Credicorp Ltd (BAP) 2009 Q3 法說會逐字稿

Good day everyone. Welcome to the Credicorp Ltd. Third Quarter 2009 Earnings Release Conference Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Alvaro Correa, Chief Financial Officer. Please go ahead sir.

Good morning. Thank you, Doris. Good morning and welcome to Credicorp's third quarter '09 conference call. We have to start this time by recognizing that the effects of the uncertainties in the world markets and the world economic recession impacted our domestic economy more than was originally anticipated.

The initial expectation of 6% GDP growth for the year, has come down to somewhere between 1.5% to 2%, which are the official numbers today. Our businesses and their performances are closely linked to the economic performance of the country. Hence growth numbers for our loan book have also suffered the same fate.

In this environment, it is with great satisfaction that we are reporting results for this quarter which is the second highest ever for Credicorp, with the exception of only of first quarter '08, when a very large translation gain boosted bottom line results.

As we will see further on, Credicorp's ability to generate income is becoming more diversified, as all subsidiaries start performing profitably. Looking forward, the turnaround in economic activity is evident and the government's anti-crisis spending program, which is gradually being executed, should support this shift in direction. Therefore, we remain optimistic about the probabilities of resuming growth in the upcoming months. Next page please.

We're on page three. As briefly indicated, Credicorp's results for the third quarter of this year shows a 5.6% earnings growth for the quarter, reaching $121.7 million, which is also 31.4% higher than the third quarter of last year. Operating performance, however suffered despite visible signs of economic recovery, as we will see in more detail further on.

Our loan book remained basically flat, leading to also flat interest income from our lending activity. In fact, increased interest income was evident only in the high margin retail book, but was in turn offset by lower income from the declining portfolio and margins in the wholesale segment. However, interest yields for investments and cash position declined, and lower interest gains were recorded on the derivatives, resulting in an 8.1% drop in total net interest income quarter-over-quarter.

Non-financial income also shows a 4.6% drop, despite an excellent evolution of fee income and gains on FX transactions. The improved fee and FX income could not totally replace the extraordinary gains on the sale of government bonds that were realized in the first half of the year.

Despite the somewhat flat performance of our lending business and reduced core income, some other positive items led to the improved bottom-line numbers. These were improved PDL performance, resulting in lower provisions; a translation gain on an expanded local currency position; lower tax provisions and performance improvement at Credicrop's non-banking businesses. All this led to the excellent results for the quarter.

In fact in third quarter '09, Credicorp reported its second largest -- second highest quarterly earnings ever, second only to the $178 million recorded in first quarter '08, which included $68.7 million of gains from translation results. This performance led to the higher EPS of $1.53 and return on average equity of 24%.

Looking at year-to-date numbers now, Credicorp shows a strong 14.9% expansion in operating income, reaching $496 million in the first nine months of the year. However, given the higher tax provisions this year related to a non tax-deductible loss in investment, the increase in net income reached only 4.6%, compared to the same period of last year.

This figure, after excluding minorities, and considering PPS's strong participation in boosting income, translated into still lower growth of only 0.9% of income, attributable to Credicorp. However, considering that 2008 was a year of no portfolio deterioration and lower taxable income, this is still an excellent performance for Credicorp.

But to explain in more detail the operating performance, let me go to the individual subsidiaries in the next slide -- next page. The reduced economic activity in the country and cautious comeback of investment activity, kept our loan book at basic BCP fairly flat. The charts you are seeing are especially clear to show the foreign currency loans and domestic currency loans are showing opposite trends.

Foreign currency loan, which are typically wholesale loans are a true reflection of corporate demand for lending, which remained subdued this last quarter. Furthermore the growth of our mortgage book, which used to be mainly dollar denominated in the past, is today primarily in local currency. Therefore domestic currency loans on the other hand, which are mainly placed in the retail market, maintained a positive trend throughout the whole crisis period and continue growing.

Overall, the top chart for total loans shows a flat performance for the quarter with only a 0.7% volume growth, which is more the reflection of the currency revaluation, rather than a real lending expansion.

