Credicorp Ltd (BAP) 2005 Q3 法說會逐字稿

Welcome to Credicorp's third-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 Ms. Aida Kleffmann, investor relations manager.

Good morning everyone and thank you for joining us today for Credicorp's third-quarter financial earnings conference. We have our CEO Mr. Raimundo Morales and our CFO Mr. Walter Bayly with us here who will be available for questions after the conference call. So I will just start with the presentation.

Following the very good financial performance achieved during the last two quarters Credicorp has continued with the same trend obtaining remarkable results for the third quarter and consequently for the nine-month period ended September this year. We are very satisfied with these results and consider they fulfill by far our expectations. Credicorp's results are at an all-time high in its history and we continue to feel confident that these results are sustainable in time.

As usual we 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 numbers and those of its main operating subsidiaries.

The Peruvian economy continued showing a good performance during the first nine months of the year. The economy grew 5.9% during the first eight months compared to 4.4 during the same period of last year. GDP performance continued being driven by higher activity in nonprimary manufacturing, oil, natural gas and agriculture. We should however note there has been a remarkable performance and dynamic in sectors related to domestic demands such as construction, retail and services. In the third quarter of 2005 the consumer price index in Peru decreased slightly reaching 0.9% during the nine months of the year. We have annualized that number and show in the chart a 1.1% inflation in the 12 months prior to September 2005, which remains below the bottom of the Central Bank's target for this year which was between 1.5 and 3.5%.

The Peruvian currency showed a 2.8% evaluation during the quarter closing at $3.34 per dollar. This decrease in the domestic currency reached 1.9% since December and took place mainly during September in which the Central Bank did not intervene in the foreign exchange market. However, on the four-year period the currency shows a very stable behavior with a cumulative 2.9% revaluation. A surplus in fiscal accounts was reported in the first half of the year but according to official estimates a seasonal deficit is expected in the second half which should allow the country to close with a 1% deficit; that is within 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 the variety of mining projects, the higher prices and volume of commodity exports, and the higher domestic demand will boost the economy during the following year. Likewise, the construction sector is being stimulated by Mi Vivienda, a very successful low-income housing program supported by the government. The country's reserves are at an all-time high of 13.7 billion; with this performance we feel positive about the country's outlook.

With respect to the Peruvian financial system, the financial markets are showing continuing expansion and interest in dynamics, the capital markets continue developing with assets in the private pension fund reaching 9.6 billion as of the end of September this year, increasing 13% over the quarter and 32% for the year. The stock of corporate bonds in the market amounts to 2.3 billion due in the third quarter and shows only a minor improvement throughout the year.

Mutual funds have also increased mainly due to lower volatility, and interest rates and valuations and capital markets. Total mutual funds amounted to 2 billion expanding 11% for the year. This continuing growth in capital market instruments does however slow down slightly the traditional loan market. Nevertheless total loans in the banking system as a whole increased 13% for the year even though the last quarter shows a slight decrease.

Commercial loans amounted to 7.8 billion of total loans, increasing 6% with respect to September of last year. On the other hand following the strengthening of domestic demand retail loans have shown more dynamics expanding consistently on a yearly base. The consumer loans increased 26%, small-business loans 42%, and mortgage loans 20%.

Following a positive trend during the last two quarters, the profit volume increased as well 1.9%, amounting to 16 billion this quarter. The asset quality of banking system improved again this quarter; as of September 2005 total pass-through loans decreased 11% over the quarter and 35% over the year. Total pass-through loans represent only 2.7% of total loans. The coverage ratio improved to 205% compared to 199% in the previous quarter.

In brief the financial system has recovered its health. Loan interest rates and spreads in dollars increased as a result of continued rises on U.S. dollar interest rates while the profit, which is our funding cost, increased at a lower pace. In solis (ph) the margins have remained steady. Average rates in solis have decreased due to low inflation prospectus and more stabilized economic conditions.

We will now review the results of the Credicorp. As I mentioned before or very satisfied with Credicorp achieving 47.6 million in net income for the third quarter of 2005. This amounts to an increase of 45% over a similar period a year ago. Net income for the nine-month period reached 137.5 million which is 43% above the results of last year. The strong improvement in this year's earnings generation follows the improvement in many areas which all contributed to the excellent overall results.

