Credicorp Ltd (BAP) 2007 Q1 法說會逐字稿

Good day everyone and welcome to Credicorp Limited First Quarter 2007 Earnings Release Conference Call.

(OPERATOR INSTRUCTIONS)

At this time, I would like to turn the conference over to Mr. Walter Bayly, Chief Financial Officer. Please go ahead, sir.

Thank you very much. Good morning and welcome to Credicorp's Conference Call for the First Quarter of the Year 2007. Once again, it is for us a pleasure to discuss our results as they continue reflecting the positive environment of strong economic growth we are experiencing in Peru.

Undoubtedly, we are benefiting from the dynamics of our markets, but at the same time, we are aware that a coordinated strategy to take advantage of the market's growth is crucial and we would not be experiencing this growth in our corporation without such a strategy. The numbers of the Peruvian economy and financial system are available to you in our press release and we will therefore not spend time on that. Next page please.

Credicorp's total results reached $79 million, a record number, which represents a 35% growth from the previous quarter and it's almost 60% above the same period a year ago. We believe this is a reflection of the economic environment since this growth in income generation is fueled by the expansion of our businesses in all fronts and consequently recovery of profitability in business segments that were troublesome. Thus in the chart of earnings contributions of the different subsidiaries, we observed the growth of 7% of BCP's earnings contribution as was expected.

However, the strong recovery of the other investments of Credicorp are at this time important drivers behind the 25% earnings growth of Credicorp. Growth of our offshore banking activity and Atlantic securities, further recovery of profitability in our insurance business of Pacifico and reaching breakeven in the pension fund company Prima resulted in such excellent performance. This is clearly reflected in the return on average equity reached this quarter for Credicorp, which surpassed for the first time the 20% target and hit 22%. Next page please.

At BCP, net earnings of BCP reached a total of $72.7 million, 7.3% higher from the previous quarter. This is within expectations and follows continued strong expansion of our loan portfolio and our fee business. BCP's loan growth continued strong at 5% for the quarter and 24% for the year, confirming the dynamics of the banking business.

Loan growth resulted in increased net interest income, which was up 4.7% quarter-over-quarter. Non-interest income also had a good performance, showing a 5.1% quarterly growth, which was however strongly supported by gains related to the excellent performance of the Peruvian stock exchange this quarter.

Despite loan growth, portfolio quality continued improving, measured by past due loans to total loans of 1.2%. However, provisions grow in line with our loan book and net provisions start reflecting a reduced portfolio of charged-off assets. After some expanded costs in the previous quarter, a normalization of this led to a nominal drop in operating costs of minus 1.8%, which obviously contributed to improved bottom line results.

Also noteworthy is the growth achieved in our deposit base of 5.8%, which reflects BCP's strength and positioning in the market and provides a very low cost funding source to support loan growth. In fact, this led to some liquidity increase, which was channels to investments in government securities.

The following chart will help us explain this development a bit further. Page Five, loan growth measured by average monthly balances reflects continuing strong activity as shown by the overall growth of 5.5% for the quarter. However, an internal re-segmentation of our loan book was undertaken to accommodate better our growing clients' needs. As a result of the new segmentation, a new -- a net volume of about $75 million was shifted from the growing SME segment to the middle market. Therefore, when looking at loan growth of the individual segments, an adjustment has to be made to the reported numbers in order to compare them to previous numbers.

The chart below the bars reflects that adjustment and reveals a very strong quarterly growth of 9.6% of the retail segment as a whole, 33% for the year. While the middle market segment still reached 5.5% loan growth, almost 19% for the year. Growth of the individual retail products was as follows. Consumer loans grew at almost 16% quarterly followed by credit cards with 8.7% quarterly growth. Thus the re-composition of BCP's loan portfolio towards the retail and SME segment is also understated in this graph, but it should continue for the year.

Page Six, income generation of the retail segment continues being very strong. Though again the re-segmentation and shift of assets to the middle market group also shifts reported income percentages. Thus these growth numbers are distorted in favor of the middle market and to the expense of the retail segment.