Next page please. Looking at low portfolio quality, the deterioration of the portfolio is a consequence of economic slow down and low volume growth continued in the third quarter, but did not reach the levels we feared. Past due loan ratio reached only 1.56%, and more importantly the increasingly past due loans have decelerated in the recent months. Provisions are therefore lower than last quarter, but enough to maintain the coverage ratio at the same level from last quarter, putting less pressure on [income].

The chart you are seeing shows the PDL ratio for the different business segments, which reveals still very low delinquencies for each type of business. Furthermore, personal and corporate debt is still relatively low in the Peruvian market, while credit information, both positive and negative is widespread and efficient. This coupled with conservative credit regulations and risk policies contribute to monitor carefully the evolution of our delinquencies portfolio and to manage our risks.

Next page please. With regards to interest income, the structure of interest earning assets changed again, driven by the declining yields that could be achieved for our liquidity position, and the normalization of international markets which made holding large liquidity positions less necessary. This also explains a further contraction quarter-over-quarter in total assets of 1.7%.

Furthermore, the reduction of our investment and liquidity position further changed the asset structure, with loans making up for a larger portion mainly 64.6% of interest earning assets.

Next page please. Interest income was therefore affected not only by the performance of the loan book, but also by the evolution of interest rates, which have reached a historical low at 1.25% reference rate for overnight deposits in (inaudible).

In fact, it is clear from this chart that interest income from loans remained flat, while all other interest income dropped. Certainly interest expense also dropped this third quarter, but not enough to offset the lower interest income, resulting in a 5.8% drop in net interest income.

This is obviously reflected in the net interest margin reported for the quarter, which remains basically flat for the loan book, but dropped to 4.9% from 5.1% last quarter when measured for all interest earnings assets. It is however noteworthy that net interest income for the year-to-date did show an increase compared to the same period of last year, as interest expense dropped 20.8%, while interest income dropped only 3.1%.

This smaller drop in interest income was achieved, thanks to higher lending spreads and further shift in the loan book in favor of the retail sector, which expanded interest on loans, even though total loan [provisions] remained subdued.

Next page please; in addition to the 5.8% lower net interest margin this third quarter '09 described before, non-interest income also reported a 13.9% drop for the quarter, resulting from the absence of the extraordinary gains from the sale of government bonds recorded in the first half of the year. However, the improved financial and economic scenario of the last month led to a slowdown in loan deterioration that resulted in also lower provisions, putting less pressure on income.

Furthermore, fee income was strong, up 6.5% quarter-over-quarter and the improvement in gains from our FX transactions was even stronger with 30% growth quarter-over-quarter, compensating partially the reduced extraordinary gain.

Operating expenses on the other hand are well under control, especially considering the continuous revaluation of the Peruvian local currency. This improvement together with the translation gain based on a higher position in local currency, which was taken as the currency strengthened and lower tax provisions made up for lower net interest income. The result was a 15% higher reported net income of $101.5 million versus $88.5 million in the second quarter of 2009, reflected a solid 24% return on average equity.

Page 9 please. Turning now to Atlantic Security Holding Corporation; Atlantic reported strongly improved results this third quarter, with an earnings contribution to Credicorp of $8.4 million, more than double the contribution in the second quarter. This result reveals a very clear recovery in both interest income and fee income from the assets under management business, as well as lower provisions following the better market outlook and some realized gains as the markets recover.

In fact, the markets positive evolution also led to a recovery of an important amount of previously impaired sums, within the unrealized gains, losses in the capital position, which moved from minus $12.5 million to an unrealized gain of $19.2 million, leading to the increased net equity position of $219 million in the book.

Total administered funds, which include assets under management and deposits increased 7.5% quarter-over-quarter, reaching $3.3 billion, whereby a shift from bank deposits managed on balance sheet to off balance sheet portfolios is evident.

Next page please. PPS; PPS experienced better than expected results following the implementation of its new business strategy, and reported significant gains in its property and casualty and life businesses, reaching a contribution of $10.1 million, up from the $9.7 million contribution for second quarter '09.

This improvement continues to be driven by significantly better technical results and a focus on risk control and diversification, which translated this third quarter into 6.8% stronger premium income and significantly lower claims as reflected by 52% higher technical result and a combined ratio of only 95.2% for the quarter.

The continuing good results are the product of changes in the business model throughout 2008 and 2009, which focused on reducing risk retention levels and controlling operating cost. The same trend is also reflected by net earned loss ratio, which reached 64.7% reflecting the low claims levels experienced this third quarter.

