Credicorp Ltd (BAP) 2008 Q1 法說會逐字稿

Good day, everyone. Welcome to Credicorp, Ltd. First Quarter 2008 Earnings Release Conference Call. As a reminder, today's conference is being recorded. At this time, I'd like to turn the conference over to Walter Bayly, Chief Executive Officer. Please go ahead, sir.

Thank you very much, [Melissa]. Good morning and welcome to Credicorp's First Quarter Conference Call.

The first quarter of this year was characterized by volatility in the local financial environment, fueled by the weakness of the U.S. currency; the turbulence in international financial markets and growing domestic demand, which added to the international hike of food prices and oil prices, generated inflationary pressures.

The Peruvian Central Bank reacted to these pressures, increasing the reference rate for the soles to curb inflation, which, in turn, fueled a massive inflow of short-term capital. To which the Central Bank reacted again with drastic measures, using an increase in reserve requirements as an instrument to control such inflow of capital.

During this quarter, the U.S. currency devalued more than 8% against the soles, a very large fluctuation, which has already turned around a bit after the Central Bank's restrictive measures. As of yesterday, the exchange rate was PEN2.77 to the $1, having reached PEN2.85 at the end of April, after the closing exchange rate for the quarter of PEN2.74.

Going through a period of such high volatility can impact results in many different ways. We have to keep in mind that our business is run in both currencies, being a rough approximation, 60% dollars, 40% soles, and that our reporting is done in international financial reporting standards accounting U.S. dollars. So we translate such 40% to U.S. dollars to do this. In fact, we always have a translation impact on our results, which will depend on the exchange rate movement and the management of our currency positions.

The stability of our currency has kept this impact as almost (inaudible) in the past. However, we had a more significant impact last year as well. It just has never been as high, as relevant as this quarter. Therefore, we are very pleased to have managed the strong currency volatility in the first quarter in favor of Credicorp's results.

We took a series of timely financial decisions regarding our currency positions and investments in the different subsidiaries that led to the strong financial gains related to currency translation. However, the sol volatile nature of these earnings is something we need to keep in mind, since these are the results of the high currency and interest rate volatility, which can quickly change following the evolution of market conditions. We would therefore like you to focus your attention on the evolution of our core business and earnings.

Having said this, I would like now to explain our results. Next page, please.

Credicorp results reflect such high volatility through the high translation gain reported for the first quarter. Such translation gain reached a total of $68.7 million for the quarter and boosted up Credicorp's income for the first quarter to $178 million, an unprecedented amount indeed. However, given discounting for this translation income, the results of Credicorp reveal a strong growth, and, thus, a continuation of its business expansion. We will evaluate and see the volatility effect and real business growth in more detail when looking at the subsidiaries' reports.

From the contributions point of view, BCP shows extremely high first quarter results and contribution of $161.4 million, almost doubling last quarter's contribution to Credicorp. This, again, includes a translation gain of $57 million. Nevertheless, behind this number, we will see continued business growth with average loan portfolio up by 9.8% for the quarter, significant deposits and investment growth, strong net interest income growth, and still contained operating expenses.

Banco Credito Bolivia reached a record $10.5 million contribution for the quarter. Atlantic Security has experienced a migration of deposits to its managed funds and has weathered very well, operating in a declining interest rate environment, reaching a 14% higher income and contribution of $5.7 million for the quarter.

Pacifico Peruano Suiza improved its results when compared to the prior quarter, but continues confronting strong claims in the property casualty business. This quarter, as a result of casualties originated by the El Nino phenomenon, which is affecting the north of the country with rains. Thus, it's $2.3 million contribution for this quarter reflects a still troubled performance.

Prima, within Groupo Credito, had a very good result of $9 million, which includes a $2.3 income from previous periods and results from its growing income generation in the reduced operating costs.

And Credicorp, Ltd., which provisions that withholding taxes corresponds to the dividends received by Credicorp from its subsidiaries, reported a $1.7 million provision.

Page four, please.