Net interest margins on the other hand reflect a small drop from 5.3% to 5.2%, (inaudible) some continuing competitive pressures. But this quarter the effects caused by increased investment of excess liquidity in central bank CDs, which generates low nominal interest income, but very attractive after-tax yields due to the tax shelter they provide, but previous to other stated net interest margins. Next page please.

To support the growth of our business and especially the explosive growth of the volume of transactions processed, BCP has expanded significantly its distribution network, opening new branches and installing new ATMs. But more importantly, introducing a new innovative and cost efficient distribution channel, the Agente BCP, of which 500 were installed in the last year. All this meant that expansion of our distribution network by over 70% last year. This quarter, growth in all our networks continued strong, adding at least 150 Agentes throughout the last quarter only. The latter is growing at a very accelerated rate, given its low implementation costs.

Page Eight, despite aggressive competition in the local markets, we feel confident to be able to defend our market shares. We remain leaders by far in deposits, having in fact even increased our share slightly. And have defended our market share even again slightly increased our market share in loans, where we see an aggressive fight among players for each percentage point. But, a very stable market for BCP.

Next page please. Fulfilling economic expansion and increased consumer confidence led to a further improvement of all our business sectors and resulting low provisionary requirements and recovery of charged off loans. Thus past due loan ratio improved further to reach 1.2% this quarter while coverage ratios remained strong at 252%. Total provisions do grow with portfolio growth, but overall our book of charged off loans diminishes in time, recoveries still offset a good portion of such provisioning, leaving only a net provision of almost $6 million for the quarter.

Page 10. Efficiency for BCP has improved as a result of a 1.8% drop in operating expenses. With the efficiency ratio again below the 50% target. Personnel expenses were lower as a result of a normalization of expenses since the fourth quarter of '06, additional incentive related payments to the retail sales force were incurred. This drop happened despite a first quarter increase in number of employees. Administrative expenses on the other hand also dropped as in the fourth quarter some aggressive marketing campaigns were implemented that were implemented in the fourth quarter of '06 were not continued in this quarter.

In fact, we have indicated our expectation of higher operating costs for the year, which usually lag in time as the approved investments are gradually implemented. Therefore the drop experience is probably not sustainable. All of these developments led to a record high return on average equity for BCP for the first quarter of 31.5%. Next page please.

Moving on to the other Credicorp subsidiaries, let's take a brief look at Atlantic securities. Credicorp's offshore private banking business has its contribution for the first quarter rising 25% quarter-over-quarter to $5 million. This represents a return on equity of 14%, an excellent performance given the mature market in which Atlantic operates. This result responds to improve the income and also a drop in operating expense.

Atlantic's asset management business, which includes customer deposits, mutual funds and securities continues being a strong fee generator and reveals an excellent growth this quarter of 11.2% from $2.5 billion in the fourth quarter to $2.8 billion at the end of the first quarter '07. Altogether, consistent results and further business expansion.

Page 12, at Pacifico Insurance Company, net consolidated income before minority interest for the first quarter reached $12.5 million. However, to evaluate Pacifico's business performance, we look at Pacifico's contribution to Credicorp after consolidation adjustments, which reached $6.6 million this first quarter versus $4.5 million the previous quarter, an improvement of 46%. This improved result starts with better production, sales numbers, which show a 5% increase in total premiums. Furthermore, better net premiums earned, up 7.8%, and better underwriting results, up 55%, together with improved efficiency, in other words proportionally lower increase in operating costs of 30%, resulted in this earnings recovery.

Within the health business, a slight deterioration of the net earned loss ratio was reported and claims increased by 17%, mainly in the corporate health plan. Nevertheless, it is within expectations and its contribution remains fairly flat at $0.7 million for the first quarter.

In the Property Casualty business, a strong growth of 36% in premiums was reported, leading to underwriting results five times above the previous quarter at $5 million. However, also higher operating expenses, mainly marketing and sales costs, were necessary and were compensated by gains in the investment and securities. Thus, [part of] life results were still higher than the previous quarter at $1.9 million.

