Credicorp Ltd (BAP) 2005 Q2 法說會逐字稿

Good day everyone. Welcome to Credicorp Ltd. second-quarter 2005 earnings release conference call. As a reminder today's conference is being recorded. At this time I would like to turn the conference over to Mr. Walter Bayly, Chief Financial Officer. Please go ahead, sir.

Thank you Christina. Good morning everyone and thank you for joining us today for Credicorp's 2005 second-quarter financial earnings conference call. I would like to start by mentioning that we are very satisfied with the results obtained by our corporation this quarter as well as with the cumulative results for the first half of 2005. We believe this reflects not only a positive economic environment but are also a result of persevering in the application of solid and sound business practices.

We are confident that our different business units have clearly defined short- and medium-term objectives, clear strategies aimed toward those objectives and staffed with talented and highly motivated professionals. Credicorp's results are at all-time high in its history and we are confident that these results are sustainable and (indiscernible).

As usual, I will briefly take a few minutes to go through some important numbers for the improving economy and financial system and afterwards I will focus on Credicorp's number and those of its main operating subsidiaries.

Page three. During the first six months of the year the Peruvian economy continued showing a solid performance. The economy grew 6% during the first five months. GDP continued to be driven by higher activity in nonprimary manufacturing mainly textiles, oil and gas, natural gas as well as agriculture. It is important to note nevertheless the remarkable performance and dynamics of factors related to domestic demands such as construction, commerce and service.

In the second quarter of 2005, the consumer price index improved, increased 0.5%, the same percentage than the preceding quarter accumulating 1% during the first half of the year. Inflation was 1.5% in the 12 months prior to June 2005, remaining at the bottom of the Central Bank's target for 2005. The Peruvian currency remained strong during the quarter closing at 3.25 (indiscernible) per dollar. The appreciation of the domestic currency took place in spite of active central baking division in the foreign exchange market with net purchases of roughly 2.2 billion during the first half of the year compared to 2.3 billion during 2004.

During the first quarter, the fiscal accounts generated a 2.% (ph) of GDP surplus compared to a surplus of 0.9% during the same period of last year. According to official estimates a deficit is expected in the second half of the year which should allow the country to close with a 1% deficit which is below the target set for the year.

The economy has recovered during the last three years as a result of higher domestic consumption due to higher demand, higher commodity prices as well as increases in private investments. We estimate that the gas production of the Camisea project, the mining projects, the higher commodity prices and the future U.S. trade agreement expected to be signed at the end of this year will contribute to stimulate the economy during the current year. Likewise the construction sector has been stimulated by Mi Vivienda, a very successful low income housing program supported by the government.

These very positive microeconomic indicators are reflected in the market pricing of Peruvian risk at 150 basis points, very close to the level where countries with investing grade currently trade.

With respect to Peruvian financial system on page 4, assets in the private pension funds reached $8.5 billion as of June 2005, increasing 5% in the second quarter when compared to the first quarter of the current year and are 28% higher than in June 2004. The stock of corporate bonds in the market during the second quarter reached 2.2 billion increasing 6% with respect to the prior quarter and 18% compared when a year ago.

Total loans in the banking system increased by 1.3 billion since June of last year in spite of continued and higher competition in the financial system. Loan volumes in the banking system increased 13% year over year. Commercial loans have increased 7% with respect to the first half of the year reaching 8.1 billion at the end of June 2005. On the other hand retail loans have continued expanding particularly in the consumer, small-business and mortgage markets since June 2004. Loans in these markets have grown by 28%, 43% and 19% respectively.

Loan volumes in the consumer segment reached 1.7 billion (ph), Micro business, 536 million, and mortgages 1.7 billion. Competition in retail banking has continued growing significantly due to the (indiscernible) Federal world focused commercial banks but also due to the presence of department stores and regional savings and loans institutions.

Deposit volumes remained almost stable when compared to the first quarter of the year. Total deposits reached 15.1 billion during the second-quarter increasing 8.6% with respect to the same period last year. The quality of the banking system loan portfolio has improved when compared to the second quarter of 2005. Total pass-through loans reached 360 million decreasing 33% with respect to the same period last year and representing now only 3% total loans.

Loan interest rate expressed in dollars increased as a result of continued rises on U.S. dollar interest rates. Average loan rate in total have decreased due to lower inflation perspective and more stable economic conditions.

We will now review the results of Credicorp on page five. As mentioned before we are very satisfied with Credicorp achieving 90 million in net income for the first semester. This amounts to an increase of 43% over a similar period a year ago. Net income in the second quarter 2005 reached 46 million, 41% above net income of 33 million reached in the second quarter of last year. Credicorp's return on average equity in the quarter reached 17.3% compared to 14.2 in the second quarter 2004.

