Credicorp Ltd (BAP) 2007 Q2 法說會逐字稿

Good day everyone ladies and gentlemen, we would like to welcome you to this Credicorp Ltd. Second Quarter 2007 Earnings Release Conference. As a reminder, today's conference call is recorded. And now at this time, I would like to turn the conference over to Walter Bayly, the Chief Financial Officer. Please go ahead sir.

Thank you very much. Good morning and welcome to Credicorp's conference call for the second quarter of the year 2007. It is certainly a pleasure for us to discuss our results, since the positive trend of the first quarter has continued throughout the second quarter of this year, confirming a more vigorous economic and business growth than expected in our original projections.

It is a fact, that the solid growth of our economy has surprised even the most optimistic of us. We are experiencing a period of good expansion with group fundamentals. And we are certain, our businesses at Credicorp is benefiting from such dynamics, as is the whole financial system.

The banking system in Peru is healthy and solid. And thus, it has also become an attractive market for others. Hence, competition is increasing through the incursion of new players. Though this is something we watch carefully, we feel prepared and very well positioned to confront this new competition.

Our strategy is clear to us and our results are reassuring. Numbers on the Peruvian economy and the financial system are available to you in our press release and we will therefore not spend time on them. Next page please.

Page 3, an 11% quarterly net earnings growth stands out for Credicorp, which reported net income of $87.4 million for the second quarter 2007, in contrast to the first quarter '07 where the impressive quarterly income growth of 25% was a result, mainly of the recovery of profitability in the previously troublesome businesses. This second quarter income growth comes from the vigorous economic environment, since a stronger than expected expansion of our businesses in all fronts was achieved. Thus, in the chart of earnings contribution of the different subsidiaries, we observed the growth of 13% of BCP's earnings contribution, compared to 7% for the first quarter, significantly higher than expected. BCP'S Bolivia is also experiencing important growth and business expansion, as its contribution to BCP's results keep consistently growing.

The drop in contribution of both, our offshore banking activity and Atlantic Security, and our insurance business at Pacifico, responds to the more volatile capital markets related income. Since underlying businesses expansion continued.

Reaching breakeven in pension fund company, Prima is proving to need more timed than expected and small loses were reported. Returns on other minor investments did however partially offset these losses. All this is clearly reflected in the return on average equity reached this quarter for Credicorp, which up 23.7% is coming gradually closer to a long term target of 25%, Page 4 please.

Looking at our main subsidiary BCP, net earnings reached a total of $82.4 million, 13% higher from the previous quarter. This certainly surpassed our expectations and follows an extraordinary strong expansion of our loan portfolio and fee business. BCP's loan growth of 13% for the quarter, beats all expectations and reflects the economic growth that leads to new investments. Since the driver of this stronger growth was for this quarter, the corporate sector, which outperformed the usually more dynamic retail segment. Loan growth resulted in increased net interest income, which was up 15% quarter-over-quarter. Non-interest income showed a slightly depressed performance, with a plus 3% quarterly growth, compared to the first quarter, because of less gains on securities. However underlying fee income did grow 7.2% this quarter.

Portfolio quality deserves a special measure, since for the first time in our history, BCP's past due loan ratio dropped below 1% reaching 0.95%, despite continued loan growth. Nevertheless, provisions grew in line with our loan book and portfolio quality.

Expenses also expanded in line with all our businesses, but at a lower rate than income growth, leading to a further improvement of our efficiency ratio. Also significant, is the growth achieved in our deposit base of 7%, 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 contributed to a proportionally low expansion of interest expense, compared to income growth, which resulted in an improvement of our net interest margin to 5.5%.

The following chart will help us explain this development a bit further. Next page please. Page 5, loan growth measured by average monthly balances of 9.4% for the quarter versus 5.5% for the first quarter reflect the extraordinarily high growth of 11.7% of the corporate sector during this quarter. This responded to the increased investment activity and the coincidence in time of several important investments of some of the main local and international corporations.

This is certainly an unusual development, though it evidences the strength of BCP's franchise. Both the [VRR] segments, the middle markets and retail, continued growing at also higher than expected rates, in both cases, close to the 10% quarterly growth. This growth rate however, had a slight distortion because of our re-segmentation of our loan book in February this year, which favored the middle market segment. Correcting this distortion, growth rates for the middle market is 7.8%, while the retail sector achieved an 11.3% quarterly growth rates.

