Credicorp Ltd (BAP) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Credicorp third-quarter 2010 earnings release conference call.

My name is Novelia and I will be your coordinator for today.

At this time all participants are in a listen-only mode.

Following the prepared remarks, there will be a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the presentation over to Mr.

Alvaro Correa, Chief Financial officer of Credicorp.

Please proceed, sir.

Thank you, Novelia.

Good morning and welcome to Credicorp's third-quarter conference call for this year.

The results we will see in a minute confirm the growth expectations for the year, both in the retail sector with its recovered dynamism and the wholesale sector as the investment mood in our market remains high.

Consequently, income generation was strong, though quarterly results tend to capture some volatility generated by nonrecurring items and some seasonality, as we will see later.

The year-to-date results, however, are more than encouraging, since those do capture the upside potential we see in this business and the strong ability to generate income.

As we say further on, these accumulated results for the first nine months of the year do indicate that Credicorp's results for the full year 2010 will be in the high end of expectations.

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The highlights of this third quarter of 2010 show a very strong business expansion, though accompanied by the volatility in income referred to before and generated by nonrecurring items.

As we will see in more detail, strong loan growth in line with economic recovery was accompanied by low past-due loans and an improvement in the quality of the portfolio.

This also led to higher net interest income, which, together with a stronger core non-financial income, that is fee income and income from foreign exchange transactions, revealed the strong economic activity we referred to before.

However, our conservative position regarding loan loss provisions and coverage led to a strong increase in such provisions despite the improvement in portfolio quality, resulting in lower core earnings.

Nonrecurring items also had a depressing effect this quarter on results and led to an 8.6% drop in operating income.

Something similar happened to the subsidiaries as well, all of which show excellent business expansion, but lower bottom-line contributions for the quarter.

Having said this, net earnings of Credicorp are still at a very strong and high level, and contribute nicely to accumulated earnings for the year, which in fact reveal the real performance of Credicorp and all of its subsidiaries and show very strong business and income generation for these first nine months of the year, which is in fact 27% stronger this year, as we will see in the next slide.

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As mentioned before, results on this chart show contraction of all income indicators on a quarter-over-quarter comparison.

As explained, a higher loan loss provision due to an internal conservative decision and despite improved portfolio quality added to regulatory changes that demanded more provisions, and together with a lower nonrecurring income reported this third quarter, explain this drop of bottom-line income.

Loan volumes, however, do show the expansion of our business, something that is however not obvious from the insurance indicators, again and mainly because of the very specific booking reserves -- booking of reserves, which were high as a result of the strong sales of life insurance policies, depressing premiums earned on the short run.

Thus on a quarterly basis, performance is, at best, flat with a strong business expansion, but lower income than in the very strong second quarter.

Year-to-date numbers, however, do show very clearly the excellent performance of Credicorp for the year.

Operating income, core operating income and net income all show growth beyond 23% for the year.

Loan growth is beyond 25% for the year with stable portfolio quality indicators.

In addition, improved efficiency and net interest margin, both better this year, also reveal the excellent business evolution.

All this leads to net income contribution to Credicorp for the first nine months of $442 million, certainly confirming the best expectations for the year.

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BCP, being the driver of Credicorp's results, reported numbers which are explained in a similar way as the previous chart.

Again, with all these numbers -- meaning loan growth, interest income, fee income and others showing growth for the last quarter, and costs under control with a minimum expansion of less than 1% for the quarter -- all would point towards a stronger income generation, except for the 69% increase in net provisions for the quarter, which is finally what put pressure on this quarter's results.

However, for the year-to-date, the increase in such net loan loss provisions is only 5.9%, reflecting the improvement compared to the previous year and stable performance of the portfolio.

Nonetheless, these stronger provisions in the third quarter are responsible for BCP's core operating income growing only 2.6%.

Furthermore, when including nonrecurring income, operating income dropped 6.3% for the quarter, which we view without concern since for the year-to-date, on the other hand, total operating income is up a very strong 19.5% and net income an even stronger 29%.

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We are in page six.

Looking at the evolution of our loan book, and as pointed out in the past, the reactivation of economic growth in the country started already in November 2009, as is obvious from these charts, and continues undisturbed so far.

Furthermore, the evolution shown last quarter remains the same.

Our foreign currency portfolio continues being concentrated in wholesale loans.

This foreign currency portfolio has remained flat for the retail sector, while its growth was triggered by the reactivation of investment activity within the wholesale sector, which typically demands dollar loans, as such activities are still very much dollarized.