Next page please. Finally Prima's business results are showing significant improvement. Despite a recent and a temporary low that stipulates that the additional salaries of July and December 2009 and 2010 are not subject to contributions into the fund, Prima reported a 21% quarter-over-quarter increase in its contribution to Credicorp reaching $5.7 million for the quarter.

The main reason for improvement is a reduction in general expenses following efficiency targets, thus Prima's earnings reflect a 15.8% return on equity to-date. Furthermore, this performance reflects also stability in the domestic labor market, where Prima maintains a dominant position, capturing important market shares, as can be seen in the chart.

Next page please. The contribution chart, you are seeing reveals the importance of Credicorp of return to profitability of all its subsidiaries. All of them including BCP as its main contributor have had improved bottom line results and contributions as described before.

On a cumulative basis, during these first nine months of the year, which can be probably considered the toughest within the whole crisis for the Peruvian economy, Credicorp has performed as good as it did last year, which was a year of record and healthy growth. These results are encouraging and even more so given the signs of recovery in the market.

Next page please. Performance ratios also reflect the improvements achieved despite the international crisis, pointing towards our target and show return on equity at the mid-20s level, improved return on assets and improving efficiency.

Next page please. Our stock performance reflects today the recovery in international markets and the increase in investor's optimism. We continue to believe that Peru has solid macroeconomic foundations and therefore will be able to continue growing during in the coming years and that we are best positioned to continue benefiting from that scenario.

Our fundamental strategy has not changed with this crisis, but it was rather reinforced given a stronger focus on capturing the growth potential in the retail segment, obtaining better profitability levels through improved efficiency and implementing better risk management tools, systems and controls. We believe this approach we are working on, are on the right fronts to achieve sustainable growth.

I would like to stop here and before stopping and getting into the Q&A session, probably it's important to mention a couple of recent events. One you already know is the purchase of Edyficar or Financiera Edyficar that was finally concluded by mid-October. Now we are in control of that subsidiary. And the second one is the recent issue of $250 million of hybrid bonds that will be considered Tier 1 capital that was done last year and closed today.

So we can now go to the questions-and-answers session. Thank you very much.

Thank you Mr. Correa. (Operator Instructions). And our first question comes from [Jorge Friedman] with Merrill Lynch.

Thank you. Good morning everyone. I'd just like understand better, the advancements on the turnaround that you are enduring in the insurance businesses. I understand that restructuring was in place both in the PMC announcing the life segments. I'd just like to understand how are you planning to do that in the health business. How long should it take, and when do we expect this to be sum up going forward. Thank you.

Okay. I will pass it on to Guillermo Garrido Lecca from Pacifico, who will be answering that question, Jorge.

Thank you.

Hi, good morning. Many a things that we have been doing in Pacifico Seguros Generales, which is a property and casualty business are now being done in the health business. We are changing the way we subscribe the business, and we are in the process of doing that just like we did in property and casualty business. And at the same time we are working very strongly on the operational side of the business.

As you know the health business is very high, has a very high loss ration and a very high operational level, because of the amount of claims that we get from the different parties as compared to the other business. And we have dedicated a lot of time into renegotiating contracts with the hospitals with the providers that we have improved and making insurance that the things that are going through the business are the ones that we need to pay.

Parallel to that we have been increasing some of our premiums, and at the same time changing the co-payment structure and the portion that the affiliate or the insured has to pay when he has the different segments at the different hospitals or providers that we have here in Peru.

We feel relatively comfortable that that will kick in overtime and the problem that we have had lately to tell you the truth is that, we have had higher claim losses because of the swine flu that hit us very hard during the months of June, July and August of this year, which was the middle of the winter here in Peru.

We feel comfortable that the changes that we are implementing on the operation side and on the underwriting side will bring us the results that we want. And once we get through this swine flu, we're sure that the profits will return to -- will be at the levels that we want them to be.

Okay. That's perfect. Thank you very much.

And we will take our next question from Daniel Abut with Citi.