Furthermore, growth of the individual retail products reflect as well, such retail activity, being the best performers, consumer loan with 23.5% quarterly growth, followed by SME loans with 15.3% quarterly growth. The total loan growth based on quarter and book balances is however higher, reaching 13% for the quarter.

Next page please. Following such robust loan growth, interest income on loans also grew at 10.2% quarter-over-quarter, revealing already here some improvement of margin. However, stronger growth of interest income on investments, both total interest income up by 12.7%. While interest expense increased proportionally less, 9.6%, leading to an improvement of net interest income in those margins. Therefore net interest margin improved from 5.2% to 5.5% for this second quarter.

Fee income also reveals a strong 7.2% quarterly growth, as transaction volumes increased significantly. However, lower income from the sale of securities for this quarter, depressed the overall non-financial income, leaving only a 3% quarter-over-quarter growth.

Foreign exchange gains reports an equally strong expansion of 7%, in line with this robust business growth. The result of this business expansion is 11.7% quarterly growth of core earnings, a very important development, which led to the overall improvement of basically all financial indicators.

If we go to page 7 please. To support the growth of our businesses and especially the explosive growth of the volume of transactions processed, and as already announced, BCP is expanding significantly its distribution network. Opening new branches, installing new ATMs and introducing in a massive way its cost efficient distribution channel, the Agente BCP. This network expansions require, however, significant planning and time to be effectively implemented. The charts above, show the advances up to now. The charts reflect, clearly reflect the dominant position of our network, which now totals 1787 network points throughout the country. Noteworthy is also the percentage of the electronic transactions, which has already reached 70% of total transaction volume. However, most of the network growth we have been talking about will only be evident and operationally effective in 2008.

Next page please. As mentioned in our introduction, the solid growth of our economy has surprised even the most optimistic of us. We are certainly experiencing a period of real expansion with good fundamentals, which is evident also in all indicators of the financial system. This continued economic expansion and increased consumer confidence, led to an unprecedented lower levels of delinquencies, which has reached for our bank the lowest level ever at 0.95% of past due loans of our loan portfolio. The obvious effect of such high portfolio quality, is the low level of provisioning required, reflected in our profit and loss, as well as a further recovery of charged off loss. Coverage ratio increased to a very high 287%, surpassing systems average.

Next page please. Looking at the cost side, cost at BCP increased around 8% for the quarter, as a result of business expansion, mainly personnel cost, which account now for 49% of total costs. Network expansion however, is not yet fully reflected. These costs reveal a proportionally lower expansion in business and income growth, leading to improvements in all ratios, thus efficiency ratio for BCP has improved to 49.3%.

Nevertheless, we should remind you of our expectations of higher operating costs for the year, which lag in time as the approved investments are gradually implemented. Therefore, the improvement experience is probably not sustainable. All of this developments led to a record high return of average equity for BCP for the second quarter, of 35.5%.

Next page please. We are now on page 10. BCP Bolivia is usually not mentioned, especially since its numbers are consolidated within BCP Peru. However, we would like to briefly point out the excellent performance Bolivia has had in the last years, despite the political environment in which it operates. As shown in the charts, net income has had impressive growth in the last years, and is today a significant contributor to BCP's results, with a contribution that is coming close to $20 million per year. And in which in turn reflects our return on equity close to 30%. Portfolio quality, has at the same time improved significantly, and is with 2.7% total loan, at perfectly normal acceptable levels, and is significantly better than the average of the Bolivian Banking System.

Finally BCP's Bolivia's market share puts it up the third largest bank, but number one in terms of performing loans. Furthermore, it enjoys today, an excellent standing within the Bolivian market. Thus, Bolivia is for us an excellent experience, which is becoming a significant contributor with total returns. Next page please.

Moving on to the other Credicorp subsidiaries, lets take a brief look at Atlantic Security. Credicorp's offshore private banking business had its contribution for the second quarter dropping by 12% this quarter, after an increase of 25% in the first quarter. This results respond to lower income from the Federal Securities for the recent quarter, after having realized large gains in the first quarter. It is therefore important to point out that Atlantic's core earnings, excluding dividends, increased 16% to 7.3% quarter-over-quarter, while operating expenses grew only 10.5%. Thus, the volatility in Atlantic's contribution stems from capital market operations and not from its core business, which is growing solidly. Atlantic's asset management business, which includes customer deposits, mutual funds, other securities, also continues being a strong fee generator and yields an excellent growth this quarter of 15.9% for the quarter, and reached $3.3 billion in funds under management. This settlement represents a very significant part of Atlantic's business, altogether consistent results and further business expansion.