To start we have a 17% growth in net interest income for the year and actually even higher, about 22% on a quarterly base. This is explained by two factors, volume growth of interest-earning assets and higher net interest margins. Volume growth is achieved through growth of 9.5% in loans. Growth that came mainly from the retail sector and growth in volumes of trading and investment portfolios increased 6 and 47% respectively. Higher net interest margins are a result of the liquidity available in the market which allowed us to increase our deposit rates at a slower pace than the increase in LIBOR rate which determines the rates of most of rs (ph). In addition our corporate strategy to focus on the development of our transactional business is paying off to higher non-interest income, mostly fees for banking services. We finally have also benefited this quarter and throughout the year of our conservative loan reserve quality. The continuing improvement of the country's economic environment has led to a significant improvement in portfolio quality. And thus not only to lower loan loss provisions but also reversals of previously necessary provisions and recoveries of charged-off loans, leading a positive figure of 9.9 million in the income statement. This remarkably improved earnings generation was strong enough to offset a downturn experienced in the insurance business which we will explain later on. And support an unusually high position for our Corporation's stock option plan which accounts for almost all the increase in operating expense.

The provision required only in the month of September was about 10 million following the sharp rise of our stock price. Altogether this provision for the third quarter was 15.3 million and for the year it reached 23.4 million, an impressive amount for our Corporation. Overall great improvement leading to better ROE numbers, Credicorp's return on average equity in the quarter reached 16.8% compared to 13.6 for the previous year.

If we look into our subsidiaries' contributions to these results, BCP continues to be a very strong contributor to our corporate results. BCP's contribution to Credicorp during the quarter grew 38% reaching 44.3 million for the quarter, and 53% accumulated until September of this year reaching an extraordinary 130.5 million contribution. This represents about 95% of Credicorp's net income; consequently the explanation for these numbers are basically the same as Credicorp's and we will see them in more detail in the following slide. With respect to the Bolivian subsidiary, its financial performance continued improving mainly as a result of the better quality of its loans.

Banco de Credito of Bolivia has contributed with 3.4 million to BCP's results during the third quarter of 2005 which compares favorably with the 1.1 million reported before. Cumulative contributions show a remarkable improvement from 2.6 for the nine-month period to 6.5 million this year.

Atlantic Security Holdings continues improving its contribution to Credicorp, mainly as a result of lower provisioning requirements for market risk and loans, as well as higher gains in sale of securities. The contribution of Pacifico to Credicorp declined during the first nine months of the year mainly due to the higher claims in the marine hull business that were registered during the last two quarters. And an increase in reserves in the health insurance business as a consequence of recalculating those reserves according to IFRS actuarial practices for this quarter.

In the Credicorp and Grupo Credito line we show a net loss of 2.7 million for the quarter mainly due to the losses of Prima. Those were 3.1 million. (indiscernible) results for Credicorp and Banco de Credito were affected mainly by the Prima losses we just mentioned and losses that were reported for the first quarter due to provisions related to our long-term investments in the electricity business, and to 4.5 million provision for taxes and dividends received from Peruvian subsidiaries. These provisions were partially compensated with 1.8 million revenue and interest earned from the sale of Banco Tequendama in that same quarter giving us a total cumulative loss of 7.7 million. We should note that these expenses except for taxes and dividends, are non-recurring.

We will now review BCP's numbers in the next slide, please. BCP's net income during the quarter amounted to 46.6 million, 40% higher than the 33 million registered in the same period last year. This quarter's number benefited from strong growth in net interest income, loans of non-interest income and reverse loan provisions. With this quarter's results BCP's net income during the first nine months of the year amounted to 136.4 million compared to 88.7 during the same period of last year. Showing a 54% increase over the year. This significant improvement in BCP's earnings generation is a result of our corporate strategy of focusing our efforts in the retail and transactional business where interesting growth can still be achieved, compared to the corporate business where BCP has already a significant market share.