And finally in the life insurance segment, total premiums grew 9% quarter-over-quarter, which along with strong gains from the sale of securities resulted in better first quarter results. Life contributed $6.1 million, reflecting a 50% improvement in contribution. Altogether, Pacifico's performance measured by its contribution to Credicorp could report an important recovery as reflected also in its improvement in its combined ratio, down from 106% -- to 106% from 114% before. Next page please.

First quarter results for Prima reached finally -- finally reached breakeven with a bottom-line contribution to Credicorp of $0.2 million. The continuing high operating cost of the industry, some merger-related costs that extended into the year 2007 and some acquisition financing costs were still a heavy weight to carry for this young business. Nevertheless, commercial results were excellent, Prima has positioned itself with the best offer in the market, funds under administration, all have reached the first phase in profitability and it offers the lowest cost to investors.

This positioning resulted in the increase of attractiveness of Prima's offer, as reflected by the market share of collections, which are new contributions into the system. Nevertheless, the reduction of the high operating costs related to salaries and commissions paid to the sales force continue being the main objective. Operating costs have already somewhat reduced, but the profitability of Prima in the future depends on further operating cost reductions and growth of its income base. Both being the focus of Prima's management. Next page please.

Page 14. BCP continues its growth path focusing in Retail & SME and transactional business, reaching a return on equity of 31.5%. BCP obtained investment grade rating from S&P, following Fitch, for senior foreign currency debt. Net earnings for the first quarter reached record levels at Credicorp with $79 million.

Income growth was fueled by growth at BCP, but equally important, by a recovery in profitability of the other companies in the group. Elements that generate income volatility have been eliminated. Atlantic remains a stable business and steady earnings contributor. Pacifico shows a continuation of improved profitability in all fronts. Prima reaches breakeven and it places itself as number one in profitability for its funds under administration. And Credicorp ratios for the first quarter reflect a solid 25% net earnings growth reaching 22.4% return on equity and 42.5% efficiency ratios.

These ratios on Page 15 are a true reflection of the trend of Credicorp. The breakthrough in return on average equity, reaching 22%, is significant for us and we believe we should be able to sustain Credicorp's return on equity over 20% for the year. And more importantly, as a result of our described achievements, we continue generating shareholder value as can be seen in the final page, 16, which reflects the group performance of Credicorp's stock.

With this, I have finished my presentation and we are ready to go to the question and answer period. Thank you very much.

Thank you (OPERATOR INSTRUCTIONS) And we'll take a question from Juan Partida of JP Morgan.

Hello. Good morning. My question is related to loan growth. Loan growth was very solid this quarter. Would you be changing your guidance in terms of this quarter's results?

And the second question is, could you remind us when you expected Prima to originally start contributing to the bottom line? Thank you.

Sure. Thank you, Juan. We continue to be very positively surprised by the volume growth. We have every confidence that the positive economic environment in which we are operating provides ground for continued growth. But I would conservatively want to see another quarter before changing any guidelines that we give to the market. Another quarter of growth to make us feel a little bit more comfortable that this new volume growth is sustainable for the rest of the year.

In terms of Prima, we have estimated that Prima this year is going to contribute between $2 million and $5 million of earnings. We might be falling a little short on the income side. We are ahead of our budget on the expense side. We are slightly also ahead of our budget with higher selling expenses than originally envisioned. The reduction of the sale force is taking a little bit more time than we had originally envisioned.

It's important nevertheless to note that there have been substantial increases in the equity of Prima as a result of unrealized gains. This first quarter, Prima has generated more than $5 million of unrealized gains, which do not go into the P&L, but go directly into equity. So all in all, we are comfortable that the months ahead or months behind, Prima is very much the road where we want it to be and it is contributing value to our corporation.

Okay. Thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS) Alonzo Aramburu of Santander.

Yes, good morning everybody. Hey, Walter, I was wondering if you could comment a little bit on the competitive environment, specifically if you've seen HSBC been starting operations a little bit more aggressively in Peru?

