Grupo Cibest SA (CIB) 2005 Q2 法說會逐字稿

Good morning and welcome everyone to the Bancolombia second quarter year 2005 earnings conference call. Today's call is being recorded. With us today we have the President and Chief Executive Office, Mr. Jorge Londono. And Vice -- Financial Vice President Mr. Jaime Velasquez. At this time I would like to turn the call over to Mr. Londono. Please go ahead sir.

Thank you. I wish to thank each and every one of you for your interest and attendance to this conference call, which we have prepared to share with you Bancolombia's results and our evaluation of expected merger synergies. I would like to mention that a slide presentation has also been made available, in the company's investor relation website at bancolombia.com, which we strongly recommend you to follow during this call.

At this time I would like to introduce Mr. Jaime Velasquez, Finance Vice President of Bancolombia, who is going to explain briefly the latest facts on the Colombian economy.

Thank you. During the first quarter of the current year the EBITD grew 3.6%. There is a positive perspective among the economic [indiscernible] according to the large [indiscernible] by the Central Bank, that stays at 3.9% growth of the economy by the end of the year. Consumer prices remain at low levels as of July the 12 month inflation was 4.9%. The Central Bank have ratified its confidence in achieving this year a positive growth of 5%. Similarly interest rates remain low and stable at 7% whose improvement shows in the financial sector and our own capital investments to grow. On the other hand even though volume is still high this growth from 12.5% to 11.4% in June.

International market has been and will be a source of opportunities for the Colombian economy. But in the first month of 2005 international [trait is expensive] an important dynamic. Exports increased 375% and imports 29% this trend is to be maintained through to the business of commercial relation, derived from trade agreements in force and others about to take place.

As you can see this is the first group scenario for the financial business. Therefore, we believe that the bank will show a sustainable as the performance of the Colombian economy maintains this trend. After this brief view of the Colombian economy I will turn to Mr. Londono who is going to go over Bancolombia results.

Thank you. As far as Bancolombia results we would like to highlight the following points. Net income for the second quarter of the year 2005 amounted to COP169.8b, increasing 45.7% compared to the COP116.8b for the same period of the previous year. The bank net loans show a strong growth they increased 26.1% in a year-over-year base, with very positive figures in corporate and retail segments. On the other hand the investment portfolio increased 6.9% thereby reallocating the banks assets to the loan portfolio.

Regarding the income interest payments on a year-over-year basis, interest of loans increased 19% while interest on investments boasted 118% due to the recovery of bond prices in the regional markets. It is important though to take into account that last year's second quarter was negatively impacted by the drop of bond prices in the region as we will explain later.

Net fees and income from services maintain that positive trend. During the second quarter they amounted COP127b increasing 16.3% when compared with last year. The result of the biggest [of view] is an annual return on equity for the second quarter of 33.8% up [47] half of the year of 29.6%.

Now let's take a look at the balance sheet as of June 30, 2005. As you can see in the slide 6 talking about assets, we have positive growth figures. Bancolombia's total loans is [inaudible] of the total and 26.1% over the year.

In the slide number 7 you can see the year-over-year growth figures in all types of credit. Corporate loans were up 17% and retail loans 32%. Financial leases maintain a very robust growth, with an increase of 55% over the previous year, which is a very important growth. Keep it in mind that we were growing at around 100% last year. This shows that the bank has been very effectively targeting the different [cultures] of demand for credit. Originally as shown in slide number 8 demands flat new loans as a percentage of total loans maintain a level of 1.66% with a coverage ratio of 255% as of June 30, 2005.

Now on the side of liability, the bank has been able to respond with the strong growth, based on its traditional sources of promise. Such as checking and savings accounts as well as time deposits. As you can see in the slide number 9 the bank deposits increased 11.2% during the year, keeping a very stable mix. Interest bearing deposits were up 10.7% over the year, while non interest bearing deposits increased 12.9% during the same period.

On the equity side, slide number 10 you can see that Bancolombia shareholders equity was up 12.8% over the quarter, increasing 29.7% compared to the end of the second quarter 2004. On realized gains register a strong growth of 162% over the year. Amounting to COP115b due to the mark to market of the debt securities classified as available for sale. As of June 30, 2005 the bank consolidated [indiscernible] technical capital to risk-weighted assets reached 13.7% well above the regular technical capital in Colombia of 9%.

Now let's go into the income payable, what we just mentioned net income for the quarter, amounted to COP169.9b, which represents a strong increase of 45.7% compared to the second quarter of 2004. But as you can see in the slide number 11, the growth for the semesters is 23.7%. I think that that figure better reflects what is the growth that we are achieving at the moment since there is some extraordinary movement on the quarter derived from the movement of the prices of bonds that we already mentioned.

