Credicorp Ltd (BAP) 2006 Q2 法說會逐字稿

Good day everyone And welcome to the Credicorp conference Call. [OPERATOR INSTRUCTIONS]. At this time, for opening remarks and introductions, I will turn the conference over to Pete Majeski. Please go ahead.

Thank you [Mark], and good morning everyone. This is Pete Majeski of i-advize. Thank you for joining the management of Credicorp today, to discuss the results for the second quarter of 2006, on this August 11, 2006.

Any comment, they may make today, may include forward-looking statements, which are subject to various conditions And these are outlined in the disclaimer in the press release that we distributed yesterday. If you didn’t get a copy, or need any assistance during today’s call, please call us in New York at 212 406 3694.

It is now my pleasure to introduce our speakers. Joining us from Lima, Peru are Mr. Walter Bayly, Credicorp’s Chief Financial Officer, and Miss. Aida Kleffmann, Investor Relations Officer, as well as other members of Credicorp’s team. And with that, I will turn over to Mr. Bayly, who will begin the presentation. Please go ahead sir.

Thank you. Good morning, and welcome to Credicorp’s second quarter financial earnings conference call. We are pleased to report second quarter results that continue showing growth and improved earnings, despite the uncertainties that affected the environment in which we operated during 2006.

We are, again, very satisfied with these results, which are beyond our expectations. We will spend a few minutes to comment on the political scenario, given its importance and then focus on Credicorp’s numbers and those of its main operating subsidiaries.

Numbers on the Peruvian economy and financial systems are available to you in our press release and we will, therefore, not spend time on them.

Next page please. The political environment has played a predominant role in the economic development in this first half of the year. Fortunately, the effects of the uncertainties around this process, have created some business opportunities for us. However, we are pleased to see the scenario settling down, in order to allow for further economic growth.

The newly elected President, Alan Garcia, has initiated his government with clear signals of his intention to pursue his electoral promises, such as the austerity measures he presented, and were approved by Congress 48 hours after the official transfer of power.

The savings expected from such austerity measures, are to be channeled to address social demand, especially, in the rural Southern Highlands, which are also the stronghold of the Nationalistic Movement. Even though this might not be a significant investment, it does give signals, which are welcomed by the population.

More importantly, his support to foreign investment has been clearly stated, and also his interest to attract and promote foreign investors. Issues such as the criticized law mining royalties will be addressed with negotiation of existing contracts, as opposed to imposing change. The [upper] party has clearly supported the free trade agreement with the United States, as they also support free trade agreements with other areas in the country.

The chosen ministerial cabinet shows his commitment to establishing a multi-party technical and renewed government team. He has pledged his role as the regional leader, visiting all neighboring Presidents and inviting Chile, through President Bachelet, to join the [NDM] pact - an invitation that has been accepted.

And lastly, a loss of visibility of Ollanta Humala, as his party has lost cohesion, and has started to break apart. All these developments have boosted optimism, and we expect a resumed flow of investments, which will further pursue economic growth.

Next page please. Credicorp’s total result achieved during second quarter ’06 continued growing, reaching a net income of $64.4m - 25.8% higher than the first quarter ’06, and 38.8% year-over-year. This improvement is reflected in the return on equity, which surpassed our target for the year of 20%, reaching 21.7% for the quarter, up from 17.4% for the first quarter ’06.

Following the trend set forth in previous quarters, Credicorp’s results were clearly led by banking operations, mainly Banco de Credito, which consolidate our Bolivian operations. BCP consolidated - contributed with a totally of $64.8m, which represents 12.5% growth quarter-over-quarter and a 52.1% year-over-year. Also our operation in Bolivia revealed a steady increase in contribution, reaching the second quarter ’06, $3.3m.

Atlantic Security Holdings is also a consistent contributor to Credicorp, complimenting the financial services offered by our corporation, with its off-shore private banking activities, and proprietary and asset management business. Its conservative investment strategy makes it a low risk operation. Atlantic’s result and contribution, this second quarter, is in line with its normal business reaching $3m showing, however, a drop from last quarter results which benefited from a [specific] sale of securities.

Pacifico Peruano Suiza, Credicorp’s Insurance Business, continued its process of stabilizing its income, by improving its risk management and insurance under-writing capabilities. Though this process is expected to require some time, it is providing consistent results contributing $2.7m to Credicorp for the second quarter ’06. That is the same level of contribution of the previous quarter.