Thank you. Good question Alonzo.

To better understand the competition, intense competition, that we are having in this market, it is better to go a bit segment by segment or product by product.

HSBC along with a couple of other players are more focused on the top corporates. But at the end of the day, in the top corporate market, we feel that our biggest competitor is not necessarily another commercial bank, but the domestic capital market. The private pension funds continue to accumulate a lot of funds thus are always avid buyers of corporate securities issued by our top customers. So in the top segment, our competitors would be Scotia Bank, PVVA, Citibank, HSBC and, as I mentioned, the domestic capital market.

On the retail side, where most of the action and growth is taking place, it's a more fragmented market. On the credit cards undoubtedly, interbank and the commercial houses, be they [Valavella] or [Ripley] are our biggest competitors and they have some very interesting dynamics. The commercial houses have competitive advantages even in terms of acquiring new cardholders. On the small businesses segment, our competition there is [Vibanco], Banco del Trabajo], Scotia Bank, some of the regional savings and loans. Again, a different dynamic.

So each of the different products or segments has its different set of competitors and there is fierce competition in each one of them. But the set of competitors tends to be different by product. Undoubtedly where we -- the bank with who we most compete with is PVVA And they are a very good, well managed financial institution with whom we compete aggressively. And if I was to pinpoint one institution, it would be PVVA with who we compete the most. And we have a lot of respect for the work they do.

Thank you, Walter. Can you comment also a little bit on how much growth you've seen outside of Lima versus Lima?

Well for us, Lima continues to represent around 60%, almost 66% of our activities. And I would say that the growth is parallel on both, both Lima and in the provinces. Nevertheless, it is important to note that our activity in the provinces is not in the rural areas. We are in the provinces, but mostly concentrated on the large and mid-sized cities. Unlike some of our competitors, which would be regional service and loans that go more into the rural areas. So for us, BCP, about two-thirds of our business is Lima, one-third outside. And both are growing at similar rates.

Okay. Thank you. And I guess just finally on the insurance side, a very good ROE this quarter, 17%. Do you think that's sustainable for the year?

That ROE has two elements. One is very good results in the -- obtained in the securities and in our investments. And the other is the very good activity we are having in terms of sales and managing our risk and our costs on the regular insurance side.

Yes, we believe that probably the results in the insurance -- in the investment activities are not going to be as superb, but little by little, the efficiencies obtained in our sales force and our [underwriting] results should continue to make this return on average equity sustainable.

Thank you, Walter.

(OPERATOR INSTRUCTIONS) We'll now hear from Daniel Abut of Citi.

Walter, could you elaborate a little bit more on one of the points you made towards the end of the presentation when you say that out of all elements that generate income voluntarily have been eliminated? Are you referring to the restructuring that has taken place at your other non-banking subsidiaries? Are you referring to the issue related to the stock incentive plan that generated volatility last year? Are you referring to both or to something else?

And second, if you could elaborate a little bit more on what you said earlier in the presentation that you were happy to see the ROE of 22% of Credicorp is above the target of 20%. Is that a firm target or should you at some point be aspiring to a higher ROE at Credicorp, more consistent with a booming economy probably allows for you to be more ambitious if you want with respect to overall profitability?

Sure.

The first question regarding volatility. In the past, there were at least four elements that come to my mind that created a certain level of volatility in our earnings that were -- that we did not like.

One is as you mentioned the valuation of the stock options granted to management. We have, as I have mentioned before, entered into a hedge that allows for those -- that volatility to be eliminated.

Number two is the volatility in the insurance business. We have -- we are slowly shifting our portfolio to more stable and less volatile activities, particularly we had a lot of volatility in the fishing fleet. And slowly we are going into segments that have less volatility.

The third is volatility we have in Atlantic Security's portfolio. We have repositioned Atlantic Securities portfolio to more investment grade, less volatile, fixed income securities.

And the fourth was the element of the acquisition of -- the start-up of Prima and the acquisition of Union Vida, the other private pension fund. Which created some volatility regarding -- there were losses at the beginning of the operating company and losses related to the acquisition.