Page 12 please, our Pacifico Insurance Company, net consolidated income before minority interest for the second quarter reached $9.2 million and its contribution to Credicorp after consolidation adjustments, $5.1 million, reflecting a dropping contribution of minus 22% after $6.6 million in the previous quarter. This drop is mainly a result of lower gains in the sale of securities. Since these were realized during the first quarter, where local markets were at a high, at a re-composition of the investment portfolio of the life business was implemented.

The results of the insurance business itself were rather flat for the quarter. Total premiums increased by 11.5% quarter-over-quarter, but net premiums earned growth was only 2.7%, following increased results and less retained premiums. Underwriting results were basically flat, despite this production growth and a drop in claims, due mainly to higher operational costs related to the development of a relatively underdeveloped distribution channel bank insurance.

Within the health business, a slight deterioration of the debt earned loss ratio was reported as claims increased by 16%, mainly in the corporate health plans. Nevertheless, it is within expectation and its contribution remained fairly flat at $0.6 million for the first quarter.

In the property casualty business, a strong growth of 22% in premiums was reported. However, underwriting results dropped 6.7% quarter-over-quarter, given the higher operating cost and higher reserves, which could not be fully offset by lower claims reported. Nevertheless, good financial results helped increase the bottom line contribution by 22% to US 2.3 million. And in the life insurance segment, total premiums were almost flat, showing a slight drop of 0.6%. However, the lower income from securities mentioned above in Pacifico's Vida portfolio and is the -- mainly responsible behind the significant income contribution drop for the quarter.

Altogether, Pacifico's performance measured by its contribution to Credicorp reflects this time, some market relative volatility, while the insurance business continues its solid recovery as reflected by yearly comparisons and also by its return on the average assets of -- average equity of 14%.

Furthermore on improvement recognition of this positive development at Pacifico, is the recently awarded investment grade rating by Fitch. Fitch gave Pacifico -- the Property Casualty Company in Pacifico Vida and Insurer Financial Strength rating of BBB minus, based on adequate capitalization ratios, above average liquidity, conservative retention levels, solid market share and franchise in Peru, and good profitability levels.

Next page please. Prima, our private pension fund. Reaching a profitable operating performance is proving to need more time than expected at Prima. Prima's second quarter result fall again below the breakeven line and reported a loss of 1.3 million. The continued high operating costs of the industry, some merger related costs that extended into the year 2007 and some acquisition financing costs are still a heavyweight to carry for this young business. Nevertheless, commercial results continue its excellent task. Prima has positioned itself with the best offer in the market, it's -- all the funds it manages have reached the first place in profitability and it offers the lowest cost to investors. This positioning resulted in the increase of the 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 sales force, continue being the main objective. Operating costs have been already somewhat reduced, but the profitability to Prima is the future that depends on further operating cost reductions in growth of its income base. Both, being the focus of Prima's management.

Next page please. Page 14. Second quarter results confirmed a more vigorous business expansion with growth surpassing our expectations. As was mentioned, economic and business activity has surpassed all official and private expectations. Our focus on Retail and SME and transactional business continues as Credicorp's main strategy. However, the wholesale sector is also seeing strong expansion from renewed investment activity. All this was delinquencies, reached the lowest level ever. Therefore, the results for Credicorp reach again an all time high with $87.4 million for the second quarter. Leading to a return on equity of 23.7%.

As usually, BCP leads Credicorp businesses, reaching an average equity of 35.5%. Atlantic, continues growing its other line, core and fund management business. Pacifico's results are in line with recovery of the long term and Prima has commercial success, though the operational costs and financial burden continue to remain high.

Page 15. This ratios are a two reflection of the trend at Credicorp. We are particularly pleased with a return on average equity reach at Credicorp of 23.7%, which is significant for us, as it brings us very close to a long term target of 25% for the year. And more importantly as a result of our described achievements, we continue generating greater shareholder value, as can be seen on page 16. This chart is reflecting Group performance of Credicorp.

Thank you very much and with this we are ready to go into the question-and-answer period.

Thank you. [OPERATOR INSTRUCTIONS] And first with Citi, we have Daniel Abut.