The improvement in this quarter results and accumulated earnings during the first semester with respect to the same periods of last year were mainly explained by one, higher interest rates due to an increase in volumes of interest-earning assets. This improvement is a result of both higher demand for retail loans which is the more profitable segment and higher loan volumes in local currency.

Two, higher express (ph) in interest rates. The liquidity available in the market has allowed the banks to increase the deposit rate at a slower pace than the increase in LIBOR rates which determine most of the rates of our assets. Three, higher non-interest income mostly fees for banking services; and finally, lower loan loss provisions.

On page six, PCP continues to be a strong contributor to our corporate result during the second quarter and first semester of 2005. PCP's numbers benefited from a continued reduction in loan loss provisions following a sustained improvement in its loan portfolio as well as higher net interest income as a result of both an increase in interest rate and higher volumes of interest earnings assets. Additionally, nonfinancial income has increased due to a rise in fee income.

Atlantic Security marginally reduced its contribution to Creditcorp during the second quarter of 2005. The reduction is mainly explained by the 11% decrease in net interest income and by 59% decrease in net gains in the sales of securities. In realized gain nevertheless and the value of Atlantic's investment portfolio reached 7.7 million, and 8% growth over the same period a year ago.

The contribution of Pacifico Peruano Suiza to Credicorp's earnings declined during the quarter mainly as a consequence of unusually high claims in the marine hull business. The underwriting results for this business reached 2.2 million loss during the quarter in spite of positive results showed in other liens of property and casualty business. With respect to our Bolivian subsidiary, its financial performance continued improving manly as a result of a better quality of its loan portfolio.

BCB has contributed with 2.1 million during the quarter 2005 which compares favorably with 1.1 million reached during the same period last year. (indiscernible) contributions were 3 million and 1.5 million respectively. BCB's return on average equity during the first semester reached 10% compared to 5.4 in the same period last year.

During the second quarter of 2005, Credicorp in Others line generated 0.7 million contribution which compares favorably with 5.7 million loss reached during the first quarter of this year. The first quarter losses were mainly due to 2.5 million provision in Grupo Credito previously named Inversiones Credito, related to long-term investments in Generalima, an electric generating company. And to 4.5 million provision of taxes of dividends received from Peruvian subsidiaries.

All of these expenses were totally charged during the first quarter of this year and are nonrecurring. These provisions were compensated with a 1.8 million revenue and interest earned on the sale of Banco Tequendama in that quarter.

We will now review BCB's numbers on the next page. BCB's contribution to Credicorp during the quarter reached 44.3 million, 55% higher than the 28.5 million registered in the same period last year. This quarter's numbers benefited from a reduction in loan loss provision, increase in net interest income and growth in non-interest income. With these results, BCB's contribution to Credicorp during the first semester reached 89.7 million compared to 55.4 million during the same period last year, a 62% increase year-over-year. Net interest income grew 22% year-over-year mainly due to the increase of interest earning assets.

BCB's credit increased with respect to the second quarter of 2004 as a result of an increase in retail loans particularly mortgage, small businesses and consumer loans.

Mortgage loans reached 671 million, 28% growth from second quarter last year. Consumer loans increased 18% year-over-year amounting to 298 million and Micro business' loan reached 190 million expanding 22% year over year. Loan loss provision net of recoveries with a positive effect went from 2.9 million in the first quarter of last year to 0.9 million during this semester. Due to improved loan quality, recoveries of previously charged off loans exceeded provision requirements during the first semester amounted to 2.2 million.

Non-interest income which includes fees and commissions, services, foreign exchange transaction and other income grew 25% year-over-year. This growth is explained mainly by a 37% increase in fees from debit cards, a 102% increase in commissions for mortgage loans and a 66% increase in corporate finance fees. Likewise, net gains and foreign exchange transactions increased by 35% when compared to the second-quarter 2004 mainly due to higher volumes of transactions made at our branches.

BCP's operating expenses which include merger costs grew 8% year-over-year mostly due to an increase in personnel expense. Personnel expenditures which account for 42% of operating expenses grew 10% year-over-year in U.S. dollar terms mostly due to the 6% revolution of the local currency.

In addition, administrative expenses which account for 28% of total operating expenses fell from 28 million to 27 million -- 4% year over year and U.S. dollar terms mainly due to a reduction in advertising and other general expense. During the quarter the efficiency ratio reached 52%, far below the 60% attained during the same quarter last year. The return on average equity reached 23.5% compared to 18.3% in the same period a year ago.