Good morning. Hello in the -- at the beginning of the year it wasn't very clear that expect the NPL ratio to double, and that's exactly what happened it reached now 1.56% as of end of September almost doubling from the 0.8% it started. Is it fair to say, that we are in the peak of this ratio and it will start to moderate and decline overtime or you are not entirely sure about that. And second relating to provisions, Walter did say in the last conference call that he expected this quarter to be somewhere in between the levels the kind of levels seen in the second quarter and the first quarter and that's exactly what happened. The question is where do we go from here? Where do you imagine provisionally level stabilizing into next year?

Hi, Daniel. This is Walter. The only reason I took--

Hi, Walter. I thought abandoned us.

The only reason I joined the call is because I knew you were going to ask that question. Actually yes, I want to be in cautions on the NPL side. There -- yes, we have seen a deterioration which was at a slower pace than the previous quarter.

Having said that, I want to be very cautious here, there will be further deteriorations. I do not expect the portfolio to improve in the last quarter. We will see the numbers, the ratios improving once we start growing. There is a lack by the time the real economy starts moving and it hits our portfolio of at least a quarter. So, I would expect the provisions for the last quarter to be equal or even the same or marginally higher, similar to what we have seen this last quarter.

No improvement in the provisions and maybe we might want to do a little bit more to start next year fresh with a good level of provisions at start next year. And there will be lag in terms of time, by the time the portfolio starts to improve after GDP grows. Did I answer the question?

Yes -- yes, I think you did. Not precisely as you did in other calls, but I think you did. So the peaking of the NPL could be sometime between the fourth quarter and the first quarter?

Yeah, I would expect NPL's to improve in the first half of next year, the first quarter of next year, not this last quarter. They should remain the same or they could even deteriorate a little in this last quarter.

That was there for, Walter. Given that you are on the call, let me ask you a follow-up question. Another thing that you have said and you deliver is that you were going to control expenses this year to offset that loan growth (inaudible). As we to tend to exceed our loan growth start to pick up again. How should we think about your expenses? Are you going to keep the level of containment that we've seen this year or expense level will start to pick up again?

We are working very, very hard on the expense side, and it is relevant that you see the numbers which have been relatively flat in terms of expenses in spite of the revaluation of the local currency. And don't forget the largest portion of our expenses are denominated in local currency, so in dollar terms, they have increased.

We are working very, very hard. We are starting in the last stages of our budget and what I do not want to see is any of our efficiency ratios deteriorating. So if we increase expenses it will be because the volumes and you know the valuable side of the expense, but we want to continue improving very strongly and not deteriorate any of our efficiencies ratios.

Thank you Walter.

(Operator Instructions). And we will take our next caller Tito Labarta with Deutsche Bank.

Hi good morning everyone. Just a follow-up on asset quality question, could you maybe just give some more outlook for your expectations for next year, and do you think asset quality could improve or just given that loan growth and your focus on the retail segment, do you think there could actually be some deterioration just given the change in the mix?

And then second question in terms of loan growth, maybe give some outlook for next year, particularly in terms of your dollar denominating portfolio and corporate lending which has been weak. Do you think that will increase next year with improvement in the economy and then also your expectations for the retail lending? Thank you.

Hi Tito this is Alvaro. We have a very positive outlook on the growth in both portfolios for next year that would be a retail probably growing faster and -- but also the corporate should be growing in soles and in dollars as well. And that also -- I mean regarding to the first question you asked, it is a combination of effects one is the portfolio, the total portfolio growing which will increase the denominator, but at the same time, we should expect that with an economy that should be growing between 4% and 5% next year, the deterioration of the portfolio should start to come -- to come down. That would be our expectation for next year.

Okay, great. And then just a follow-up on that, then just given the improvements the next year, what kind of recovering provision levels, if you look at like 2007 and 2008 provisions were about 0.5% of loans. Demand in 2009 increased closer to 1.5. Do you think if you can go back to the level we saw '08 or maybe somewhere in between. Thanks.

Maybe some in between not for the rest of this year, but maybe somewhere in between for next year.

Okay, great. Thank you.

And our next question comes from Victor Galliano with HSBC.

Yes, hi. I was just wondering if you could give us some kind of -- some kind of color as to what's going on the competitive landscape in Peru. I mean where do you see your toughest competition coming from especially in the retail segment. Is it from Interbank, is it from Scotia? Has there been any change in the intensity of competition and what are your -- what do you think your biggest challenge is here. And also maybe talk a little bit about how much further you can rollout the Agentes strategy and that sort of thing and how significant that is to protecting your market share. Thank you.