Net interest income grew 29% in the third quarter compared to the same period of last year and 24% on a yearly basis. Mostly due to growth of its average interest earning assets as well as growth of its net interest margins. During the third quarter the average interest earning assets increased 15% compared to the same period of last year as a consequence of higher volume of both investments and loan portfolio. The loan portfolio grew 9.5 from 4.1 to 4.5 billion by the end of the period. This growth was fueled by the retail segment where mortgage loans reached 707 million a 30% growth over the year, consumer loans increased 26% amounting to 320 million, and (indiscernible) businesses loans reached 205 million expanding 35% over the year. BCP's spreads also increased with respect to the third quarter of 2004; as a result not only of the widening of our U.S. interest rate gap but also of the concentration of growth in the more profitable retail segment.

Loan loss provision net of recovery had a positive effect of 3 million in the third quarter 2005. With recoveries of previously charged off loans exceeding provision requirements due to improved loan quality. In the third quarter 2005 recoveries of charged-off loans charged-off (ph) accounts amounted to 6.6 million while provisions during the same period reached 3.6 million. That gives us a positive 3 million.

Non-interest income reached 70.6 million in the third quarter of the year, 19.1% higher than the 59 million earned during the same period of last year. Mainly due to higher gains on securities transactions, increased revenue on banking services and recoveries from the sale of foreclosed assets.

On the expense side BCP's operating expenses grew 9% but in less proportion to growth in net interest income and more importantly it doesn't really reflect any significant expansion of its general operating expenses, but rather the unusually high provision we referred to before at the Credicorp level for our stock option plan following the sharp rise of our stock price. Almost the total of the 23.8 million provision for the year related to the stock appreciation is captured at BCP. Thanks to this control in cost growth during the quarter the efficiency ratio for BCP reached 49.5% this quarter, far below the 58% achieved in the same quarter last year. Which puts us closer to our target number of 50%. On an accumulated basis we are at 61.9% (ph)now. Altogether very good results. We see growth, better net interest margins and better efficiencies leading to excellent bottom-line results. Thus BCP's return on average equity reached 23.1% compared to 20.3 in the same period a year ago.

In the next page we see BCP's loan quality. Further good news is that the quality of BCP's loan portfolio continued improving during this quarter. The consolidated past due loans ratio which includes the Bolivian loan portfolio, continued declining from 5% to 2.7% over the year. BCP's consolidated coverage ratio reached 175 higher than the 134 reached at the end of the third quarter of last year. Likewise, the past due and refinanced loans as a percentage of total loans fell from 9.9 to 6.6% over the year.

On an unconsolidated basis both the Peruvian and Bolivian loan portfolios remain healthier than the banking system average in each of these countries. The Peruvian portfolio, past due loans ratio of 2.1 is lower than the system's 2.7. And the coverage ratio of 215% is higher than the average of the banking system of 205. In the case of Bolivia the same happens, the PDL ratio was 6.9% lower than the 13.7% of the system and the coverage ratio currently at 116% is higher than the system's 75% ratio.

As the Peruvian economy continues to grow and the Peruvian currency remains stable we foresee a continued improvement in the quality of our portfolio. In the case of Bolivia we have built up the required reserves and we do not anticipate any major deterioration of the existing portfolio. We expect stable provisioning requirements in the following quarter. Today loan loss provisions themselves are around 5% of net interest income.

We will now turn to Atlantic's results in the next page. Atlantic's contribution to Credicorp during the third quarter reached 3.6 million, 28% higher than the 2.8 million contributed in the third quarter a year ago. Improved contribution was mainly due to higher net gains from sale of securities. This compensated a decrease in financial income. This drop in financial income is a result of lower margins which decreased mainly because the year 2005 the investment portfolio grew its lower risk and lower return segments while at the same time funding costs were higher due to increasing interest rates, squeezing margins. With this result Atlantic's contribution to Credicorp during the first nine months of the year amounted to 10 million compared to 9.3 million during the same period of this year. Provision requirements for market risk in the third quarter this year amounted to 200,000 while no provision was required for loan losses. On an accelerative basis provision requirements were 90% lower at 1.3 million during the first nine months of the year, versus the 1.6 million reached during the same period of last year. Contributing to the increase in net income results.