Page eight. The quality of PCP's loan portfolio continued improving during this quarter. The consolidated pass-through loan ratio which includes the Bolivian loan portfolio continued declining from 5.1% to 2.7% year-over-year. PCP's consolidated coverage ratio reached 182% higher than 129% reached at the end of the second quarter last year. Likewise, the pass-through and refinance loans as a percentage of total loans fell from 10.3% to 7.3% year-over-year.

For the Peruvian and Bolivian loan portfolios remain healthier than the banking systems average in each of these countries. The Peruvian pass-through loan ratio of 2.3% is lower than the system's 3% and the coverage of 230% is higher than the average of the Peruvian banking system at 199%. In the case of Bolivia, the pass-through loan ratio was 8.5% lower than the 13.7% of the system's and the coverage ratio currently is 105% higher than the system's 78% ratio.

As the Peruvian economy continues to grow and the Peruvian currency remains stable we foresee and improvement in the quality of the portfolio. In the case of Bolivia, we have built up the required reserves and do not anticipate a major division of the existing portfolio. We expect stable provisioning requirements in the following quarter.

We will now turn to Atlantic's results on the next page. Atlantic's contribution to Credicorp during the first semester reached 6.4 million, very similar to the 6.5 million contributed during the same period last year. During the second quarter, the contribution of Atlantic to Credicorp amounted to 3 million compared to 3.6 million contributed during the same period last year. The reduction is mostly explained by net interest income fell from 3.6 million to 3.2 million, an 11% decrease due to flattening of the yield curve.

Net gain from sale of securities fell from 1.1 million to 0.5 million, a 59% decrease. As a result, net interest margin decreased from 2% to 1.6%. There were no provision requirements for market risk and loans during the second quarter decreased 0.5 million. The cumulative provision reached 1.1 million during the first half of the year.

Atlantic Security Holding continues to concentrate on increasing its fee income related to world management business in maintaining a low-risk profile in its proprietary investments. As a consequence, parts under management have increased from 694 million to 797 million year-over-year generating higher fees with a lower risk profile. During the second quarter of 2005, fees on parts under administration and brokerage services amounted to 1.1 million, 2.5 higher than during the same period last year.

We will now turn to Pacifico Peruano Suiza on the next page. Figures for the first half of 2005 incorporate (indiscernible) Salud, which was merged in August of last year. The contribution of Pacifico to Credicorp during the quarter amounted to 0.1 million, far below the 1.9 million contributed during the same quarter a year ago. Pacifico's numbers during the quarter were mostly affected by higher cash (indiscernible) in the marine hull business, the net loss ratio in this business reached 195%; the underwriting results gave us a 2.2 million loss during the quarter.

On the health insurance company registered a 1.2 million provision for reserves as a consequence of recalculating those reserves according to international financial reporting standards at trial practices. As a result, the net loss ratio increased from 83% to 91% during the quarter. This is a onetime adjustment related to the Nova Salud (ph) portfolio.

In looking at this line of business of our life insurance company is under competitive disadvantage vis-à-vis other domestic players. Due to one, our usage of a more conservative mortality rate tables than those established by the local regulators; and two, a more conservative fixed income investment policy. Regardless of business advantages, we will persevere in what we believe are sound and solid business practices.

General expenses grew 22% with respect to the second quarter 2004 mainly due to the incorporation during the quarter of 1.4 million expenses related to the merger of Nova Salud and 0.4 million expenses related with personnel reduction. Consolidated total premiums and health fees grew from 77 million to 89 million during the quarter increasing 16% year-over-year. Cumulative total premiums in June 2005 increased 18% with respect to the same period last year.

During the same period health insurance business grew 133%; property and casualty business grew 10%; and the life insurance business fell 4% mainly due to lower volume in life annuities.

Net gains during the quarter increased from 27 million to 45 million mainly due to higher cash (indiscernible) in marine hull and higher volume in the health insurance business due to the incorporation of Nova Salud.

During the quarter the consolidated net loss ratio which compares net claims with net premiums earned increased from 76 to 83%. The other results decreased from 3.2 million in the second quarter of last year to 2 million during the same period 2005. As a result of the increase in net claims, the combined ratio in the property and casualty and health business increased from 103% to 108% during the quarter. The impact of higher casualties in the marine hull during the quarter were atypical and such magnitude was not registered in the past. Overall, for the rest of the year we expect Pacifico will increase its profitability and we are able to achieve better results more in line with its historical performance.

In summary, page 11. Creditcorp's results for the quarter were ahead of our expectations in spite of lower financial performance achieved by Pacifico during the quarter. Banco Credito Bolivia has improved its results with lower provision requirements. Its loan portfolio has been cleaned up and its portfolio quality is better than the systems. BCB's roll and return on equity which 10% during the first semester of the year compared to 5.4 in the same period last year. This improvement is a result of successfully transferring and adapting the BCP's Peru model to Bolivia.