The domestic currency portfolio, on the other hand, is mainly concentrated in the retail business.

The retail domestic currency loan book has continuously grown, showing a good performance even throughout the last year's crisis, driven by all products.

Overall, loan growth is strong and reveals a year-over-year growth rate of 26%, which will probably level out slightly in the last quarter.

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Main revelations of this chart on interest income are the following.

Interest income does increase by 11%, so our loan book expanded strongly and significant liquidity in local currency was captured and invested with the Central Bank.

Interest expense show a 25% increase as our funding structure changes towards more solid denominated deposits, including the funds captured for investments in the Central Bank CDs that carry higher interest rates, and dollar funding from international markets increases to much fund our balance sheet.

This higher interest expense was more than offset by the stronger interest income, leading to a 6% increase in net interest income for the quarter.

Year-to-date numbers do reveal the substantial change in funding costs, which led to a significant increase in net interest income of 16.4% for the year-to-date compared to the same period of last year.

This impact of this evolution on NIM is slightly negative for the quarter, but more important than the quarterly movement, shows a stronger increase in NIM for loans for the year-to-date, which goes up from 7.5% to 7.8% and allows overall NIM to stay fairly stable at 4.9%.

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Despite the improvement in delinquencies and stable performance in general of our PDL portfolio, which improved the PDL ratio from 1.71% in the second quarter to 1.59% in the third quarter, provisions for loan losses increased substantially in the third quarter, following a decision to increase the coverage ratio to a more comfortable 193% from 180% before that, and also given the regulatory changes introduced recently that required higher provisions.

In fact, net provisions rose to $52.6 million from $31 million, becoming this way, the driver behind a contraction of operating income as explained before.

It is important however to keep in mind that the increase is only a function of more conservative and surely sound decisions of our management and regulators, and portfolio quality represents no concern at all at these levels.

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Nonfinancial income dropped 1.3% quarter-over-quarter, mainly driven by the difference in nonrecurring income generated by the sales of securities relative to the Peruvian government's exchange and repurchase of some specific paper we held on our books.

It is therefore noteworthy that the core fee income related to banking service commissions at BCP did grow 6.4% quarter-over-quarter, and foreign exchange transactions were up 11.7% for the quarter, given that a more dynamic economy drove an increase in banking transactions and investment activities.

On a year-to-date comparison, however, the good evolution of core non-interest income, which includes fee and FX income, is evident, since despite an also important differential in non-core income, total non-financial income goes up by 10.8%.

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A 0.9% quarter-over-quarter increase reported in operating expenses is a reasonable continuation of the cost reductions reported in the first two quarters of the year.

However, business growth will demand some investments, though these will be performed more efficiently in the future.

Overall, and when looking at year-to-date numbers, expenses are growing at a lower pace than income, which was precisely the objective of our efficiency-geared efforts.

Consequently the efficiency ratio reported by BCP continued showing important improvement with a further drop to 46.3% for the quarter.

For the year-to-date, this drop is only 2.6 percentage points down to 48.5%.

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As of the main subsidiaries of Credicorp -- of BCP, BCP Bolivia reported this third quarter a modest increase in earnings contribution of 3.7%, mainly driven by lower provisions as the Bolivian financial market remained stable, but certainly subdued compared to the previous year.

Loan growth however was strong, reaching 8.6% quarter-over-quarter, though this did not translate into higher net interest income, revealing further compression of margins, which is to a large extent, the result of the prevailing economic, political, and regulatory environment.

Overall, profitability continues dropping, as also reflected by a further drop in return on equity to 18.3% from 20% the previous quarter.

For the year-to-date, BCP Bolivia reports a 40.7% drop in income contribution to $12.4 million, whereby this will probably set the new levels of income that can be achieved within the existing economic framework.

Edyficar, BCP's micro-lending vehicle, has in turn reported a very good business evolution, with lending activity growing at a very strong pace of 10% this quarter.

Reported contribution to BCP shows a 6.6% increase quarter over quarter, which reflects strong loan growth and the low level of provisions this year.

Therefore, Edyficar continues being a strong performer and a fast-growing business, and has accumulated a contribution to BCP of $17.5 million for the first nine months of the year, reflecting a return on equity of 24.6%.

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Turning now to Atlantic Security.

Atlantic reported a slip in contribution this third quarter, down from $13 million to $10.6 million, as a result of conservative provisions made for some investments on its portfolio, as well as a slight decline on gains from sales of securities.

However, core income generation, which includes both interest income and fee income, increased slightly by 1.9% for the quarter.

