Credicorp Ltd (BAP) 2006 Q4 法說會逐字稿

Good day everyone and welcome to the Credicorp Ltd, Fourth Quarter Year End 2006 Earnings Release Conference Call. As a reminder today's conference is being recorded.

Also, Raimundo Morales the CEO of Credicorp is sitting with Walter Bayly today. At this time I would like to turn the conference over to Walter Bayly, Chief Financial Officer. Please go ahead sir.

Thank you very much, Enola. Good morning and welcome to Credicorp's Year End and Fourth Quarter Financial Earnings Conference Call for the year 2006. 2006 was a very good year, characterized by strong and overall business expansion. It is therefore our pleasure to present to you these results on the following pages.

Numbers on the Peruvian economy in the financial system are available to you in our press release and we will therefore not spend time on them today. Next page please. Credicorp's total results for the fourth quarter were up 23.3% from the previous quarter, reaching net income of $63.3 million and resume in this way the expected income levels for the year. In fact, it has been a very good quarter which puts Credicorp's results back on track after the third quarter results, which were affected by extraordinary provisions. Therefore return on average equity climbed back to 18.8% from 16.3% in the third quarter.

Banco de Credito (BCP) led these results and contributed on a consolidated basis with a total of $65.6 million, 29% more than the $50.8 million in the third quarter '06. BCB, our Bolivian Bank, which is consolidated in BCP, reports a contribution 23% higher for the quarter. Atlantic Security, our offshore banking operation, reports as well a contribution improvement of 5% for the quarter.

PPS or Pacifico, our insurance company reported a contribution similar to the already improved third quarter results continuing in this way its recovery from past losses and offering an interesting outlook for the future.

Finally, Prima AFP, our pension fund business, completed its merger process with Union Vida and has assimilated all the start-up and merger related costs, showing in the fourth quarter an important loss of 11 million.

Looking at the full year results on the following pages we can see the improving trend is more evident as the quarter's volatility evens out. Credicorp's total results for the year 2006 shows a 27% growth, reaching a net income of $230 million, after $102 million in 2005 and $130 million in 2004.

Return on average equity reveals this improvement reaching 18.5 in 2006 after 16.4 in the previous year and 13.6 in 2004. Being BCP the dominant subsidiary, it is only logical that Credicorp's results follow closely those of Banco de Credit. BCP on a consolidated basis contributed with a total of $239 million. That is 35.4% more than in 2005 as a result of its successful growth strategy.

Aside from BCP, we can also confirm a continuing positive trend aimed at recovering profitability in the different subsidiaries that form part of Credicorp. In fact, BCB, which is consolidated in BCP, reported an impressive earnings growth $ 3.7 million in 2004 to $14 million contribution in 2006.

Atlantic Security is a more stable performer and its growth is in line with the mature market in which it operates, that is 16% for the year.

BPS, which was one of our biggest concerns, reporting a contribution 158% higher for the year at $14.5 million, after having suffered some important losses in several business sectors that lead to the deterioration in 2004 and 2005. The improvement in BPS's earnings is a result of the corrective measures and changes in the technical management which have contributed to recover profitability in all insurance business sectors.

Finally, Prima AFP is following through a strategy to position itself as a strong player in the pension fund business. The acquisition and subsequent merger of Union Vida and Prima completed in December 2006 was an integral part of that strategy. Thus, Prima reported a loss of $21 million for 2006, consolidating also Union Vida's results and incurred merger costs. These results, though higher than originally expected, should clear the path for future growth and the stabilization of the today, extremely high operating costs and should leave a positive generating operation for 2007.

It is however, noteworthy that this year Credicorp had to absorb two major extraordinary costs, number one, the extraordinary provisions for a stock appreciation rights program, which represented a 36 million expense included in BCP's results. And, a double taxation of the dividends paid included in the Credicorp and Others line, due to a change in our accounting policy which represented a double charge of about 9 million.

Though, on the other hand Credicorp through BCP, benefited from a very low provisioning. All in all the corrective measures aimed at improving the problem sectors of Credicorp are paying off, clearing the path for further growth, which, together with the excellent growth prospects of the core banking business, we expect will lead to further improvement in Credicorp's profitability.

Given this contributions breakdown we would like to give you some detail on the main earnings contributor. Next page please.

Starting with BCP, net earnings at BCP reached a total of $67.7 million, 28% higher from the $52.8 million the previous quarter, recovering its expected level of income after the drop in the third quarter explained by extraodinary, high, stock appreciation rights provisions that quarter. With this recovery in earnings this fourth quarter result for the year 2006 reached a record of $248 million, up 34.5%.