Slide number 12 shows a strong net interest income growth. It amounted to COP356.6b, increasing 50.6% compared with the same period the previous year. Interest on loans continues its positive trend increasing more than 19%. And interest on investments were up 117.5% due to the recovery of the regional debt price. However, it is important to remember that the results of the second quarter of 2004 were negatively impacted by the regions drop of bond prices.

During the first-half of 2005 the interest on loans increased 20.8%. While the interest on investments were up 11.2% compared to the same period of 2004. And as we mentioned that better reflects the -- our comparative figures. The regions of loans and interest amounted to COP40.5b, increasing 25.6% compared to the previous quarters. Recoveries of previously charge of loans and foreclosed assets kept a very positive trend amounting to COP20.2b.

On the analysis of this fee income generation we can show that it continuously 1 of the banks main strategy. Net fee income amounted to COP127.1b, increasing 9.5% over the quarter, as you can see in the slide number 13. This represents a 16.3% increase compared with the second quarter 2004. And now represents 51% of the operating expenses and 75% of the net income.

In the slide number 14 we can see that Bancolombia's credit cards presented a strong dynamics. Their billing increased 21.4% during the second quarter of 2005. This is resulting in an 18.1% market share of the Colombian credit card business.

Operating expenses were stable during the quarter, amounting to COP251.4b, an increase of 13.8% compared to the second quarter of last year. As you can see on slide number 15 the Bank efficiency improved to 50.5% due basically to the strong income portfolio.

But as you can see on that slide 16 during 2004, Bancolombia Panama loans portfolio was stable, whilst its investment portfolio increased 6%. It reported net income of $9.9m during the second quarter, increasing 61.2% compared to the previous quarters due mainly to the recovery of bond prices mentioned above.

As you know the merger was completed on July 30, 2005. In slide number 19 you can see the most significant figures that come out of the mergers. The number of clients go from 1.8m to 4.7m taking into account the other losses. The branches grow from 388 to 665, despite the distribution network optimization that has led to the closing of some branches. We plan to have 675 branches by the end of the year that is 20 additional branches during the year.

We also have -- plan to have 12 -- 1,216 ATM's with a net addition of 131 ATM's during the year. The number of outstanding shares is to increase 26% meaning that at today's APR prices the market cap of our company will be $3.9b. Finally as we explained previously, this merger will be accounted as a pooling of interest.

In slide number 20 you can see how the bank has deepened with the strength, in every market segment, with high opportunities of growth in most of them. Especially you can see that we have very good opportunity for growth in construction, in the government sector, in micro financing. And, of course, in the personal banking segment, as a result of the significant increasing the client base and the opportunities of core service.

Similarly in slide 21 there is a description of the outcome of every business line, with many opportunities in most of them, especially mortgages and investment banking.

In the next slide you can see the synergy analysis of the mergers that we had promised to show to you. The graphic illustrates the estimated net impact of the merger over 7 years in 2005 prices. This is the net results of the merger expenses and the positive effect of past years in a region to revenue synergies aren't taken. During the third year the positive net results are mainly the consequence of tax tiers used by [Confinsura and Conavi]. Beginning on the second year of mergers the effects of the net revenue synergies from all the 3 entities, will be consolidated.

As well as the savings generated by the profits of [indiscernible] of [presentation] the items that make up the income savings and expenses showed in the columns will be discussed later in this presentation. In time the level of net profit in that [indiscernible] will tend to stabilize. And the large portion of future profitability from the merger shown in year 7 will remain going forward. The net revenue volume of these projections is expected to be COP410b, which is equivalent to 13.9% of the merged entity equity.

On the slide number 23 we show the detail of the merger expenses that we are considering in our projections. We see the extra expense in employee's salaries and benefits, which is derived from the expansion of salaries and labor benefits for the entire organization. We see the expensive but we are projection in the real estate. Also in technology and in the other expenses in integration and consulting expenses. And some dividend reductions we've calculized from the elimination of the dividend received previously from Conavi and Confinsura, but however, are offset by the pooling of revenues of the 3 entities in the projected merged company.

Now on the next slide on slide number 24 we see that the synergies and savings that we are projecting for the merger. The first element is savings in general expenses or cost savings, we characterized from the optimization of properties. And economies of the scale that we are achieving are at the top of the mergers. We also show the [break] in the net interest margins, which is obtained as a result of a better structure of funding of the new [ranges]. We show the pre-income increase that we obtained of our special penetration of our new client base.