For the year-to-date, however, the substantial improvement in Atlantic's performance is evident, with the total contribution to Credicorp more than doubling from $14.9 million in 2009 to $37 million in 2010 as a consequence of the recovery in the asset management business internationally and the substantial changes in the business structure, and professionalization of services at Credicorp.

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In the insurance business, the low casualty levels from which PPS, Pacifico results benefited in the past increased across the board, leading to a reduction in technical results.

Pacifico Vida had the lion's share of this effect in addition to excellent sales in life policies, which in the short run generated high reserves, affecting negatively technical results.

Thus, bottom line of the insurance business reflects this and its contribution to Credicorp dropped to a still very solid $10.4 million for the third quarter from $12.5 million in the second quarter, but maintaining a better than expected combined ratio, which reached this third quarter 93.8%.

Nevertheless, also this business shows the significant improvement of its earnings generation capacity when looking at the accumulated earnings and contribution to Credicorp for the year-to-date, which reached $31.4 million versus $25 million in 2009, which in turn was already a very good year.

Furthermore, with the announced acquisition of ALICO shares in the insurance group, a transaction recently executed and completed, future contributions to Credicorp will include such additional share and reflect a more substantial role in Credicorp's income generation.

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Finally, Prima AFP maintained the excellent results from previous quarters and reported 4.1% higher fee income, 3.8% higher operating income, but lower bottom-line results due to higher income tax provisions driven by higher-than-expected taxable income for the year.

This led to a stable contribution to Credicorp of $5.7 million for the quarter and a year-to-date contribution of $17.5 million, up 5.6%, year over year.

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The contributions chart reflects this explained evolution, and makes evident the significant improvement achieved year-to-date.

That is, a 27% increase in net income attributable to Credicorp, which as mentioned before, puts Credicorp on track for a total year-end net income at the high end of expectations.

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The market data on this slide is recognizing the evolution of results and performance of Credicorp and speaks for itself.

We are certainly pleased to see our stock having beaten the $120 mark and our market cap close to $10 billion.

Before passing on to q-and-a, I'd like to comment and explain briefly an internal change in our holding structure that was announced as a material event two days ago, although it has no implications whatsoever in the control and management structure of the organization, but because of its nature has to be better explained.

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Today's holding structure is represented in the chart you are seeing, which in fact already reflects the acquisition of ALICO's stake in our insurance business, which was done through Grupo Credito and Credicorp directly.

Currently, dividends to Credicorp from its Peruvian subsidiaries such as BCP are remitted abroad and must be remitted back to Peru when capital for new investments in the country is required.

In order to avoid unnecessary flows of dividends and capital investments within our organization, which has some unnecessary tax implications, the Board has approved a change in the holding structure to more efficiently manage such flows in view of our strategic decision to continue focusing our future growth and investments in Peru.

The change implies shares of BCP being transferred from Credicorp to Grupo Credito, the Peruvian holding vehicle, in order to better manage the flows of dividends and capital.

To view this, please flip to the next chart.

The new structure will look like the one in this chart, whereby a transfer of shares is executed from Credicorp to Grupo Credito in order to facilitate Credicorp's future investments in Peru without modifying the controlling structure of BCP.

This change has been approved by Credicorp's Board of Directors and involves a transfer of 84.9% of BCP's total shares to Grupo Credito, its Peruvian wholly-owned subsidiary, through a capital contribution.

This transaction has been authorized by the Superintendency of Banks of Peru, and will be executed in the coming days.

The reason why the remaining 12.7% of BCP's total shares will stay directly held by Credicorp is purely a taxation, since the transfer of such additional shares would have generated a large taxable gain.

Credicorp, in conjunction with its subsidiary Grupo Credito, will continue to control the same 97.6% of such shares, while maintaining its governance structure.

With the new structure, Grupo Credito, whose shares are wholly owned by Credicorp, and acts today as the local holding for some of Credicorp's investments in Peru, such as Prima AFP and others, including the recently acquired stake from ALICO in PPS, will become a more relevant domestic holding vehicle, since it will in addition hold a majority stake of BCP stock.

With this change, Grupo Credito will continue -- will become the vehicle to efficiently manage Credicorp's future investments in Peru and transfer to Credicorp the dividends required to maintain Credicorp's dividend policy unaltered.

We will now gladly answer any questions you may have, so I would like to open this session to q-and-a.

(Operator Instructions) Your first question comes from the line of Tito Labarta from Deutsche Bank.

Hi, good morning, Alvaro.