BCP's net loan growth was sound at 6.7% for the quarter and 21.6% for the year confirming the dynamics of the domestic banking business. Loan growth resulted in increased net interest income, which was up 10% quarter-over-quarter, reflecting the stronger growth of the retail loan book which grew at 8.6%.

Non-interest income also had a good quarterly performance following the strong expansion of fee income based on increased transaction volumes, as well as by gains related to the excellent performance of the domestic stock market, reaching a sound 10% growth quarter-over-quarter.

On a yearly basis, net interest income grew 15% and non-financial income 14% leading to core earnings growth of 14.6%. Despite loan growth, portfolio quality continued improving to an extremely low net provision of only $1.9 million. The increase of 14.4% reported in operating costs for the year is less related to the strong retail growth than to a significant provisioning resulting from the stock appreciation rights program and to the re-evaluation of the local currency.

This year this provision generated an important volatility in BCP's reported earnings. Thus, a hedging mechanism was contracted and will minimize such effect in the future. Also noteworthy is the growth achieved in our deposit base of 25% which reflects BCP's strength and provides a very low funding cost source to support future loan growth. The following charge would help us explain these developments a bit further. Next page please.

Looking at the loan growth in more depth and measuring average monthly balances, growth of the retail and SME segments confirm the consistent greater dynamism., reaching growth rates of 8.6% quarter-over-quarter and 25% year-over-year. Fourth quarter growth rates for the corporate and middle market loan book dropped slightly quarter-over-quarter and were more in line with normal expectations. For the whole year 2006 however, both segments reported a very dynamic growth, which was 12% for the corporate market and 17% for the middle market. Thus the recomposition of BCP's loan portfolio towards the retail and SME segment continued through the year, though at a slower pace reaching a loan book composition of 37% retail and 63% wholesale. This pace will most likely increase as further economic expansion and banking penetration is achieved in the retail segment where the more mature corporate and middle market grow at lower rates. Next page please.

Income generation of the retail segment continues being very strong reaching 21.9% for the year. Net interest margins in the retail segment are still high despite the recent tightening experienced. Nevertheless, even though we continue experiencing a shift in asset allocation towards the retail segment, overall net interest margin for 2006 drops to 5.17 from 5.54. This is a result of an extremely competitive environment which has led to a tightening of margins in all business segments.

To support the growth in the retail business, BCP has expanded significantly its distribution network opening 19 new branches and installing 104 new ATMs. But more importantly, introducing a new, innovative and cost efficient distribution channel, the Agente ViaBCP of which 500 were installed in the year. All of this meant an expansion of our distribution network by over 70%. As the retail sector continues growing, as expected, and our loan portfolio continues shifting towards this profitable segment and given the competitive pressure of margins, we should be able to defend and maintain this global margin at similar levels in the future. Next page please.

Despite aggressive competition in the local market we feel confident to be able to defend our market shares. We remain the leaders by foreign deposits having in fact even increased slightly our share. And on the loans side we have defended our market share where we see an aggressive fight amongst players for each percentage point. But a fairly stable market share for BCP. Next page please.

As has become almost familiar throughout the year 2006, continuing economic expansion and increased consumer confidence led to a further improvement of all business sectors and resulting low provisioning requirements and recovery of previously charged-off loans, despite aggressive loan growth and the significant riskier retail and SME business expansion. Thus, as the loan ratio improved further reaching 1.3% at the end of the fourth quarter, as did as well the coverage ratio which increased to 249.5%, this further positive evolution of portfolio quality led to a small 3.2 million provision for the fourth quarter. And an extremely low provision required for the full year reaching an almost insignificant 1.9 million of total provisions. This level of recoveries of previously charged-off loans is clearly not sustainable in the future where we expect to see more net provisions.

Page 10, though most of BCP's 2006 increase in reported total operating cost is related to the previously mentioned stock appreciation rights program, this extraordinary cost included in other operating costs in our P&L, are excluded from the efficiency ratio calculation. Nevertheless it is higher administrative, and more importantly, personnel expenses in the fourth quarter due to increases in our retail sales force, who have had a negative impact on our efficiency ratio for the fourth quarter, leading to a deterioration to 53.9% from 51.6% in the third quarter.

On a yearly basis however, operating costs excluding extraordinary expenses grew proportionally less than income, leading to an improvement in BCP's efficiency ratio for the year which reached almost our target at 50.5%. The overall performance improvement is even more evident measuring return on average equity for BCP which improved both for the fourth quarter and for the full year, reaching 28.6% for 2006 after having achieved 23.4% in 2005. Return on average assets was also up to 2.52%. Page 11.