Okay, Victor. As we have mentioned before, we will be very much focused on the consumer lending and credit cards, perhaps on the micro lending and SMEs. And we are very strong competitors there in the consumer, especially in credit card. As you mentioned Interbank is a very good competitor, they are actually leaders in credit card business. But at the same in that segment, we will face stronger, even stronger competition from retailers. We already have Ripley and Falabella, and the Interbank group as well.

Now [Pares] from Chile has announced the opening of a bank here for that single suit for the retail business. So stronger competition will be there, and we will have to find ways to get into that business through basically alliances with whatever midsize retailers we may find there.

In terms of the micro lending, definitely, now that have a difficult platform to grow, we will be displacing other competitors. We're getting into lower segments of the population and we'll have to face both MiBanco and the (inaudible) and probably other competitors as well. So yes, competition will be strong and we think that our distribution channels will be basically the first and most important element to face that competition. You mentioned Agentes, we think that the Agentes will not only allow penetration or high penetration in deposits, but also in the micro lending business as well.

Okay. Thank you. And what are your -- could you give us any sort of guidance on or maybe on margins with we saw. Do you continue to see a kind of -- do you expect a trend of, slightly downward trend continuing forward on the back of this competition?

Absolutely, we see that in the long-term spreads will come down. We are already seeing in the corporate lending business a very strong pressure on margins. Competition is very strong from the three, four most important banks here and the same will eventually happen in the retail business, not probably in the short run but in the future for sure.

Okay, thanks. And finally just one last question. Are you giving any guidance on loan growth in soles and in dollars or just an overall loan growth number for 2010?

Just a growth number, we always mentioned that growing three, 3.5 times was the GDP growth. If we consider the GDP it should be growing between 4% and 5%, that would bring us to a number close to 15 to, I don't know, maybe higher in the retail business and around 15 or even lower in the wholesale. So that are still the numbers for next year in our opinion.

Okay. Thank you. Thank you very much.

Thank you, Victor.

And with JPMorgan, we'll go next to Saul Martinez.

Hi. How are you doing guys? I guess it's a more of a high level question in terms of the sustainability of your profits. I mean you've had a very good first nine months of the year in terms of profitability. You've been generating about $110 million to $120 million per quarter and as you mentioned you've done it in a pretty difficult macro environment.

So going forward you would -- you know, you'd expect some things to help you. But at the same time you've had some non-operating items or some non-core items I guess you could say really helped the results in terms of trading and it realized gains, FX translation result.

I guess my question is how comfortable do you feel that the current level of profits to about $115 million to $120 million per quarter in ROEs in the mid 20% range, how comfortable are you that those levels are sustainable as we head out in the following quarters?

Saul, Walter speaking. That's actually a good question, and it gives me a chance to talk a little about this. As you mentioned high level [view]. Yes, that is precisely the challenge. We are now struggling with our next biggest year's budget and setting everybody's goals. And clearly the question is how do we continue growing in terms revenue without counting on the extraordinary gains that we have had this year, the gains on the sale of securities.

And there are basically two levers that we can play. One is growth, clearly we expect growth to be there next year's with, as Alvaro just mentioned around 15% growth in volume of activity in loan portfolio. We should grow in fees. And the second is very clearly expenses. We are working very, very hard to improve our efficiencies.

We think that even though margins will tighten on each individual product, nevertheless as we have seen in other financial industries, ala Chilean where banks have been able to sustain a 20 plus return on equity with margins getting tighter on the back of a couple of things. One is a change in the portfolio mix. As our retail grows at a faster pace than wholesale and retail having obviously higher margins, we are able to somewhat control the tightening of spreads in each individual product.

And the second element is what I mentioned before, which is growth. But we think that yes, we can sustain at 25% return on equity, and in the pace at which we will grow will very much dependent on the Peruvian economy. But we are confident that that growth will come, and we are actually getting ready for a sustained period of growth.

