commercial loans, mortgages and leasing operations. We expect that this portfolio will contribute this year with roughly $5 million to Credicorp's after tax net income.

Page 6. All of our subsidiaries improved their performance during the year. BCP made the largest contribution to our corporate results. The improvement in BCP's result was mainly explained by lower loan loss provisions following a continuing improvement in the loan portfolio quality, as well as by lower merger costs after the consolidation of Santander Peru el Financiera Solucion. Atlantic Security Bank also improved its contribution to Credicorp. Mainly as a result of lower provisions for market risk and lower loan loss provisions. The increase in value of its investment portfolio was a major factor behind this improvement. Additionally, it's now realized gains, closed the year at 9.9 million compared to 11 million in realized gains a year before.

The contribution of Pacifico to Credicorp's increased substantially this year. Due to the consolidation of income, claims on insurance activities and expenses as a result of closing, of the closing of the Pacifico merger with Novasalud in early August. Increased revenue from premiums -- premiums and health fees in 2004 were partially offset by hard claims and health cost expenses and non-interest expenses. Additionally, the contribution in 2003 was effected by adjustments for minority interests or reserves related to previous years, which amounted to $6.6 million. With -- with respect to our Bolivian subsidiary, its financial performance continued improving, mainly as a result of lower provisioning requirements. Loan loss provisions resulted in 3.1 million expense compared to 8.9 million charge against results during 2003. Additionally, its local book figures showed a net income of 4.8 million during the year, which compares favorably with 1.5 million registered during the same period 2003. Our operations in Bolivia have improved significantly this year. The quality of its loan portfolio has recovered substantially and all provisioning requirements have been met. We are successfully implementing BCP's business model of BCB and we feel ready to increase Credicorp's presence in the Bolivian market.

As of December 2004, Credicorp's consolidated-financial statements include Banco de Tequendama . However, the sale price of this sub -- subsidiary has been agreed it did not contribute to consolidated net income in the last quarter. A provision equivalent to the net income generated during such period was registered in the other expense category. In the fourth quarter of 2004, the Credicorp and others line contribute with 0.9 million, which included a gain of 3 million from the sale of long-term investments on equity securities. On the other hand, the 3.6 million loss in the last quarter of 2003 includes a 2.1 million loan loss provision and reserves related to assets received in lieu of payment, in the last -- in lieu of payment and the cumulative contribution in 2003 included a 6.5 million charge for contingency reserves.

We will now review BCP's number in the next page. BCP's contribution to Credicorp during the quarter amounted to 28.1 million, 3 percent higher than the 27.4 million contributed during the same period last year. With this results, BCP's contribution to Credicorp during the year amounted to 111.1 million compared to 91.3 million during the same period last year. This year's cumulative results include 4 million in merger costs with Financiera Solucion, where last year's figures included 30 million in merger costs with Santander Peru. BCP's net interest income fell 4.5 percent with respect to the fourth quarter of 2003. Mostly due to a continuous fall in average interest earning assets. While the net interest margins also had a slight decline. Average interest rate-- sorry,. average interest earning assets reached 3 -- 6.3 billion during the fourth quarter 2004, a decline of 4.2 percent comparing with the fourth quarter of 2003. During the last quarter of 2004, the net interest margin increased mostly due to higher foreigncy -- foreign currency loan rates due to increased lending to higher margin segments while local currency loan and deposit rates remained mostly stable.

Provisioning requirements declined from 14.7 million to 6.4 million when compared quarter over quarter and is in line with the continued improvement in the quality of BCP's Peruvian and Bolivian loan portfolios. Loan loss provisions represented 9 percent of BCP's net interest income during the last year, a level which is closer to international standards. BCP's other income fell 9.9 year-over-year and 6.9 percent from the fourth quarter 2003, mainly as a result of lower recovery of loans written off and a decrease of banking services fees. Fees from banking services declined 3.4 million, which is 6.5 percent quarter-over-quarter. due to lower fees on savings account, debit cards, and distribution network fees which reflect the impact of the tax on financial transactions on our business. Excluding extraordinary merger costs with Santander Financiera Solucion, BCP's other expenses fell 4.5 percent. When compared quarter-over-quarter at 4.1 percent year-over-year. This was mainly due to lower administrative and personnel expenses.