The earnings evolution seen at Credicorp stems mainly from BCP's performance, which reveals extraordinary and historically unprecedented net earnings for the first quarter of $165.8 million. As explained before, this earnings number includes $57 million of translation gains, which resulted from the high currency volatility and careful management of BCP's U.S. dollar/soles positions. Furthermore, our U.S. dollar position was intentionally reduced, given the currency weakness and expectations, leading to a significantly higher income from currency translation.

As can be seen in the chart, the structure of our income generation has been affected by the volatility explained before. However, though the impact of such volatility through the translation gains was very strong this quarter, the underlying income generation continues expanding, and BCP's business performance, excluding such significant extraordinary and non-recurrent income, remains as strong as in the previous quarters. In fact, net interest income increased 11% quarter over quarter, following a robust loan book growth of 9.8% when measured by average daily balances for each quarter.

As we will see later, even when looking at our loan book by currency, excluding that way any revaluation impact, the growth numbers reported are very strong.

Fee income also followed the trends of previous quarters, showing a 4% quarterly growth, compensating a drop in foreign exchange transactions and resulting in core earnings growth of 7.3%. All together, however, non-interest income was also boosted this quarter by a close to $18 million gross income from the sale of Visa shares under its IPO.

On the cost side, operating costs dropped 8.9% despite the inflating effect of the revaluation of our soles denominated costs for two reasons. One, the seasonality reflected by the year-end related expenses hike of the last fourth quarter '07, which set a high comparison base. And, two, the evolution of BCP's expansion costs, which are, in reality, not as linear as projections. Furthermore, such strong income generation also allowed for 53% higher provisions as our provisioning policy was revised, and higher provisionary levels set for a growing retail business. All this leading to the extraordinary results reported.

Next page, please. The volatile market environment had also some additional effects on BCP's reported business. The initial increase in soles interest rate, combined with international weakness of the U.S. dollar, attracted international investors, which resulted in large inflows of funds into the soles market, looking for higher returns through higher interest and revaluation, impacting positively the deposit volumes in the system. Furthermore, the revaluation effect we're reporting in U.S. dollars are soles-denominated deposits, close to 50% of total deposits, boosted also the reported growth numbers. This revaluation effect added to the increased foreign inflows and organic growth of our deposits, resulted in completely unusual 15% quarterly growth in deposits, mainly time deposits, which increased by $1.7 billion in the quarter.

A similar effect is evident on our asset side, with our already large investment portfolio, to a great extent denominated in soles, reevaluated in our U.S. dollar accounting. Such revaluation added to additional funds in excess of the required to fund loan growth resulted in extraordinary 43% growth of investment portfolio, which was up by $1.5 billion. Such investments were channeled through Central Bank CDs, a very attractive investment alternative, given their tax treatment. This investment growth is very significant when compared to our loan book expansion of $600 million. That is, more than twice the amount of new loans was invested in Central Bank CDs changes significantly our interest-earning asset mix.

Next page, please. Loan growth measured by quarterly average balances reveals some strong quarterly growth in all business segments, so these numbers experienced also some distortion due to strong revaluation of our soles loan book, 32% of the portfolio.

But even looking at the growth numbers for each currency, I think the charge you are looking at, real growth in each currency is strong and is very revealing. In fact, against expectations, the corporate sector continues growing strongly and has become the fastest growing sector for two consecutive quarters. This is the result of the continuing investment activity and excellent expectations of the business community. The retail sector maintains, however, its growth, also strong and consistent with expectations.

This chart reveals mortgage growth in soles is extremely strong, with 22% quarter over quarter, while SME grows strongly both in soles and U.S. dollars. Consumer loans also experienced stronger growth in soles rather than U.S. dollars. In general, a better-balanced growth structure that works in favor of portfolio quality.

Nevertheless, this evolution worked against our strategy to protect our net interest margin, with our lower-yielding portfolio growing more than the higher-yielding retail loan book. This is explained better in the following page. Next page, please.