Just a couple of questions, first on provisions.

I kind of expected that -- you had mentioned they were going to come up this quarter, but just wanted to get a sense of how much it was impacted by the new regulations with the countercyclical provisions and just how much by your own conservative policies and what we should expect going forward.

Is this kind of the level we should see?

Maybe you could give a little more color on that.

And then the -- just a second question on the subsidiary, specifically Atlantic and Pacifico.

Just wanted to get a sense of what to expect going forward.

Is the levels we saw at this quarter, is that like the sustainable levels going forward?

Or just how we should think about it, given just the strong year-to-date growth rates we're seeing there, if you could, some more color on that.

Thanks.

Thank you, Tito.

The -- as of the reserve requirements or additional reserve this quarter, actually it is really a combination of two effects, but both effects are actually added together, since whatever the regulator requires for us to make, will add up to the coverage ratio.

Having said that, the new requirements are probably explaining all of what you have seen, which is helping the coverage, as I said.

There is -- there will be in this last quarter, additional reserve requirements in order to comply with what the regulator has asked to have by the end of this year.

As of Pacifico and Atlantic, well, Atlantic will probably do an additional reserve this last quarter.

So you should expect this quarter to be more or less the same, although you would see fee income probably continue growing in the next quarters.

That means the core business should continue to grow.

As of Pacifico, here we have -- Guillermo Garrido Lecca will explain that.

With regards to Pacifico, the third quarter was a little bit below the second quarter of this year and what we had been doing in the year.

And we expect the fourth quarter to be again more in line with what we had been doing previously, which is in the -- around $8.5 million.

Okay, thank you.

And then just a follow-up on the provisions.

When you mentioned in the fourth quarter you expect to see just a little bit more to comply with the regulators, could you just -- what are like the regulations asking for?

Or is there like a minimum coverage ratio or what exactly would be the impact of that?

The way this works is the regulator has set up six-month period where the ratios that you have to apply to the current performing portfolio are increasing on a monthly basis.

Therefore, we have to continue raising that ratio and therefore provisions as of December.

Actually the requirement goes up to February, but we want to get that done by the end of December.

All right, thank you.

Your next question comes from the line of Daniel Abut from Citi.

Two things, Alvaro.

First, a follow-up to the prior question.

It seems fair to expect that the fourth quarter will be another quarter of high provisioning level compared to prior quarters.

Is it fair to assume that it should be similar to this quarter?

And then how do we think about 2011, when you no longer have this additional pressure coming from regulatory requirements and the provisions should be more in line with the performance of the portfolio and the growth in the portfolio?

What is a more normalized level of provisions then for 2011 that we should be working with?

And second on loan growth.

You explained in your remark, Alvaro, that if you look at what happened in the first nine months of the year, you are getting close to a 25%, 26% --(inaudible) annual level of loan growth, although that should be level in the fourth quarter.

How should we think about loan growth in 2011?

In the past, you and Walter have guided something close to the 20% that is looking kind conservative in line of what we are seeing already this year.

Okay, thank you, Daniel.

As of provisions in the fourth quarter, you should probably have -- you will probably see a similar amount of what we have done in this quarter.

I don't have the exact figure, because this is like a moving target since we have to reserve on the size of the portfolio.

As of 2011, yes, we won't have to do additional or to catch up with the new procyclical provisions that the regulator is requiring.

But the portfolio will continue to grow.

Although we expect provisions to be slightly lower compared to the total size of the portfolio than this year, since the quality of the portfolio should continue improving over the year.

And so portfolio growth, the role is staying the same.

We should grow between 3 and 3.5 times GDP, which we are expecting to grow 6% more or less for the year -- 6%, 6.5% on the year.

And that should continue to be the rule of thumb, no change about that.

Hi, this is Walter, Tito and Daniel.

Let me add a little bit more color on the provisionings.

The way the countercyclical regulation works is that once it kicks in, two things happen.

First, you have to catch up with the stock.

That is you have not done procyclical or anti-cyclical provisions for the past year-and-a-half.

So you have to catch up to the level that is required.

And then going forward, you will do more provisions than what you were doing originally.

The catch-up, which is the first piece, we have until February to do it, but we want to get it out of the way by year-end.

Thus, as Alvaro was mentioning previously, last quarter will probably be similar to this quarter.

Next year, clearly we will have to do slightly higher provisionings because the countercyclical percentages that apply are slightly higher than in times when the country is not growing.

But that works counter the fact that the economy will continue to grow and the quality of our borrowers will increase.