Atlantic's results more stable mainly due to the flattening of the yield curve and similar to previous quarter results. Atlantic will continue to concentrate on its fee income related to parts under management while maintaining a low-risk profile in its proprietary investments. We are confident that Atlantic will increase its profitability during the following quarters.

Pacifico had a negative impact in the marine hull business due to higher casualties during the quarter. However, the consolidated total premiums increased both during the quarter and semester mainly in the property and casualty business and health insurance. We expect Pacifico's profitability will be more stable and will recover as a result in the following quarters.

As for the future we have a positive outlook with respect to BCP based on its lower provision requirements in its Peruvian and Bolivian loan portfolio. The prospective of growth in loan volumes particularly in the retail segment where we should be able to exploit more efficiently its extensive branch network and increase the efficiency of its operations as well as taking advantage of our positive outlook for the economy. All of those efforts should allow BCP to continue increasing its profitability in the future.

I would also like to mention that Prima AFP, the new pension fund company of the group started its operations last week. With a low-cost strategy, the Company will be able to offer its customer competitive rates with value added services. Prima's commission rate is 3% lower than the average of the system. We expect that Prima will generate 10 million losses during the year and reach break even in the first half of 2007.

In summary, Credicorp's operating units are well prepared to sustain profitable growth. Their portfolios are very adequately covered. The efficiency levels continue to improve and the prospective growth in loan volume were in line with the economy performance. The insurance company should be able to recover its profitability levels in the following quarters.

Thank you very much with this. And with this we conclude the first part of the conference. We are now ready to go into the question-and-answer period. Thank you again.

(OPERATOR INSTRUCTIONS) Ben Laidler, UBS.

Could you just talk a little bit about Bolivia? I'm impressed by what you were able to do on the past due side there. Could you give some thoughts as to how whether you think you can keep making progress there in bringing past dues down? And if so, how long do you think that could go?

Absolutely. We are equally surprised. When the whole political and social turbulence started in Bolivia, we were -- we started running our bank in a very defensive mode both in terms of operations, systems, credit and liquidity. And we were expecting a deterioration of the loan portfolio in line with the disturbances that had occurred in the country. So far we have not seen those. The country has relatively quickly stabilized itself.

But nevertheless we are conservative in our estimations in that the outlook is still unclear. We should have presidential elections toward the end of the year. And we expect a certain level of turbulence and instability going forward. But again those are our expectations and the reality the numbers do not indicate that so far. We continue to see the quality of our portfolio improving and a certain strength in the demand for loans. To be very frank, we are equally surprised by the strength of the quality of our portfolio.

Great. If I could just follow-up on the Peruvian loan portfolio. I guess I'm slightly surprised at the fairly low growth rates you are seeing on the consumer and the credit card side. I'm just wondering if you have any thoughts as to what is behind that?

Sure. Let's divide it by segments and you have three segments. Number one will be the mortgage and there the mortgage you have two types of growth, one on the traditional mortgage. But the one that is being the big driver is not a traditional mortgage but the Mi Vivienda, which is the low-income housing program supported by the government. That is growing at a very, very strong pace. We see a still demand outpacing the supply of new housing units and we are very encouraged with the backlog of demand that we have for this type of housing unit. The program is being operated very successfully. And we foresee at least a two-year growth, solid growth in that market.

On the small businesses, what is happening is that we and our competitors are becoming more and more knowledgeable as to how to operate and penetrate and sell loans into these very small business units. They are showing a big dynamics and we are adapting our models both on the sales side, on the operating side, on the credit side to be able to continue offering loans in those segments. Demand continues to be very strong there.

And the third segment would be the typical consumer loans credit card. And those loans are growing but not at the fastest pace at which the other two segments are growing. So what we have is really a larger penetration in sectors of the economy that we're not accessing these facilities, be it mortgage loans for low-income housing or loans for very small business. It is really growth in the nonbank segments of the economy.

That is great, thank you.

Jorge Rodruguez, Centura.

Good morning. My question has already been answered during the last question -- during the last question and answers. Just to congratulate you on your results. Thank you.

Thank you very much.

(OPERATOR INSTRUCTIONS) At this time, there appears to be no further questions. I'd like to turn the call back over to Mr. Bayly for any closing remarks.

Thank you very much for your continued support and presence in this conference call. As usual we are available for further questions should any of our investors or analysts require so. We thank you again very much. Goodbye.

That does conclude our teleconference for today. We'd like to think everyone for your participation. And have a great day.