Net interest income had an important 11% quarterly increase as a result of the 9% interest income growth, which more than neutralized the 6.4% higher funding cost, following the reserve requirements increase by the Central Bank. This is, in itself, a welcome evolution that should favor net interest margin. However, as seen before, our loan portfolio structure evolved against expectations with a lower-yielding corporate portfolio growing more than the high-yielding retail sector.

Furthermore, the events in the market, explained before, which include the strong revaluation effect of our large soles-denominated investment portfolio also changed our interest earning asset mix, increasing significantly more our investment and lower nominal yielding portfolio than our loan portfolio. Thus, interest-earning assets reported a significant 11.2% quarterly increase in U.S. dollar terms, putting a negative pressure on net interest margins, which ultimately led to the reported tightening of our net interest margin to 5.07% this quarter from 5.17% last quarter.

Next page, please. Portfolio quality remains solid with a slight deterioration of ratios which are a reflection of normal fluctuations in reported PBL volumes. Despite the strength in portfolio quality, or because of it, we are revisiting our provisioning policies, becoming more conservative, and increasing our provisions for our fast-growing retail portfolio. To do this, we are using a more sophisticated risk assessment methodology, which is still being evaluated and validated using comparative data from other markets.

The increased volume of provisions reported of $25.9 million versus $19 million the previous quarter already reflects some of that revised policy. We are aware that a strong growth cycle can easily disguise a deterioration of portfolio quality, and expect this new risk assessment methodology will help us identify any deterioration in time. Nevertheless, we should mention that we have, to date, no signs of any deterioration in the near future.

Next page, please. Through this first quarter of the year, no significant number of new branches was opened. The work towards the expansion of our network goes full speed ahead. Our projections, adjusted for the requirements of the process itself, show most of the branch openings in the second half of the year, maintaining a target of over 340 branches for year end. This has also had an impact on the costs reported, since such expenses are not as lenient as the original projections. Nevertheless, our fixed salaries expenses does increase 19%, reflecting the increase hike in advance of branch openings to support such network growth. However, looking at total personnel expenses on a comparative basis with the previous quarter, however, these dropped 6.1% because of the high comparative base set by the fourth quarter, which included year-end performance compensation.

Administrative and general expenses also dropped compared to the previous quarter about 18%. This is, again, given the high year-end marketing (inaudible), the system expense in the first quarter, and the non-linear expense progression for the network expansion. This evolution and the extraordinary high income reported for the quarter resulted in the unexpected strong improvement of our efficiency ratio to 47.5% versus 57% last quarter, as can be seen in the following page. Thus, the performance of BCP in the first quarter '08 resulted in significantly improved ratios with a truly extraordinary return on average equity of 57%, which includes, as already mentioned, the non-recurring items.

Page 12, please, about Bolivia. The numbers speak for themselves. Our Bolivian bank continues performing extremely well with a return on equity of 56%. We should, however, point out that BCP Bolivia also experienced an extraordinary income of close to $2 million from the sale of the Visa shares under its IPO. So this return on equity reflects this non-recurrent income.

Even though the business is evolving well, the political developments in Bolivia are worsening, and the effects of it show in the lack of investment activity. This will eventually lead to a downturn in results, though it is very hard to predict at this stage.

Next page, please. Looking at Atlantic Security, we feel very pleased with the $5.7 million income contribution, up from $5 million the previous quarter. This result was achieved despite being exposed to declining interest rates. In fact, core revenues were up 4.7% for the quarter, driven by higher net interest income, which improved by 16% following the bank's active management of its cost of funds through periodical adjustments of interest paid on deposits. Furthermore, net interest margin for Atlantic improved during the period to 1.6% from 1.34%.

Asset quality remains strong, given the minimum of our secure lending activity and extremely conservative investment policies, which have spared Atlantic the widespread losses in the international banking community. The asset management business, on the other hand, experienced a migration from deposits to Atlantic Security off balance sheet managed funds, which was fully captured by our managed funds, thus the slight drop in total assets under management of 1.9% is related to market valuation of the portfolios.