The losses reported in Credicorp, in Grupo Credito, include the start up operation of AFP Prima. Prima has showed significant portfolio growth, having captured more than 6% market share. Thus, its negative contribution to Credicorp is, again, lower than expected for this second quarter, a $2.2m loss. We will comment on some new developments in this sector later on.

At Credicorp holding level we had, the previous quarter, a large charge related to taxes on BCP dividends, paid for 2005. Any loss in a foreign exchange hedging position, taken to cover Credicorp’s local currency dividends from BCP and PPS paid early in the May 2005 -- 2006 sorry, which resulted in a significant reduction of earnings for Credicorp consolidated.

This second quarter ’06 only a provision of about $2m per quarter on such future BCP dividends is charged, and a remaining loss of FX hedges, leading to a reduced negative contribution of only $3.4m. This provision per quarter should continue to stabilize Credicorp’s earnings. Given this contribution breakdown, we would like you to give -- we would like to give you some more details on the margin earnings contributor.

Next page please. Starting with BCP, net earnings at BCP continue their growth trend, reaching for the second quarter ’06 $67.3m, which represents growth of 12.4% quarter-over-quarter and 51.9% year-over-year. With this performance, return on average equity for BCP reached an unprecedented 33.8%. A real record number, reflecting the improvement in performance from 23.5% we achieved in the second quarter ’05.

This excellent result follow an acceleration of loan growth quarter-over-quarter of 7.9% and -- quarter-over-quarter of 7.9% versus 2.9% in the first quarter ’06, which was achieved without experiencing too much pressure on margin. This acceleration in loan growth is reported in all business segments. Both retail and SME continue being the strongest, consistently growing sector for the year. This led to an also important growth in net interest income, which grew 8.9% quarter-over-quarter to $114m, becoming the driver of improved income generation.

Fee income was, however, flat since the continuing growth in transactional fee income, as volumes increased 2.5% quarter-over-quarter, was offset by a drop in capital market related fees. Consequently core revenues show, also, a strong growth at 5.8% quarter-over-quarter. Provisions were again positively impacted by the improvement in the economic activity, and continuous recoveries of charged-off accounts, leading to minimal net provisions. We will comment on this further on.

In the second quarter ’06 excess liquidity deposited at the Central Bank, and in other less profitable assets, was channeled to loan growth. This is a favorable trend, which is expected to continue, given the positive expectations for economic growth and to support, or further improve, net interest margin. The resulting better composition of assets, allowed for a recovery in net interest margin, up to 5.34% compared to 5.1% in the first quarter ’06.

Cost did accompany this quarter, the business expansion, growing in line with it at 7% quarter-over-quarter. This allowed us to maintain the already improved efficiency ratio, which stayed at 48.6% for the second quarter ’06. The following charts will help us explain this development a bit further.

Next page please. Looking at loan growth in more depth, and measuring average monthly balances, growth of the retail and SME segment, confirmed their overall, and consistent greater dynamics, reaching growth rates of 5.3% quarter-over-quarter, and 24% year-over-year.

However, this second quarter ’06 growth, in the middle and corporate segments, report significant higher growth, though certain seasonality is usually experienced with increased lending activity in the middle of the year. This is, in this quarter, only one element of loan growth.

In the middle market, the strong expansion of export activity has increased the need of additional production capacity, leading to important investments in capital assets, reaching loan growth of 9% quarter-over-quarter, and 16.7% year-over-year.

It is, however, in the corporate segment where this second quarter demand for loans leaps forward as corporations prefer building up a security cash cushion in the midst of electoral process, increasing their borrowings considerably. And some pent up demand for new investment financing build up [during] due to political consideration.

Consequently, growth for corporate lending reached an usually 12.1% growth over quarter, after having remained basically flat the previous quarter, and contributed this way to an improvement of its yearly growth rate to 9.3%.

Altogether net loan growth achieved 7.9% quarter-over-quarter, and 17.7% year-over-year. This development put a temporary hold on the re-composition being experienced on BCP’s loan portfolio throughout, where the trend towards the retail and SME segment has been clearly observed. This trend will most likely resume, as the political and economic scenario settles down.