Good morning. And while they are normally, and not just in Peru, but in most banking sectors that we cover, there is strong seasonality in the earnings of the bank and which tend to produce the earnings of the second half -- the earnings contribution of the second half tends to be higher than normally seen in the first half. Sometimes it's as high as 55% of the total 54%, 53%. Even now, some of the results have been in the first half over the year and given that you continue to warn us that we will see higher expenses in the second half of the year. Do you think it is likely that BCM may be an exception for Credicorp and we will seek another reverse seasonality, where the second half contribution to total earnings of the year will be lower than the first half? And if so, can you share with us, what rough percentage would you expect that combination to be between first half and second half?

Sure, Daniel. First of all let me give you the business sense of what is going on and you will probably derive your own conclusions from my thoughts. Yes the second half of the year tends to have a more higher level of business activity, particularly related to the Retail side. On the other hand, there are a couple of factors to be aware of, one is that in the first half of the year, we have had unusually high gains in securities, due to the capital -- domestic stock exchange activity. So yes, we expect more business activity. Second, be aware that during the first half we have had unusually high profits related to the gains of capital market activity. And we are aggressively increasing our investments, which will start to have an impact on our cost base. So how all this will juggle at the end of the day and produce the end results, I would not [give] at this stage to give you an overall projection whether the second half earnings will be higher than that in the first half. But those are the three main elements that will determine whether the second half will be better or less than the first half.

Okay. And as a follow-up, Walter, I think you mentioned that you are getting closer to a long-term goal of a 25% ROE. When you say long-term goal, do you have any idea of what do you think Credicorp may get there, when measured for the year as a whole?

I will tell you one year, or maximum two.

One to two years, you are going to be 25%, as we [inaudible]?

Yes.

And it is the one that I imagined, it will be that by then, the operating subsidiaries, not the bank should produce better contributions.

Absolutely. Yes. We have expectations that the insurance company is slowly increasing with return on equity. And Prima of course is now, we expect the second half of the year, Prima, to be positive and most likely end the year in an overall positive number. So we have a lot of upside on those two subsidiaries while we continue seeing solid growth in the banking activity, both in Peru and Bolivia.

Thank you. That was very helpful.

You're welcome.

We have one question remaining in our queue. [OPERATOR INSTRUCTIONS]. We'll move on now to Juan Partida with JP Morgan.

Four questions. The first regarding Prima that you just mentioned. And it's just a clarification, on the first page of your press release, you mentioned that in the first quarter of this year, you broke even and actually had positive earnings. But I am a bit confused with your slide number 13, where you show net losses for the first quarter of $10.8 million or $10.9 million. I wonder, if you could explain some misunderstanding or something?

Okay. Prima's first quarter results were indeed positive. But those were affected by a couple of factors; one is the earnings of the private pension fund companies have a certain level of seasonality. That is, since what we charge is a percentage of the contribution done into the funds during the months of July and December, there is a double contribution, which appears as double income in the months of January and August. So January has double income and August has double income. Thus the second quarter is worst, probably of the year.

So there is a certain level of seasonality. The truth, I am right now reviewing the chart on page 16 -- 13 and I am afraid there might be a mistake there.

Yeah.

The number is not $10 million net losses, it is what is reported on the first release.

Okay.

You are right. I am sorry.

Very well. And then my second question has to do with the insurance company and this -- first, what is your outlook for the combined ratio, which has been increasing? And it's particularly surprising, because my understanding is that, say in the second quarter of '06, when you were turning the business around, the claim ratio apparently, was lower than now. So, just to get your thoughts on what the outlook for the combined ratio is or should be going forward?

Okay. I have here with me David Saettoneis who is the CEO of our Insurance Group and may be he is better qualified to address the question. David, go ahead.

Sure. Yes, we've continued with our restructuring process and we've continued having some restructuring expenses during this first half of year, and that explains part of the increase in the combined ratio. And the other thing that we are doing is we are trying to recompose our portfolio business. We have currently about 20% of our business coming from personal lines, and we want to shift that from 20% personal and 80% commercial, to more or less half-half within the next 3 years.

So, we are doing a lot of investment in developing new distribution channels like bank assurance and other affinity programs like that, and that's requiring further investment. We expect to improve our combined ratio, bringing it below to 100% level, mainly by reducing our costs, because we won't have these restructuring charges anymore. And also by increasing our premium base in businesses that we retain more of, which are these personal lines of business. I hope that answers your question.

Yeah, it does. Thank you very much. If I could just follow-up with one more question. What is your guidance for 2007 loan growth? I mean the run-rate as of June year-over-year was 27-28%, what are you seeing for yearend 2007?

I would say 25-30.

Okay. Thank you very much.

Our next question comes from Ed Kuczma with Van Eck Global.