Next page, please. Even though the insurance business continues growing with total premiums up by 7.2% for the quarter and net premiums earned up by almost 9% for the quarter, casualties were still very high across all insurance sectors, as revealed by the net earned loss ratio of 85.5%, leading to still poor overall results for the insurance group, reflected by the $2.3 million contribution to Credicorp for the quarter. Such poor performance was mainly related to the property casualty business, specifically in segments affected by El Nino phenomenon, which generated rains in the north of Peru, originating casualties and heavy transport losses, infrastructure, and agriculture.

Furthermore, within the property casualty business, the medical assistance sector also had inflated costs since the revaluation of the soles affected their costs, which are soles-denominated. This led to a poor technical result, though better than the previous quarter, which had even worse claims. Thus, after operating costs, which remained basically flat, net results for the period were at break-even for the property casualty business.

Things look a bit different at the life insurance sector, which reported premium growth of 12% for the quarter. Claims in this sector were also higher this quarter due to the revaluation effect on the soles-denominated disability and survivor insurance, as well as the [hiring surge] related to the new business. Thus, technical results reached a negative $1.9 million. However, this business lives from a financial income generated by the premiums collected and reserves, which at the end resulted in a $2.5 million contribution to the insurance group after minority interests.

In the health segment, production increased 7% quarter over quarter, but also in this segment, claims increased, as revealed by the net NEL ratio of 91% versus 81% for the previous quarter. Operating expenses were also higher, since the change in policy resulted in inclusion into the EPS of medical personnel previously working under advisory contracts or on PPS payroll. The bottom line results reached by this business was a stable $0.8 million contribution.

In brief, though the insurance business continues growing, it is also characterized by an important increase of casualties for the whole industry and throughout different insurance sectors, which led to the continuing weak results. This supports PPS strategy to work towards the recomposition of its risk portfolio favoring the retail segments of property casualty, which offer more retention, diversification, and predictability of risk.

Next page, please. Finally, Prima reported this quarter a significantly higher net income and contribution of $9 million. This number includes, however, a $2.3 million earnings recognition from previous periods, resulting from the treatment of deferred tax liabilities. Nevertheless, even discounting such extraordinary income, Prima's then $6.7 million reflects still an excellent performance, which finally shows the efforts made in operating cost reduction and commercial position. In fact, despite the reduction in the sales force, the productivity of individual salespeople has increased, as well as the quality of its contributions.

The commercial positioning of Prima as the best offer in the market -- lowest fee, high-performing funds, best service -- is also of crucial importance. This positioning resulted in the increased attractiveness of Prima's offer, as reflected by the high almost 34% market share of collections, which are new contributions into the system. Though better results are tangible, consolidating and maintaining its leadership and improvement of its fee structure continue being the main objectives.

Page 16. As a result of this extraordinary evolution, performance ratios for Credicorp reached this quarter also extraordinary levels. We are, however, all aware that there are some non-recurrent income-generating events impacting positively these ratios. Nonetheless, this reflect the developments of our market. And the market view of this evolution is also reflected in the charts in the next slide. With a market capital of $6.6 billion, Credicorp is starting to reflect today the potential of the Peruvian market and improved performance of Credicorp.

With this, I finish my presentation. Thank you very much, and we're ready to go to the question-and-answer period.

Thank you, sir. (Operator instructions).

Our first question comes from Juan Partida from JP Morgan.

Hi. Good morning. I have two questions. The first is regarding the operating expenses. You mentioned that some of the expenses related to the branch infrastructure expansion will happen more towards the second half of the year. What is your forecast or what is your expectation for the growth in operating expenses for this year versus the last year? And a similar question for fees. We saw an interesting increase in this quarter. If you could, give us your opinion as to how sustainable this is. Thank you very much.

Sure. Thank you, Juan.

Taking the last question first. On the fee side, we feel relatively comfortable that most of the fees that we have reported for this first quarter comes basically from recurring transactions. We don't think that there is anything particularly (inaudible) as it relates to extraordinary, so I feel confident in hoping that we can sustain the numbers we have obtained for the first quarter and continue with that trend. So nothing extraordinary in the first quarter that makes us think that we have non-recurring items that will affect us going forward.