We are confident that the next 18 months, the world will continue to settle down. We are starting to go into an [electro] period, but once that finishes, we expect that we will have a candidate wherever it may be that will be processed and suddenly the country will find itself in a very strong position, a very strong position from economic perspective in terms of reserves, inflation, very healthy financial system and the balance sheet of the companies are not leveraged, the finances of the government are in very good shape.

So, we are already preparing ourselves for a sustained 5% to 6% GDP growth in the next five years. What that means is that the system will probably double again in the next five years, and that is why we are getting ready in terms of infrastructure, we're getting ready in terms of capital with the issuance of the tier one security and we're getting ready in terms of funding. So, we are preparing ourselves for a very strong sustained period of growth over the next five or six years. That is our view, from high above as you mentioned.

Okay, that's very helpful. And just as a follow-up, any concerns at all about the clinical dynamics as we head into a presidential cycle?

There will be in our view, short-term uncertainties undoubtedly. [Electro periods] are far from being certain. But if one takes a view that in the prior election the anti-system candidate gained a percentage of the votes, we have seen in this past five years, it should trickle down in the economy.

You can actually see it if you basically walk around the main cities, all throughout the coast and the main cities. There is still obviously a portion of the population that has not benefited from what has happened in Peru in the past five years, but that is fortunately a decreasing segment of the population.

The overall level of poverty which was about 56% of the population in the year 2000 I think has come down to about 36%. And you can actually see that if you walk around. The initial polls show clearly that trend which I just mentioned. So, it has to be and the anti-system candidate will get a lower percentage of votes and fortunately we have a system that we have a second round.

So at the end of the day, in the second round, there will be an anti system candidate and a pro-system candidate and we are confident that we will end up having a candidate that will have the capacity to attract independent professionals to run protective side of the economy be it at the Central Bank, the Minister of Finance, et cetera, et cetera.

Okay. Thank you so much.

Our next question comes from [Fred Morris] with JPMorgan.

Hi good morning, everyone. My question has been answered. Thanks

And we will go next to Jorge Kuri with Morgan Stanley.

Hi. Good morning, everyone. I have a question on margins. I guess that the surprise so far this year has been the resilience of your financial margins in the face of the sharp reduction we saw in benchmark interest rates in Peru. So two questions, first what is your expectation for year-end 2010 interest rates and second what does that mean for your margins? Are we going to see an improvement in margins or basically the fact that you were resilient on the way down, mean that is probably less upside in 2010 and should we expect margins to remain kind of like in the 4.7% level, which is what we've seen over the last two to three years? Thanks.

Thank you Jorge. Definitely we expect that the reference rate of the Central Bank should stay at the 1.25 level for a while. That will be at least for the next six to nine months, and getting probably closer to 2.5% by the end -- at the end of 2010. And that will definitely help our margins.

As you know one of the main competitive advantage of the bank is the cost of funds. We have a large deposit base that at this moment is getting -- it's costing us very, very lower. It will still cost us basically something at a very low level. And as long as the interest rate comes out -- comes up that will help our margins.

Having said that, again what we mentioned in several times the change in the shift of the balance sheet of the loan portfolio to the retail sector will prevent us from seeing net interest margin being deteriorating over time.

All right. So the expectation for 2010, if I'm reading between the lines is basically flattish margins to probably very slightly higher relative to 2009. Is that right?

That will be fair statement, yes.

All right. Thanks.

(Operator Instructions). And we will go next to [Fabio Zagari] with Barclays Capital.

Hi good morning everyone, congrats on the results. Just wondering if you could shed some light on the evolution of your insurance business. We have seen loss ratio going down this quarter, this last quarter. So I just wanted to understand that where would PPS loss ratio be in early 2010. And then my next question would be on the evolution of fee income. In the context of GDP of 5% to 6% growth next year, where do you see this line growing? Thanks.

With respect to the loss ratio for the insurance business. We expect that to be 60%.

Oh, the second question is regarding the fee income for next year. Should it grow in that probably slightly higher growth rate than the GDP as has happened in the past like around, maybe 50% more than GDP or probably double, but not as fast as the loan portfolio.

Okay, thanks.

And Mr. Correa, there appear to be no further questions. At this time, I'll turn the call back over to you for any additional remarks, sir.

Oh, thank you very much everyone for being here with us and we -- as I mentioned, we're glad to share these results with you and are ready for any further contacts and questions if you want. Thank you very much.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.