Yeah hi. I had a question regarding BCP and the costs you mentioned that the networks expansion costs are not reflected, [and I guess], they were higher in the second half. Looking at year-over-year operating costs expanded 15%, how much higher can they get and what do you expect the efficiency ratio to get to at BCP by the end of the year?

Yes sure. Probably our worst scenario where we are aiming at opening, we can do better that, is that our cost-to-income will be around 52.

Okay. Very clear. Thank you.

Mr. Bayly we have no further questions, sir. I will turn over conference back over to you for additional or closing remarks. Actually it looks like we have a follow-up from Mr. Abut

Yes Daniel?

Mr. Abut, we are unable to hear you sir. You may want to check your mute button?

Hello.

Now we can hear you.

Walter, given the success rate you are achieving in Bolivia, despite a very challenging political environment. And you illustrated a significant improvement in ROE there, in one of your slides. Has that opened your appetite to re-explode in [singles] of Peru or are you so busy with this accelerating growth opportunity that you are seeing in Peru that it's highly unlikely that you would venture outside of Peru, any time so?

It is totally out of the table. We are not looking at anything. This level of growth has put a lot of strain in all our resources, human, infrastructure, technological, etcetera. So at this stage, it doesn't make any business sense at all to focus ourselves out of Peru. Where we are having probably one of the fastest growing financial markets in Latin America, it doesn't make any sense to do anything other than focus on this market.

It's actually -- well, I shouldn't interfere there, Walter. If I could just use -- just elaborate without -- knowing now that it's unlikely to relocate anytime soon, but what have you learned from the Bolivian experience and you are not so successful in Colombian experience, that when and if longer term, you are ready to do things outside of Peru, you will use a criteria to guarantee or at least increase your chances of a more successful operation?

Clearly, there have been several lessons we have learnt from our international ventures, Colombia, Bolivia, and Central America. Probably the main one I would care to point out is that we do not know how to play a niche bank. As a corporate culture, we are a large bank what we do well is run a bank that goes all the way from lending to micro businesses, middle market, corporate, capital market activity, foreign exchange etcetera. So that is what we do, we do well running a universal bank.

The second point was that it doesn't make any sense in any of our markets to become a marginal player. If you go to any of those, markets you become one, two or three -- or our experience, don't bother going. So, second point is that you have to become a significant player in the market in order to be successful. I think those two would be the most important lessons we have learned, and so going forward those will be the things that we would be very careful to follow.

Thank you. Very useful. Thank you very much Walter.

Mr. Bayly, it appears we also have a follow up question from Mr. Partida. Let's go to him.

Yes Thank you very much, and sorry for taking so much time. Also in Prima, we saw there that the growth in the number of affiliates quarter-on-quarter, was only -- was less than 10,000 affiliate, and you are keeping a very large sales force still. Is it something -- is this the normal progression that we should expect or was there any thing that explains the relatively low growth quarter-on-quarter?

Yeah, let me give you a feel of what's going on. The truth is that the market has been extremely aggressive; there is a tremendous amount of retention of the existing -- of people that are ready in the systems switching from one company to another. To give you a feel of this, before we got into the market, the total number of transfers, people moving from one ASP to another, I think, was about 4,000 a year. At the peak of our aggressiveness in the market, that number reached about 40,000 a month -- 60,000 a month, I am corrected here. So, what this involves is a the tremendous amount of commercial activity, a big amount of sales force that was bringing customers from another ASP and on the other -- on the other hand, the other were taking away more customers. What is slowly happening, is that the sales force increase, we at the peak, I believe we had about 2400 salesperson, that number today is very close to 800 and we are slowly reducing and everybody is doing the same. So really what is happening is that the level of movement within the industry is slowly decreasing and that would allow us to gradually become a profitable operation. So here, the size of the pie did not grow, but nevertheless, the number of transfer from one private pension fund to another was huge and that is slowly decreasing.

Thank you very much.

You're welcome.

Mr. Bayly, no further questions, sir. I will turn the conference back over to you for closing remarks.

Thank you all for joining us in this second quarter conference call. As usual, we have said for the past couple of quarters, we are very satisfied with our results. Our strategies put in place continue to give us excellent performance and we are benefiting from the very strong economic performance of our economy and thank you very much again for joining us, and we hope to be with you in the next quarter with equally positive results. Thank you and good bye.

Thank you, Mr. Bayly. That does conclude today's conference call. Thank you for your participation. Have a great day.