Next page please. On the BCP income side, net interest income remains strong growing 8.9% quarter-over-quarter and 24.6% year-over-year. While fee income remained flat for the quarter, leading to a year-over-year growth of a moderate 5%. The distribution and growth of net interest income, and non-interest income by business segment, on a year-over-year basis, is clearly reflected in the left-hand side chart.

Total fee income was flat quarter-over-quarter, since a volume growth in transactional fee income, was offset by an overall drop in capital market related fees. In fact, fee income from capital market related services, was significantly lower this second quarter, since these activities which have a long maturing period, were on hold given the political uncertainty.

However, transactional fee income was specifically affected by the strategic decision at the beginning of the year to reduce certain banking fees, to favor banking penetration, has been compensated by increased transactional volume, or growing around 2.5% quarter-over-quarter.

Transactional fee income is expected to become stronger, since alternative and more cost efficient distribution channels, such as Agente ViaBCP, are on full expansion and will increase the number of points of sale dramatically within the year which, in turn, should boost transaction volumes.

Again, the importance in potential of the retail and SME market remains evident, given the largest net interest margins that can be achieved in this sector.

Furthermore, loan growth led this quarter to a re-composition of asset allocation, which is a very welcome evolution that corrects the development of the first quarter, where we experienced strong asset growth, due to the high liquidity in our balance sheet. As you may recall, in anticipation of the growth in our portfolio, particularly, on the mortgage side and the potentially disruptive electoral process, BCP did some long term funding exercises, which allowed to also be very liquid during this period.

This quarter, however, the shift in allocation of such liquid assets, into loans, is leading to a significant higher interest income and a resulting strong improvement in profitability. Therefore, net interest margin recovers to 5.34% after having dropped to 5.06% last quarter, because of the described development.

This development in strong interest income growth, further confirms BCP’s ability to continue growing without a major problem in overall average net interest margin, since our asset mix can be still be further improved, and low market penetration still allows for good growth rates with reduced impact on margins due to competitive pressure.

Next page please. Economic expansion and increased consumer confidence is leading to a global improvement on all business sectors, with an important positive impact on provisioning requirements, recovery of charge-off loans, and all portfolio quality indicators.

Therefore, past due loan ratio continued improving, despite aggressive loan growth and a significant riskier retail and [SSB] business expansion, reaching 1.65% at the end of the second quarter from 1.91% in the first quarter ’06 and 2.67% in the second quarter ’05. This indicator is a true reflection of the high quality of BCP’s portfolio.

Reserve for loan losses also increased, improving the coverage ratio to 219% at the end of this second quarter, versus 203% in the first quarter and 181% in the second quarter ’05. This portfolio improvement led to lower provisioning requirements, reaching only 9.22% of net interest income, or 0.8% of total average loans on an annualized bass, compared to 15.5% and 1.3% respectively in the first quarter ’06. Nevertheless, you do see an increase due to the more retail or rented portfolio structure of today, when compared to the 6.6% and 0.5% for those ratios a year ago.

In absolute terms provisions in the second quarter reached $10.5m and were 35% lower than in the first quarter ’06, which were high given the growing retail portfolio, though an extraordinary country risk provision close to $4m for the Ecuadorian exposure was also included in the first quarter.

This overall economic recovery resulted, as well in high recovery, from previously charged-off loans, from higher recoveries than expected, leading to a high recovery of $9.2m, which reduced net provisions to a very low $1.3m and contributed to net income improvement.

However, the higher than expected recovery this first quarter, so far, have almost reached already the projected volume of recovery for the full year. Therefore, recoveries in the remaining half of the year should be expected to drop, leading to higher net provisioning levels for the future. In brief, a continuation of a very healthy growth with low provisioning requirements and strong coverage, thanks to loan ratios.

Next page please. Cost controls continue allowing business growth with very moderate cost growth, only 6% year-over-year, which led to a significant improvement in efficiency during the last year. Nevertheless, this second quarter ’06, costs did grow in line with business expansion, up 7% quarter-over-quarter, though, without any real loss of the improvement in efficiency achieved before.