Personnel expenses declined slightly, mainly as a result of savings incurred in the merger with Financiera Solucion. After initial [INAUDIBLE] expenses declined as a result of a reduction in communication, third party fees and maintenance services related to our restructuring of our systems. The inclease -- woops -- the increase on losses on inflation adjustment to 4.1 million for total year 2004 from 13.1 million in 2003 is due to the negative effect of higher wholesale price inflation and of the strengthening of the local currency exchange rate. In total year 2004, we have 4.9 percent inflation compared to 2 percent in 2003, while the local currency appreciated 5.2 percent in 2004 with what it was 1.5 percent in 2003. It is important to mention that starting 2005, financial statements of Peruvian companies will no longer be adjusted by inflation. This measure will not generate a tax shield in BCP. Profit and loss reaching last year approximately 10 million. From Credicorp's perspective, this measure will impact on profit and loss with an increase in charge for income tax.

During the quarter our efficiency ratio, excluding non-recurrent expenses and revenues, reached 54.6 percent and our return on equity, 15 percent measured in terms of our contribution to Credicorp. On a cumulative basis, this ri -- ratios reached 56.2 percent and 15 percent respectively. We are confident that as a result of the improvement in the quality of BCP's loan portfolio, future growth and business volumes, mainly in the retail segment, confirm our control on expenditures BCP will continue improving its results in the near future.

Page 8. The quality of BCP's loan portfolio continued improving during the year. Our consolidated past due loan ratio, which includes our Bolivian loan portfolio, continued declining from 6.07 percent to 3.68 percent year-over-year. BCP's consolidated coverage ratio reached 160 percent, higher than the 155 percent reached at the end of the previous quarter and higher the -- than the 124 percent reached a year ago. Both our Peruvian and Bolivian loan portfolios remain healthier than the banking system average in each of these countries. Our Peruvian portfolio passed through loan ratio of 3.2 is lower than the system's 3.8 percent and our coverage ratio of 179 percent is higher than the average of the Peruvian banking system of 177 percent. In the case of Bo -- Bolivia, the pass through loan ratio was 11 percent, lower than the 20.7 percent reached in December 2003 and lower than the 14 percent of the system. And the coverage ratio, currently at 100.6 percent, is an improvement over the 76.7 percent obtained in 2003 and higher than the system's 84.3 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 do not anticipate a deterioration of the portfolio. We expect stable provision requirements in the following quarter.

We will now turn to Atlantic's results in the next page. During the last quarter, the contribution of Atlantic Security Holding to Credicorp amounted to 4 million, compared to the 3.1 million registered during the same period last year. With this result, Atlantic's contribution to Credicorp during the year amounted to 13.3 million compared to 7.8 million during 2003. In addition, non-realized gains increased from 9.5 million in September to 9.9 million at the end of the quarter as a result of the recovering the market value of the investment portfolio held by Atlantic. The improvement in Atlantic's performance reflects an increased focus on the wealth management business and the lower risk profile of its proprietary investments. As a result of this strategy, administered funds increased from 549 million in December 2002 to 664 in December 2003, and 746 million as of December 2004, generating higher fees with lower risk.

The larger contribution of Atlantic to Credicorp's result during the year is mainly explained by -- by a reduction in provisions for credit and market risks from 12.2 million in December 2003 to 1.7 million in December 2004, an 86 percent decrease year-over-year. During the last quarter, Atlantic register provisions for market REIT of 148,000, while last quarter of 2003 numbers included 1.8 million in generic and other provisions to reflect losses in the market value of higher yield -- of high yield bonds. Non-interest income, which includes realized gains in the Social Security and commissions declined from 8.1 million in 2003 to 4.7 million in 2004, mainly as result of a 3.8 million reduction in realized gains in the sale of securities. Fee income on fine (ph) administration and brokerage services reached 4.4 million, 22 percent higher than during the same period 2003. We are confident that the result of its increased focus on the wealth management business and the reduction in the risk profile of its investment portfolios, Atlantic will continue improving the profitability of its operations in the following quarters.

We now turn to Pacifico Peruano Suiza on the next page. During 2004 the contribution of PPS to Credicorp was 9.6 million, almost 3 times higher than that of the previous year. In 2003, Pacifico registered adjustments for minority interests and reserves related to previous years reaching $6.6 million. Novasalud, which was acquired in March of 2004, merged with Pacifico in August 2004. This acquisition explains the increases seen in premiums and health fees, claims, health costs and operating expenses. Higher operating expenses include extraordinary merger costs amounting to $1.6 million. With respect to PPS main figures, Pacifico's total premiums for the year increased 13 percent, mainly as a result of higher business volumes in the life and health insurance line, which 4 and 198 percent respectively. In particular, the health insurance business grew as a result of their incorporation of Novasalud. Pacifico's property and casualty premiums have been negatively effected by a general reduction in market prices and delays in the renewal of certain large accounts.