If I could just ask, the fourth quarter is typically seasonally strong, and yet you did even better. Is this related to the increased transactions on the opening of branches, or what was behind the very strong performance this quarter in fees?

Well, it's overall -- first of all, there is an element of revaluation there as well. About 30% to 40% of our fees are local currency denominated, so there is an inflation effect there just because of the currency. But, overall, in one of the charts you probably see, the volume of transactions this first quarter versus the first quarter last year was about 20%. So what we're seeing is an increased volume overall of transactions, credit cards, et cetera, and that is very -- those are recurring events.

Does that answer the question?

It does. Thank you.

Okay. As it relates to operating expenses, clearly it is not necessarily fair to compare with the prior quarter's operating expenses because of the reasons we mentioned before. We had some relatively high expenses on systems and marketing in the last quarter, and, on the personnel side, we had the year-end compensation programs.

But if you look at the operating expenses for the first quarter last year, you'll probably see -- I don't have it in front of me -- but probably between 27% and 30% increase in overall expenses, and that is probably the trend that we should expect going forward.

Now, in this 30%, roughly, there is also an element of currency revaluation. There is a revaluation of the currency, but, overall, if you look in dollars versus dollars, we should expect that our expenses will grow by about 30% this year.

Thank you very much.

You're welcome.

(Operator instructions).

Our next question comes from Alonso Aramburu from Santander.

Yes. Good morning. How sustainable do you think is the loan growth in the next few quarters, I mean after this quarter? We've had very strong growth, obviously. You said the Central Bank put in most of the metrics in place in the first quarter of this year, and I would imagine you would start feeling some of that impact starting 2Q. Are you starting also to feel some of that impact in April of this year?

So far, no. No, we haven't seen the growth slowdown. But, nevertheless, that should happen. If it doesn't happen, everything they taught us in graduate school will be wrong.

There is definitely has to be an impact of the measures of the Central Bank in the growth of domestic demand. The question is what is the lag, what is the time lag in which this will happen? But it will happen. I have no doubt it will happen.

One thing that I do believe the Central Bank has done -- it has, through all these measures, impacted expectations. Expectations as to the currency that continues revaluation of the currency, expectations about inflation, and expectations about growth. So we should expect a slower-paced base of growth going forward.

And do you think -- obviously, you have a Central Bank meeting today -- that they will implement any additional measures, or do you think they're pretty much done, especially on the (inaudible) requirements side?

I would expect that they are going to wait some time to see the effect of all the measures before they move again.

Great. Thank you, Water, and congratulations on a great quarter.

Thank you, Alonso.

(Operator instructions).

We have a question from Juan Partida from JP Morgan.

Yes. Thank you very much. Walter, I do have another question regarding -- would you be changing sort of your expectations or your guidance on net income for this year on the back of this quarter? Are you getting a bit more optimistic on your prospects or the same?

If we eliminate extraordinary non-recurring items, I think we remain very much on target with what we had originally anticipated. But, obviously, these non-recurring events are -- add more income that we had originally expected. But, excluding the extraordinary non-recurring events, and by those I mean the currency revaluation, the adjustment at Prima and the Visa effect, we are very much on target to what we had originally anticipated.

Very good. Thank you very much.

You're welcome.

And, at this time, we have no further questions. I'll turn the call back over to you, Mr. Bayly, for any closing or additional remarks.

Thank you, Melissa.

Well, thank you all very much for joining us in this first quarter. We are very pleased, obviously, with our results and very satisfied with the fact that -- it is important for us that you understand the non-recurring situation or events that have impacted our P&L. We want to keep the expectations of the investment community in line and make sure that the nature of these non-recurring events is well understood.

But, nonetheless, we're very happy. We are working in a very positive environment. The economy continues growing at a very healthy fashion, and we expect to have more good news for you in the future. Thank you very much, and, with this, I bid you farewell.

That concludes today's presentation. Thank you for attending and have a great day.