Moving on to other Credicorp subsidiaries, let's take a brief look at Atlantic Security, Credicorp's offshore private banking business. Atlantic had its contribution for the fourth quarter rising 5% to 4 million. This resulted in a 16% growth for the year reaching a contribution to Credicorp of 15.7 million, an excellent performance given the mature market in which Atlantic operates. Both net interest income and fee income rose strongly quarter-over-quarter, reaching 35% and 26% respectively reflecting a solid business development. For the year income growth is also strong, especially fee income, up 25%, and gains related to the capital markets which were up 33%.

Atlantic's asset management business continues being a strong fee generator and reveals an excellent growth for the year of 38% from $999 million a year ago to $1.3 billion at the end of 2006. All together consistent results and further business expansion. Next page please.

At Pacifico, our insurance company, net consolidated income before minority interest related for the fourth quarter reached $42.6 million including an extraordinary and very high income related to the sale of securities, basically BCP stock and [Alicorp] shares. However, to evaluate PPS's business performance we look at PPS's contribution to Credicorp, which excludes, in the consolidation process, such extraordinary income leaving PPS's fourth quarter '06 contribution to Credicorp at $4.5 million. Very close to the contribution in the third quarter of $4.6 million.

For the year 2006 total contribution of $14.5 million is three times higher than the poor performance of 2005 of $5.6 million. These improved results represents a recovery in earnings. Within health, within the health business, which -- though reported lower income in quarter-over-quarter, has operated profitably all the year after reporting losses through 2005.

In the property/casualty business important claims hit the company again this fourth quarter resulting in operating losses for the quarter which were only offset by the extraordinary sale of securities. But the yearly performance does reflect also an improvement compared to 2005. And in the large insurance segment, fourth quarter results were better quarter-over-quarter but a year-over-year drop of 31% in earnings was recorded as the conservative policies still in place for its annuity business keeps putting Pacifico Vida's life insurance business at a competitive disadvantage.

The changes in business strategy and technical results are evident when observing that despite a moderate 4% growth of total premiums, growth of net premiums earned and underwriting results were significantly higher at 16% and 78% respectively.

On the other hand, the cost cutting measures were put in place, operating cost still grew 27% given the cost of personnel management changes. All together however, Pacifico's performance measured by its contribution to Credicorp could report an important recovery as reflected also by the improvement in net loss ratio, down to 72% and combined ratio down to 104%. Next page please.

Fourth quarter results for Prima include this time the consolidated numbers of Prima and the merged operations of Union Vida. In fact, the merger process was completed on December 1st and has resulted in the second-largest pension fund in the market.

Fourth quarter operating and net results were negative leading to an $11 million loss. Since, in addition to the continuing high operating costs of the industry the merger resulted in significant charges. To some extent larger than originally expected. Among the merger costs, the most noteworthy were the write-off of the computer system of Union Vida, write-off of the value of the brand, layoff costs of redundant personnel and the loss in part of a cumulative tax shield of the company. The high operating costs are related to the salaries and commissions paid to the sales force in order to defend our client base . All together the losses reported in consolidating to Credicorp reached $20 million for 2006. Having completed this process Prima is prepared to start operating as an income generating entity for 2007. Next page please.

In summary, this has been a very interesting and successful year for many reasons. We have reached and in some cases surpassed our growth targets. We have identified additional business areas with great potential to focus on. We have expanded by over 70%, our distribution network at BCP, in a very cost efficient way. We have managed our business successfully through uncertain political times.

We have confronted the increased competition in our market and successfully defended our dominant position. We are turning around the non-profitable business of Credicorp and are showing already, some successes. All in all, we have seen our corporate strategy pay off and are paving the way for future growth. All of this to close the year with a significant increase in net results and an improved return on average equity of 18.5% as you can see in the following page 15. These raises are a true reflection of the trend of Credicorp.

We believe our corporation is today in an excellent position to benefit from the local market's future growth and the changes carried out clear a path to achieve and deliver further improvements in the coming year. And very importantly, as a result of the described achievements we have generated greater shareholder value as can be seen in page 16. This chart reflects the improved performance of Credicorp.

Thank you very much. And now we can go into the question-and-answer period.

[OPERATOR INSTRUCTIONS]. Mr. Bayly, it appears we have no questions.

I can't believe I have been that clear. Well, thank you all very much for joining us in this conference. As we mentioned we are very enthusiastic with the growth we see happening in the Peruvian economy and we think we can benefit from that. And again, thank you very much for joining us.

Thank you ladies and gentlemen. That does conclude today's conference. We do appreciate your participation.