Net premiums earned, which exclude the premiums paid to reinsurance companies and the charge in reserves increased 40 percent as a result of a 32 percent decrease in premiums paid to insurance companies and the increase in total premiums due to a transaction registered with Novasalud. The net loss ratio, which compares net claims with net premiums earned increased from 67.4 million to 68.2 million in 2004. The increase is mainly explained by higher casualties required, marine hull, dishonesty and health. The combined ratio to -- in the property and casualty and health insurance business decreased from 100 percent to 96.7 percent in 2004. The combined ratio in the property and casualty business was 92.8 percent, reaching 97 percent when the health insurance business is included. The lower combined ratio is explained due to the efficiency incorporated by Novasalud which more than compensated the increase in the net loss ratio in the health insurance business.

For 2005, we expect that the life insurance business will continue growing significantly and will gradually increase its contribution to Pacifico's profitability. The property and casualty business will recover in line with the economy, but will probably face a reduction in commercial margins as a result of increased competition. Finally, we expect to consolidate our purchase in the health insurance business with the purchase of our -- Novasalud and improve our operating margins and the profitability of this business.

In summary, next page, we are satisfied with Credicorp's results for the year, which are in line with our expectations. We have seen positive trends in all of our subsidiaries and we are confident that this positive trend will continue during the current year. Banco de Crédito has improved its results with lower provisionsing requirements, its loan portfolio. Banco de Crédito Bolivia has improved its results with lower provisions requirements, its loan portfolio has been cleaned up and its operations are being restructuring following our Peruvian business models. We believe we are now prepared to increase our Bolivian volumes, our business volumes in Bolivia to continue improving the profitability of our operations.

In the case of Atlantic, the reduction of 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 this new strategy should allow Atlantic to increase the value-added to its customers and have a more stable revenue growth. PPS is facing an increasingly competitive environment in the property and casualty business, which has been effecting its commercial margins. However, we expect that the domestic econ -- economic recovery and softer conditions in the international reinsurance market will allow us to improve the profitability of this operation. On the other hand, we are confident in the purchase of Novasalud will allow us to consolidate our presence in the health insurance market and obtain operational efficiencies, which will boost the profitability of this business.

With respect to BCP, the lower provisioning requirements and the reduction in operating expenses and merger costs has allowed it to continue improving its financial results during the year. And this was achieved in despite of thee continued pressure of business volumes due to increased competition from capital markets and the impact of the tax on financial transactions. For 2005, we have a positive outlook with respect to BCP based on its lower provisioning requirements and its Peruvian and Bolivian portfolio and its increased focus on expense control. In the following months, BCP will remain focusing on increasing its loan volumes, particularly in the retail and small business segments. We should be able to exploit more efficiently its extensive branch network. All of this effort should allow us to continue increasing the profitability of the business in the following quarters. Additionally, Bank Boston's loan portfolio will continue -- will contribute to BCP's profitability and lead us to reach a market share of approximately 36.5 percent in the loans.

In summary, Credicorp's operating units are today preferred to sustain profitable growth. The 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 our stable economy with adequate economies of scale that should give us a competitive advantage in the market where we operate. Finally, I would like to highlight three important issues for the current year. Fina -- one, financial statements were adjusted by inflation according to Peruvian GAAP until December 2004. Starting January 1, 2005, Peruvian authorities have decreased the suspension with legal and tax effects of further inflation adjustments, which is a consequence of international guidelines for low inflation countries as experienced recently in Peru. Thus, Credi -- from Credicorp's perspective, this measure will impact on the profit and loss with an increase in charge for income taxes.

In addition, number two, Credicorp's management has decided that Credicorp and all of its subsidiaries will start with the first quarter 2005 reporting all their financial statements preferred in accordance with international financial reporting standards and in U.S. dollars. Finally, I would like to end -- mention that Credicorp is in the process of setting up a new pension fund company, AFP. We estimate that Credicorp will be in the market by the end of July competing and -- and standing out from its peers with a low cost strategy. With this comments, we finalize the presentation and are ready for the question and answer period. Thank you very much.

Thank you, Mr. Bayly. The question and answer session will be held electronically today. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you are joining us today using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment we will proceed in the order that you signal us and take as many questions as time permits. Once again, enter star1 on your touchtone telephone if you do have any questions. We'll pause for just a moment to give everyone the opportunity to signal for questions. From UBS, we'll hear from Vim Laidler.