So clearly, next year we are expecting that the net of these two effects will by quite lower provisionings in dollar terms than what we have seen this year.

If I can follow up, Walter.

I mean if I look before the global crisis, you were provisioning about 1% of average loans or some quarters even below that.

This last quarter was 1.8%, and it's probably going to remain at that level in the fourth quarter.

I would expect that next year it should be significantly below that 1.8% level, but probably not going back to the 1% that we used to have before.

So what do you think is a more normalized level?

What's the average between 1.8% and 1%?

Okay, that's a great answer.

Somewhere around there.

Okay, fair enough.

Okay.

(Operator Instructions) Your next question comes from the line of [Mariana Barros] from JPMorgan.

Hi, good morning.

We saw this quarter -- actually has been running very high in recent quarters, your realized gains on securities.

I would like to understand what we can think -- how can we think about this line in the future as a more normalized level?

Thanks.

Hi, Mariana.

It's difficult to come up with a number there because this is a business where you have to just seize opportunities when they come.

Most of the portfolio we have been building on government securities, it's gone.

It's difficult to expect something as large as even what we had in this third quarter.

It's probably coming down.

And yes, the other item here is that when you have -- we have very low interest rates now, so it's very difficult when you expect to have those interest rates not coming down further to have capital gains.

So it's going to be difficult really to get something like that.

Yes, most of the profits come from fixed-income trading.

And as Alvaro was saying, obviously we've had a period with a reduction of interest rates, which allowed for the portfolio to revalue.

Clearly that scenario is not going to happen dramatically in the future.

We don't expect any further very important reduction in interest rates in dollars, and clearly not in soles.

So us being mostly a fixed-income trading operation, we will have some normal trading gains, but clearly the big opportunities, we do not see them coming.

And again, very difficult to predict because they are opportunistic more than day-to-day trading.

Okay.

Okay, thank you very much.

Your next question comes from the line of Boris Molina from Santander.

Yes, I'd like to see if you could clarify a little bit complementing on the question just asked.

We track -- our framework for analysis expects to see how your book value per share growth and your basic framework is -- you have retained -- you have your earnings, you pay some dividends, and that more or less explains the movements in your book value per share.

Nevertheless, in Credicorp, you have very high and volatile swings in unrealized gains in securities, which in this quarter representing close to 30% of your reported net income.

Second quarter 2009 was 110%, third quarter 2009, 72%, 40%, 20%, minus 26%.

This is a very, very volatile line and it represents a -- I would say one of the largest levels of volatility I've seen in a retail bank in Latin America.

And it looks like a very risky proposition for investors to see how is this going to evolve over time.

So I wanted to a get a sense of what type of securities, and in which business units you hold the securities that introduce this volatility to the balance sheet?

Is it related to the insurance portfolio?

And how do you manage or do you plan to manage these risks.

Or if these unrealized gains also include in-translation gains, given that your functional currency is the US dollar, and if you have any plans to convert to local currency for further reporting in the future?

Okay, good question, Boris.

On the unrealized gains, yes, it provides some volatility in the book value.

And that is mostly related to the life insurance portfolio.

Clearly, that is something in which we have a serious discrepancy with the accountants.

Because if you think of how the life insurance business works, on the asset side, you mark to market the portfolio, relatively large portfolio of very -- of investment-grade, high quality securities that much fund the liability of the renta vitalicias, the annuities.

But if you think about it, you mark to market the asset side, but you don't mark to market the liability side.

So at the end of the day, those unrealized gains really never belong to the shareholders.

Yes.

If you were to mark to market the asset and liability side, they would go hand in hand because we do much fund those annuities.

And they do provide for volatility in the book value.

I agree 100% with you; what can I tell you?

The accountants still don't get it.

Yes, I can [understand.

Right.]

Let me build on that.

It's mostly -- mainly high -- a fixed-income portfolio.

But we also have another line that -- it's equity really and adds some volatility to that line as well -- is the stake we have in BCI, in BCI from Chile.

Oh yes.

We have a -- through a subsidiary we hold in Chile, and that moves together with the movement of the stock.

That also brings some volatility because the stake is not low.

It's like $150 million or so in value.

Okay, excellent.

Thank you very much.

And at this moment, there are no further questions in the queue.

I'd like to hand the call back over to management for closing remarks.

Well, thank you very much again for being in this conference call.

We'll be glad to be here for you whenever you need more information and color on Credicorp and the market.

Thank you.

Thank you for your participation in today's conference.

This concludes your presentation and you may now disconnect.

Have a great day.