So those four elements are ones that at least upright come to my mind that we have been working to try to eliminate, to have more stable earnings.

Regarding the return on equity, the truth is that within our corporation there are two investments that I would be very happy if they obtained a 20% return on equity. One is Atlantic Securities, which is a bank that has a relatively low leverage situation. It has a relatively stable most investment grade asset. It does -- it is not necessarily clear that a sustainable 20% return on equity can be obtained in that business.

And the second is the insurance business. The insurance business, we -- it is still in my mind untested with whether we can achieve a sustainable 20% return on equity over the long run. We are striving and have plans and various work so that's the objective, but it's not clear that, at this stage, that we will be able to sustainably achieve that.

So if you put that together into the package of credit quality, where BCP clearly is obtaining 30 plus return on equity, we have always fixed in our minds the objective of reaching 20%. We have surpassed that and the truth is we have not stepped down to quite figure out whether 25% to be a target we should reach -- we should aspire to or not. So let us think about that and we will develop this part a bit further. But as a first step, our objective was always the 20% and we have been surprised positively by having already surpassed that.

So I owe you an answer on this, Daniel.

But your answer makes a lot of sense. I was asking because we are seeing the improvement in some of the other subsidiaries you mentioned, in particular Pacifico, that with some more time on our side should help. But also we have seen the booming economy in your banking business and that reflected in the 30% plus ROE in BCP. And it probably hasn't escaped you that the bar has been raised because while 20% used to be very good levels of profitability when you look on a worldwide basis, most of your comparables outside of Peru have -- have been having for the last couple of years ROE that are more in the mid 20s than in the low 20s.

I agree with you.

But thank you. That was a very, very helpful answer.

Okay. You're welcome.

We have a follow-up from Juan Partida of JP Morgan.

Yes. Thank you very much. My question is related to expenses this quarter. I was expecting to see a little bit more in terms of investment in the retail infrastructure. Is there any particular reason why that didn't materialize this quarter and you're expecting it to ramp up until the second or future quarters? Thank you.

Sure. Two elements here. One we have gone ahead with our budgeted, if you will, budget was developed in the last quarter last year, budgeted, invested growth in infrastructure via the ATM branches and Agente BCP.

What we are is in the process of revisiting that in light of the exceeding growth targets that that original investment firplanm is going to probably be increased. So one element is, yes, we had invested what we had originally planned, but we are going to probably revisit that in light of growth.

Second is that in the last quarter last year, we had some unusually high expenses related one to a catch up we had to do in the last quarter of increasing the pool -- for bonuses to be paid. So we do a linear provisioning of the amount we're going to pay in bonuses at year-end, but profits grew ahead of original plan and in the last quarter we increased that level of provisioning.

Second in the end of the -- in the last quarter as well, we had a lot of very aggressive marketing expenses that were incurred due to some very specific campaigns related to the holiday season. So those did not appear in the first quarter, therefore somewhat making the comparison with last quarter a bit unfair.

If you compare probably with the first quarter last year, the numbers are a little bit more normalized and comparable and there you see an increase of about 15%. We are going to accelerate the level of investments. We are hiring more people. So we are going to see the increase in our expenses and a deterioration of our cost to income ratio. Again thinking to invest in the future and creating a -- upgrading the level of infrastructure that we have to deal with growth.

Thank you very much.

You're welcome, Juan.

And Mr. Bayly, it appears there are no further questions at this time. I'll turn the conference back over to you for any additional or closing comments.

Thank you very much all of you for joining us on this conference call for the first quarter. As we mentioned, we are very encouraged by the economic environment in which we are operating right now. We believe there are good opportunities and we are -- we believe that our corporation is well positioned to take advantage of them and we are working very hard and the results seem to reflect a successful implementation of our previously decided strategy. Thank you very much again for being with us and with this I bid you farewell. Thank you.

And that does conclude today's teleconference. Thank you all for your participation. You may now disconnect.