Nevertheless, we are aggressively expanding our branch network with additional personnel needs and system support, which we expect will result in increased costs for the second half of the year. This way, BCP’s efficiency ratio remains basically unchanged at 48.6% for the second quarter ’06. An improvement in the overall performance of BCP’s business is better reflected in the profitability ratios. Return on average equity, for BCP, reached an unprecedented 33.8% a real record number, reflecting the impressive improvement in performance from 23.5% achieved in the second quarter ’05, while return on average assets reached 2.8%.

Next page please. Credicorp off-shore private banking business at Atlantic remains a steady contributor, with this contribution peaking with special transactions and/or market volatility. Therefore, the high results of the previous quarter were driven by important growth in deposits following the political stability in the country, and a very specific sale of securities, which contributed significantly to the high results. Whilst their volatility disappeared, a second quarter contribution to Credicorp was back in line with it’s normal activity reaching $3m, thus, reflecting a negative 38.8% growth quarter-over-quarter, but a 2.1% growth year-over-year.

Assets maintained strong growth, posting gains of 9.4% quarter-over-quarter, and 44.3% year-over-year, but net interest income growth remained flat due to the fact that the quality of assets remained stable and a flat yield curve did not allow for significant margins in [gapping] assets and liabilities.

Atlantic Security’s strategy to focus in the asset management business continues to bear fruit increasing fees and commission, which reported growth of 16.4% quarter-over-quarter and 52% year-over-year.

Third party managed funds, which includes customer deposits, mutual funds, and securities under custody have grown 10.1% and 49.7% [quarter-over-year] and year-over-year reaching $2.3b at the close of second quarter ’06. Altogether consistent results with further business expansion.

On page 11, Pacifico Peruano Suiza’s financial highlights. Though the recovery process of Credicorp’s insurance business is expected to require some time, it is already leading to consistent improved results.

Net consolidated earnings before minority interests for the second quarter ’06 reached 6.1m. After minority interests in Pacifo Suiza net income reached 4.7m for the second quarter ’06. However, after the consolidation adjustment that deduct dividends from BCP on Pacifico, BCP’s shareholdings and minority interests, Pacifico Peruano Suiza’s contribution to Credicorp for the quarter is 2.7m, leaving it at the same level for the first quarter ’06. These results follow the recovery in earnings reported by the property and casualty business of PPS, as well as the continuing performance of the Life, Pacifico Vida, and Health EPS business.

Property and Casualty. Year-over-year premium growth for this segment reached 16%. Underwriting results were 5.1m above the second quarter ’05, basically, because of it’s 20% higher net premiums earned, and a net loss ratio of 56%, 14 percentage points below its second quarter ’05 level. This better underwriting result, net -- deposited net earnings after minority interests for Pacifico Peruano Suiza, which additionally benefited from BCP’s high dividends, and reached 2.3m - a significant improvement from the loss of 0.2m in the second quarter ’05, and a basically break even situation in the first quarter ’06.

Pacifico Vida Life. Total premiums dropped 1% year-over-year mainly following the drop in sales on individual annuities. However, reserves dropped 35% for the same reason, and an additional reversal of reserve related to the insurance for disability and survival for the private pension fund, also contributed to improving earnings. Thus, results were higher than previous quarter.

Health, PPS. Total premiums in the health business were 2.7% year-over-year. Net loss ratio improved to 78%, leading to an underwriting result of 3.8m, a significant improvement. Nevertheless, despite a very good underwriting result, net income reached only 0.2m because of a cost adjustment to write-off an obsolete software, which still appeared with a high residual value in the book. Therefore, the combined ratio and net loss ratio showed improvement quarter-over-quarter and year-over-year. Expectations for further results are therefore encouraging.

Prima AFP. Our new private pension fund venture, Prima AFP, a continuation of its good result but also some excellent developments can be reported. Despite the competition in the private pension fund business brought about by Prima’s appearance in the market, Prima AFP continued growing without losing its high portfolio quality. As of June, its number of affiliates reached 97,000 representing a quarter-over-quarter growth of 31% and it’s expected to surpass 100,000 affiliates with the sales efforts of that month.

Contributors-to-affiliates ratio is a very healthy 89%. Furthermore, its funds under management grew 33.7% from 553m in the first quarter, to $713m in the second quarter, reaching a market share of above 6%. For the second quarter ’06 Prima reported losses of 2.2m, still part of the start up costs, which were again lower than expectations as a result of higher income, cost controls, and good returns on reserve [inaudible].