And we show in the next slide, slide 25 a detailed presentation of the tax impact. As you can see the total tax impact of the mergers which includes the tax impact that derived from the [indiscernible] enjoyed by Conavi and Corfinsura. And the attention of the affects of Bancolombia taxes stability regime.

In the last slide number 26 we show the same figures of at the beginning of this [indiscernible] of merger synergies are presented in dollars. And again as we mentioned at the beginning we illustrate that this is equivalent to 34.9% of the total equity of the merged company.

Thank you for attending this presentation. And now we will be happy to try to answer whatever questions you may have.

[OPERATOR INSTRUCTIONS] Your first question comes from Mario Pierry of Deutsche Bank.

Good morning everybody. I have got a couple of questions, first it is more of a technical question. I am wondering how were you able to account for this transaction? Are you using pooling of interest while International Accounting Standards I don't think accept pooling of interest, I though you were here to do a purchase accounting, so it was more on the technical side there.

And then on your synergies, if you look on page 22 of your presentation, you give us the [information] that net income impact over 7 years, and then you calculate the net present value of that. But shouldn't we also do a perpetuity value of your benefits going forward? And plus your net present value of the synergies are much higher than what you are showing. Thank you.

Okay. Yes thank you for that question. The first question in fact is derived from regulatory accountancy in Colombia. And the Superintendent of banking has recommended us to do this pooling of interest.

Now on the second question, you're right, we've been into for second quarter [separation] of the synergies. I would like to have explained the fact that this is due to a previous separation of our synergies, we will have to work on achieving them in the coming months. And we will be getting more detailed projections of them. But nevertheless I think that it is a figure that is showing the rationale of the merger with this [vertical] rate through our equity.

Okay thank you.

You're welcome.

Your next question comes from Arthur Burns of Deltec Asset Management.

The contribution in the second quarter to the appreciation of the -- basically there must be sovereign Colombian bonds. You earned roughly COP0.50 a share, could you more or less say what portion of that COP0.50 was appreciation of your investment portfolio?

Yes.

I am trying to quantify what you don't show in either the slides or the press release, how important that was to your quarter.

Okay. Yes I very much understand your concern and that -- the best answer that I can give you is that in fact what happened, was that during the first quarter, there was a significant drop in our investment portfolio derived from an increase in the rate of interest in the bond market in the region during the first quarter. That was a record during these different quarters, so that is why when we mentioned those income figures, we directed you to look at them in the semester rather than in the quarter base. Because the semesters then eliminate the noise and shows you the real outcome of the bank and the real weight of our income from investment and from our interest base in our loans.

As we've mentioned this shows that rather than an increase of over 100%, we have something like an increase of 11% on interest on investments during the semesters. And that is, again I explained a more reasonable way to look at it.

Thank you.

I don't know if that is complete, but we will be more than glad to give you precise figures on the interest on that to Jaime Velasquez, to Mauricio Botero. And their telephone numbers will appear on the first page of our press release later on.

Thank you very much.

You're welcome. Okay so that appears to have been the last question. I will again I would like to thank everyone for the questions in these conference calls. We are very glad to present our quarter, which was very good. And we also believe that the first presentations of the merged entity figures are very promising of the results that could be obtained. We are very challenged in the administration, to be able to work on those possibilities we can obtain the positive accretive value or accretive returns of the merging.

And we will be very glad to hear any additional question or any additional information that you may require. That could be presented to Sergio Restrepo to Jaime Velasquez or Mauricio Botero at the telephone numbers that appear in our press release.

Excuse me Mr. Londono.

Yes go ahead.

You do still have several questions sir.

Oh, okay.

Would you like to take the questions.

Okay, I will take questions. I am sorry, I thought that there were no more questions.

I apologize.

There was a time lapse.

Your next question comes from Ben Laidler of UBS.

Okay.

Hi, good morning gentlemen. Just a couple of questions. Would you just be able to give us some general guidance, as to what you think the consolidated rate of loan growth would be going forward on a 12 month basis?

Yes, we are very optimistic with loan growth. The economy is doing well, is growing and it has started to show in our loan growth. We emphasis a lot probably the line of our growth, which is the lowest, which is corporate growth. But that nevertheless has remained at 17%. And that is very good news because it shows this growth in the largest portion of our portfolio, which is the corporate growth.