Atlantic Security Holding continues to concentrate on increasing its fee income related to its wealth management business and maintaining a lower risk profile in its proprietary investments. As a consequence funds under management had increased from 709 million to 900 million over the year, generating higher fees with lower risk profiles. Mostly due to additions to the client base and higher valuations of the portfolio.

We will now turn to Pacifico Peruano Suiza in the next page. When looking at Pacifico and its results for this quarter we have to make a note because financial statements in the third quarter of this year -- sorry -- the third quarter of the last year include figures generated by Novasalud between February and July, all of which were registered in August 2004 as a result of that acquisition. Based on this information figures are not really comparable on a quarterly basis, especially for the health insurance numbers which are more directly affected. So we prefer to look at the cumulative results.

Having said this we do have to acknowledge the results of our insurance business have not been the best this year. Total premiums on a nine-month comparison show a modest 4.3% growth from 251 million to $262 million. The significant drop observed when compared to the same period last year is a result of the distortion I just described. Produced by the Novasalud merger.

Property and casualty businesses which represent an important 47% of total premium showed a 4.2% drop this quarter compared to the same period of last year. The decrease is mainly due to lower premiums in the fire insurance segment which fell 7.3% because of delays in the renewal of some important accounts. However, accumulated as of September this year property and casualty businesses increased 4.4%.

The life insurance segment which represents 32% of total premiums in the third quarter increased 5.2% on a quarterly comparison led by pension fund insurance along with life insurance, all of which offset the lower volume in life annuities which dropped by 17.8%. The annuities are under competitive disadvantage vis-a-vis other domestic players due to the more conservative business practices we apply to our business. First, we use a more conservative mortality rate table than those established by the local regulators. And second we have a more conservative investment policy. Even though these disadvantages made us lose ground in this market throughout the nine-month period we will persevere in what we believe are sound and solid business practices.

The health insurance business which accounts for 21% of total premiums would show approximately a 28% increase in health payments on a quarterly basis when we exclude the Novasalud distortion. And does actually show a 12.5% growth for the accumulated period. With regards to net consolidated underwriting results these continue showing the burden of the higher claims in the marine hull segment registered during the last two quarters an a 1.5 million provision for reserves as a consequence of recalculating our health insurance reserves according to IFRS actuarial practices. Therefore for the period ending September this year it shows a 27% drop below the year ago period, reaching 15.6 million. Consequently, total net loss ratio increased from 72.1% to 77.5% in this nine-month period.

Finally, during the third quarter of this year the contribution of Pacifico to Credicorp amounted to 2.4 million, lower than the 3 million contributed during the same quarter a year ago. With this number Pacifico's total contribution to Credicorp for the first nine months of the year reached 4.7 million, far below the 7.7 million achieved during the same period a year ago.

We just go briefly into a summary. Credicorp's results for the quarter were ahead of our expectations in spite of the low financial performance achieved by Pacifico during the quarter. Our result reinforces our strategy to attack the retail entrants section of business, there is where we see growth. Hereafter we have a positive outlook with respect to BCP based on its lower provisioning requirements in its Peruvian and Bolivian loan portfolio, the perspective growth in loan volumes particularly in the retail segment were we should be able to exploit more efficiently its extensive branch network and increasing the efficiency of its operations. As well as taking advantage of the positive outlook of the economy. All of these efforts should allow BCP to continue increasing its profitability in the future.

Banco de Credito Bolivia has improved its results with lower provisioning requirements. It's loan portfolio has been cleaned up and portfolio quality is better than the system's. Banco de Credito Bolivia's return on equity reached 14% during the first nine months of the year compared to 6% reached in the same period a year ago. This improvement is the result of successfully transferring and adapting the BCP Peru business model to Bolivia.

Atlantic results were stable mainly due to higher net gains from sale of securities which compensated lower financial income during the quarter. Atlantic will continue to concentrate on increasing its fee income related to its wealth management business and maintaining a lower risk profile in its proprietary investments. We are confident that Atlantic will increase its profitability during the following quarter.

Pacifico's performance this quarter is better than during the first half of the year, since no significantly higher claims were reported. However, its overall performance for the nine-month period appears to greatly deteriorated by the losses in the marine hull business and provisions in the health insurance business due to recalculation of reserves. We expect that Pacifico's profitability will recover and remain more stable during the rest of the year.