The results for Prima AFP are within expectations or even better. The process of organic growth tends to be more challenging and slower than is required to achieve the target market share set at Credicorp. It was, therefore, of utmost strategic importance to obtain the acquisition of one of the important market players and accelerate the process of achieving positive results in this business.

Altogether it is also noteworthy that this market continues growing at a very good growth rate. Growth of funds under management was very strong for [the system] at 10.6% for the quarter, supported by the high returns achieved this quarter, reaching total volume of funds under management for the system of $11.4b. Thus, this denotes the large potential offered by a still young business in a growing economy.

Next page please. Acquisition of AFP Union Vida. Such an acquisition would address three major issues. A strategic positioning of Prima as an important player allowing a faster stabilization in the current price war in the pension fund market, leading to a reduction of associated costs, and an improvement of profitability. A consolidation of Credicorp as the leading financial Group in the country consolidating its leadership in financial -- in all financial segments, benefiting of such a position to grow aggressively as the Peruvian economy develops. And a more efficient use of Credicorp’s excess capital, which is expected to contribute to achieve the target return on equity numbers of above 20% for Credicorp.

This was successfully achieved through a negotiation process with the Santander Group, the major shareholder of AFP Union Vida. The transaction, which remains to be concluded by the end of the August, will lead to an improvement in Credicorp’s return on equity in the longer run. For this year we do not expect yet to see the benefits of the merger since the merger process will result in one time costs for Prima related to the write-off of assets such as [inaudible] and tax credit, and personnel reduction costs. In the 2007 period, however, the Company expects a positive contribution of between 15m to 20m, reflecting our return on equity for the investment of about 10%, which is expected to improve over time and is significantly higher than today’s alternative use of capital.

Altogether the strategic positioning of Prima will allow us to quickly benefit from one of the fastest growing segments in the Peruvian financial market, and should lead to achieve better results in this business. Once the capital to asset ratio improves contributing to a longer term stabilization of Credicorp’s total return on equity at attractive levels.

Next page please. Overview and summary. BCP on the overall and summing up these results, we feel very pleased, especially, given the excellent results that led to surpassing our ROE targets for the year at BCP and Credicorp, and doing so throughout an extended uncertain electoral process.

BCP continues reporting solid loan growth, and excellent bottom line results. Dynamics in the most profitable business segment - their retail and SME segments - continues though an unusual growth acceleration in the corporate and middle market is [inaudible]. Continuing the asset shift in favor of higher yielding assets. This business expansion was achieved while loan quality continued improving and maintained its actual very comfortable levels, without any significant increase in costs. Thus, all ratios show significant improvement.

Atlantic continues expanding its asset management business and represents a stable and low risk income generator.

Pacifico continues it’s recovery with improved results as shown by the positive bottom line result in all three business [segments].

And are newly created pension fund company, Prima, reported results on track with projections but has made a major strategic move by successfully bidding to acquire one of its main competitors, AFP Union Vida.

Altogether Credicorp has benefited from the strong economic performance of the country and is very well positioned to continue doing so.

Next page. The market numbers reflect the performance, which you all must have been following very closely. Just an additional note, this performance has also been followed by international institutions which have awarded us some important recognition. BCP was awarded Best bank in Peru by Your Money magazine for its award for excellence 2006 context and also our Bolivian operations, Banco Trado of Bolivia, received the award for Best Bolivian Bank in the same [contest].

Thank you very much and, with this, I am ready to go into the question and answer period.

Thank you very much. [OPERATION INSTRUCTIONS] We’ll first hear from Juan Partida with JP Morgan.

Hi, good morning. I have two questions. The first is regarding the insurance business. We saw a very interesting premium growth and also a reduction in claims and yet the contribution to Credicorp earnings was stable. You mentioned that there were some extraordinary write-offs that explain that, but could you just give us some guidance as to what to expect for the second half of the year? That’s my first question.

And the second question is regarding the AFP business, the pension fund management. If you -- after the acquisition of Union you mentioned that your objective was to become the number one in the country, so my question is would that -- would you try to do that organically or are you thinking of additional acquisitions? Thank you.