Hi. Good morning. Congratulations on the results. Two quick questions. On the -- on the AFP, would you be a give us some idea of the startup costs involved there and maybe some revenue projections if possible over the next couple of years, but -- but particularly how much it's going to cost you to set up and -- and maybe initial losses, what -- what should we be penciling in there? And secondly, just on the dividend side, just your thoughts as to potential changes in dividend policy. Your thoughts on excess capital and whether we could see any of that being paid out any time soon. That's it.

Okay. Thank you, Ben. On the AFC, we have budgeted this year an -- an -- an -- an expense of $3.5 million and it -- it depends on -- on how aggressively we go about it in the business. But, at this stage, we have only budgeted a 3.5 percent ex -- 3.5 -- sorry -- $3.5 million expenditure and at this stage I would -- I -- I wouldn't want to comment on future revenue growth because that's -- where we'll somehow outline the -- the strategy that we have for the business. I'd rather keep those comments, those -- those numbers confidential at this stage. Regarding our dividend policy, we're in the process of reviewing our results. We have a recommendation which will be presented to our shareholders meeting at the end of March and clearly we expect the dividend payout to increase as we have been -- as -- as have been in the past . We -- we expect dividends to be generous this year.

Mr. Laidler, any further questions?

Yes. Just -- just -- just a couple. I -- sorry. But that will be an ordinary dividend, an incr -- a potential increase in the ordinary dividend payout, or, I mean, is -- is -- is there a chance of an extraordinary dividend on top of that?

At this stage, we're looking for a generous ordinary dividend. Okay. Thank you. You're welcome.

Up next, we'll hear from Carlos Gomez with Citigroup Asset Management.

Hi, on the AFP, I would like to know if the fact that you are setting one up means that you are no longer considering acquiring one or if you are still thinking of both possibilities.

Thank you, Carlos. All our options are -- are open at this stage, but we're manly -- mainly focused on the setup of the new operation. Obviously we're always open for opportunities, should any arise, but at this stage, our primary focus is to set up a -- our -- our own operation, which is very much focused on the low cost strategy.

Mm-hmm, and -- in relation on question, I understand you intend to report in I -- in IS -- IRS start in 2005 and I think everybody will appreciate that. However, would it be possible to still have the figures in chollas (ph) because after all that is the functional currency of much of your business and we would like to be able to compare them with the stat -- statutory reports in Peru.

We have to continue reporting them for Peruvian superintendency and the local [INAUDIBLE] exchange, so, yes, those numbers in local currency will be available, but we will not comment on them in our conference call on or press release, but the numbers clearly are available.

Thank you.

You're welcome.

As a reminder to the audience, if you do have any questions, please press star 1 on your touchtone telephone. Moving on, from Centrino we're hear from Jorge Luis Rodriguez.

Yes, good morning. I -- I would like to -- to know if you have any comments on the possibility of an expansion in the Bolivian mar -- in the Bolivian banking market and if you have any outlook, or any guidance for 2005 net-net earnings, net-net results. Thank you.

Sure. We feel very comfortable that in the Bolivian market we have reached the efficiency and the quality of our portfolio and the business model that -- that allows us to think that we would like to - to grow in that market. We have the strategy of becoming back number one and that is something that could take us anywhere between 6 months and 3 years and we're -- we're working towards that and for this year, we have a budget which is probably 10 percent above what we made in our Bolivian subsidiary last year. Last year we made $4.8 million and I believe the budget for this year is slightly over $5 million. But our long-term strategy, as I mentioned, is we have about a 12.7 percent market share and we're in the first group of banks. We're now bank number 4, I believe with market share, and eventually we would want to be number 1, but that is something that, depending on the opportunities, could take us anywhere from 6 months to, you know, 3 years. The reason behind it is that our subsidiary over there has excess capital and the best way to really utilize and exploit that excess capital is by having a lower asset base to fully utilize that leverage, higher.

Thank you .

And as a final reminder to the audience, if you do have any questions, please press star 1 on your touchtone telephone. And we'll pause for just a moment . At this time, Mr. Bayly, there appears to be no further questions, sir. I'll turn the conference back over to you for any additional or closing remarks.

As usual, thank you all for joining us on this conference call and we -- we hope to be with you at the end of next quarter. Thank you very much.

And that does conclude our teleconference for today. We'd like to thank you all for your participation. You may now all disconnect.