Finally in our new venture, Prima, the pension fund business, we are pleased with our results. Results are coming along better than projected so we expect that Prima will stay within target numbers generating no more than the 10 million losses during the year we have announced and reaching breakeven during the first half of 2007.

In summary, Credicorp's results, operating units are well prepared to sustain profitable growth. The portfolios are adequately covered, the efficiency levels should continue to improve and the prospective growth in loan volumes will be in line with the economy's performance. Thank you; with this we conclude the first part of the conference. And we are now ready to go into questions and answers.

(OPERATOR INSTRUCTIONS) Adrian Huerta with JPMorgan.

This has to do a little bit with the level of provisions that you reported this quarter. We take into consideration that you had recoveries of $6.5 million in recoveries, that means that the required level of provisions were only $1.6 million, I mean out of a portfolio of almost $4.5 billion. Why this quite low. Even the growth that we have seen in the retail portfolio, that is my first question. And then the second question is, what was the impact of the good performance of the Peruvian stock market in your third-quarter results? Thanks.

Thank you for your question, this is Walter Bayly. Regarding our provisioning, what has been happening is that on the wholesale side of the portfolio after several quarters this year of continued growth companies are (technical difficulty) their sales companies are lowering their sales, companies that in the past were classified for instance they were three are now classified level two. So the total quality of the portfolio is improving and requires every quarter less and less provisioning. So the reversal of provisioning not only comes from previously charged off loans or recoveries but also from the improved quality of the existing wholesale bank portfolio. This clearly is partially offset by the increased volume of the retail side which continues to require normal levels of provisioning. I don't know if this explains why we have no (inaudible).

You mean like from moving up in the scale some companies so you only now are required to make less provision for those companies?

Exactly. And as a result obviously they have had good sales, good profits and are lowering the debt of the balance sheet of this company and is becoming stronger.

Okay.

Regarding the stock market, could you repeat your question --

If there was any impact on your result from the good performance of the Peruvian stock market in the quarter?

No, we don't really carry (technical difficulties) equities. In our portfolio we have a (technical difficulty) probably around 10, $20 million of equity. It is mostly for creating purposes. So it is not material at all. It was a gain of securities that we show the 6 million could be related to equity, also could be related to (technical difficulty)

And just finally can you give us a little bit your expectations from 2006 in terms of margins, operation requirements and expenses and royalty in your own portfolio, please? Thank you for the good quarter, guys.

Regarding the portfolio we have seen a decline this quarter. The decline is on the (indiscernible)middle market related to fishing. We are very active lending to the fishing industry, the fish (indiscernible) industry and during the quarter and this portfolio has (indiscernible) throughout the year, clearly the portfolio increases while there is (technical difficulty) cumulated inventories and there was fishing down start this inventory start to come down and the loan that are financing them obviously start to decrease. That has been the reason why our middle market loan portfolio comes down approximately by $80 million during the quarter. The (indiscernible) portfolio has come down that is related to a couple of specific transactions that were taken to the capital markets, the changes and provisions in the top corporate portfolio came down by about $150 million during the quarter. Did not have a substantial impact on the net interest margin, these are very tightly priced loans. The fluctuations that could be taken partly did not have a lot of impact in net interest margins.

Going forward we continue to see the trend which is the middle market will grow to a pace (indiscernible) the GDP. This last quarter the fishing (indiscernible) actually begun yesterday we expect the volumes to pick up where they left at the second half of the year. And stock corporate will fluctuate depending on the (indiscernible) transaction and clearly the growth in the futures on the retail will continue to have strong growth, mortgages, consumer finance and lastly small business. Those strengths are what we expect (technical difficulty) as well.

Thank you and congratulations for the good results.

Thank you, Adrian.

(OPERATOR INSTRUCTIONS) At this time it appears there are no further questions.

Okay, we thank you all for joining us in this conference call. As Aida mentioned we are extremely satisfied with the results and furthermore we see no reason why business should not continue towards the future. We are confident that the strategies we have put in place are consistent and hopefully the results will continue to be as positive as we have seen this quarter. Thank you very much and goodbye.

That does conclude today's conference; we thank you for your participation and have a great day.