[Great.] First on the private pension fund, yes, our objective is to be number one. We will aggressively pursue organic growth. At this stage we’re not considering any further acquisitions. We have to focus on -- we have finalized the agreement. We have to merge the companies, there’s a lot of work involved in systems, integrating of the funds, all the sales force, but at this stage it doesn’t make any sense to divert our focus from organic growth and a successful integration of both companies.

Regarding insurance, yes, we -- the two elements that offset, if you will, the growth of the business that did not result in higher contributions to Credicorp was that, part of the earnings in the insurance company, is the fact that they have an important ownership of shares in Banco de Credito. And they received a relatively large dividend, actually, $1.8m of dividend. So, once the consolidation process goes, obviously, those dividends are deducted. And the other element was to write-down on some assets at the Health side.

For the second half of the year we expect the core businesses to continue growing and showing good results, without the negative impact of -- or the deduction of these two elements. So we can to achieve a higher contribution than what we have seen in this quarter, though, at this stage we’re not putting any pressure on results of the insurance company.

We are letting them do their internal work in improving their underwriting and several processes that need to be adjusted. So, at this stage, I think it is conservative to assume that the same numbers for the rest of the year. Next year we will start putting some more pressure on the insurance company to produce results. At this stage there are a lot of changes going on and we would want to be very conservative in expecting results.

Thank you very much.

You’re welcome.

At this time we have no questions in the queue but I would like to remind our audience, if you would like to [OPERATOR INSTRUCTIONS] Pause one moment. Ben Laidler with UBS has a question.

Hi, good morning. I just wanted to ask quickly if you would talk a little bit about the competitive trends you’re seeing on the retail side, both with the formal and the informal, or the traditional and non-traditional banking sector?

Absolutely, Ben. The competition remains fierce in all segments of the retail side. On the mortgage side, the market continues growing and we have even lost, marginally, some market shares on the traditional mortgages. There is fierce competition. We’ll continue to be number one with [great] growth rates, but it’s very, very aggressive competition and the competition in the mortgage side comes more from the traditional banks.

Competition on the credit cards -- we have done very well in this market with some marginal gains in market share. And again, the competition there comes more from, not only the traditional bank, but from the department stores which have very important competitive advantages in terms of acquiring new cardholders. The cost of acquisition of a new cardholder for a department store is significantly less than that for a traditional financial institution.

On the lending to retail -- SMEs and small businesses, micro-businesses -- our competition there is mostly banks that are exclusively focused -- financial institutions exclusively focused on that business. They tend to have processes that are more faster in response than ours, which are centralized processes throughout the country. But, we tend to have more aggressive rates. Our funding costs give us a benefit, which is our competitive advantages against those players.

So, I don’t think there’s any major shift in competition. It is still fierce and we are -- face competition from different specific specialized players in each of those markets. Overall, we have maintained our market shares, some marginal losses in market share in the mortgage. Some marginal gains in the credit cards, and in the micro-businesses. But, overall, I would say stable but very fierce competition.

Sorry, I’d just like to follow up. Any sort of change in competitive stance or strategy from [inaudible] since the takeover?

We [feel Visa] are very competing and starting to articulate a very solid proposal for the top corporate and for the middle market. They have a good credit card operation so, yes, we see them competing aggressively, which they were not some time ago. So yes, it is another player. It is a welcome player. They’re a very serious competitor. We respect them a lot, and we welcome their competition.

Great. Thank you.

At this time we have no questions in the queue. [OPERATOR INSTRUCTIONS]. We’ll pause one moment as we await additional responses. At this time we have no questions in the queue. I will now turn the conference back over to Walter Bayly for any closing or additional remarks.

Just a closing remark. Again, we feel very satisfied. I want to caution though analysts that there are a couple of things coming for the second half of the year. We’ll have the extraordinary effect -- one-time effects of the acquisition of Prima and, as I mentioned in my presentation, we are in the process of investing. That investment includes growth in branches, retail distribution points, and systems.

We will see some probably increased costs. Clearly, we expect those increased costs to yield us benefits going forward but not immediately. And again, the point I mentioned in my presentation that we have seen a lot of recovery from previously charged-off loans in this first half. Clearly, that is a trend that has to slow down going forward. But what is important is that our core earnings continue to be very strong and there is growth in the economy, and in the banking system, so we are very positive and confident going forward.

With this I want to thank you all for your presence. Thank you very much, that’s all.

That does conclude our conference call. Thank you for joining us today.