But as you can see, that growth of retail and leasing activities is very good. We foresee that fresh to keep it dynamic as we frequently mention, Colombia is very well on the bank. And that leads to the part that when the economy grows the financial sector should grow more faster than the economy. And in fact, that is what is going on at the moment. The financial sector is growing twice or more than twice than what the economy is growing. And the bank is growing much faster than the financial sector. We are in a better and in a very good position to take advantage of the opportunities that the growth of the economy is offering to us.

Okay, but you basically think the growth rate is going to slow from here and your not comfortable giving any sort of specific guidance on what you think the consolidated loan growth would be? I am concerned that you're incorporating Conavi in, and the mortgage portfolio there is shrinking. And I am just trying to conceptionalize what that's going to do to your overall loan growth rate?

Okay, very good, thank you very much for your position. I would like to give more on the mortgage portfolio. I think that that might be 1 of the most important opportunities for the merger entities. We don't want to go on saying that that could be taking in a very short term, but it is definitely something that is going to be evolving in a positive direction in the mid-term.

Actually when you look at the Colombian figures, mortgage loans used to represent more than twice of the total portfolio credit than what they represent today. So we are a very low level. And if we are able to market the mortgages better and we are able to interpret the opportunities of the current situation of the economy that will be a great market. Real estate is booming all around the clock and the increases of prices have not been felt at the same level in Colombia. So we still have a lot of room for benefiting from the good opportunities offered in real estate, and in home equity loans for our clients. And we look at that very optimistically.

Okay. Thanks very much.

You're welcome.

Your next question comes from Paul Tucker of Merrill Lynch.

Thank you everybody. You've already answered my question on mortgages, so thank you for that.

I had 2 other questions if I may, 1 of those was a more general question, about the competitive nature of the banking and financial sector in Colombia. Clearly you're creating here something of a universal banking powerhouse. Could you just maybe give us an idea for what you expect from some of your competitor groups, who presumably will feel inclined to themselves compete more aggressively with you going forward?

And secondly I joined the call late, so forgive me if I missed this. But could you give me an idea of whether you have any specific targets for measuring management success in the integration program? And by that I mean some kind of quantified number for return on equity cost to income ratio. And any indication for the way in which management compensation may be tied to those targets being achieved?

Okay. Well on the first chapter we definitely believe we that Colombia is looking increasingly better in the international scenario. And I would figure that we will see some increasing interest from multi-national competitors to come to the country.

I believe that also the current banks, multi-national banks that are already based in Colombia, are increasing very well in activity. And we will see competition getting very active. We believe that the model that we have been practicing is a good model for participating especially in that competition. And we are very happy with what we see that we could do with this merger to increase the competition of Bancolombia.

The Colombian market [indiscernible] with these mergers that are going on the 1 in Bancolombia and the other mergers of [Sariliensa] of [Group Associale] and [Cosmena] and for all the others that will be announced is contemplating the pricing. But until the structure particularly the competitiveness is very good, it's an open market and we have a lot of competition. So there is not any form [portfolio] control of the market in all 9 of the businesses.

On the respect of management measurement and management success, we have implemented in these last years, a very complete system of information that allows us to measure value creation to the bank. And that is the placement of our system of management compensation.

We are absolutely convinced that this is a very good system of measurement. And it's a system that is going to be very strong for driving us through the mergers. The value measurement that we have in place, allows us to measure value creation for the every line of business for every time. But also for every agent, for every manager, for every account manager of the bank and allows us to measure how much capital each 1 of us is using up and how much value is it producing on this. So I think that these measures, as I said before is a good tool to follow what is going on during the merger.

Thank you very much.

You're welcome

[OPERATOR INSTRUCTIONS] you have a follow up question from Mario Pierry of Deutsche bank.

Yes hi. I was wondering I see that you are starting to disclose your pro forma financials for the second-half 2005. I was wondering if you are also going to make available the pro forma numbers going back? And I notice that your ROE for the pro forma bank is around 28% in the first-half of the year, without any benefits from synergies from the merger. So I just wanted to get an idea from you where you think this ROE of this bank can go over the next 2 or 3 years?

Okay. The first part of your question, whether we are revealing the pro forma figures of previous semesters. We are working on that for the preparation of our 20-F form. I am just looking at my colleagues here - we don't have yet a precise date, but it might be probably at the end of September of this year. We could probably give you a more precise date of when this 20-F form is going to be released later on today, I can make a call to you, Mario.

And the second part is the projections of the current year. I didn't follow your question, could you repeat the second part of your question to me please?

Sure, no it's just looking at your pro forma figures of second-half 2005, you are showing an ROE of about 28%. And this does not reflect any synergies from the mergers. So I wanted to get an idea what kind of profitability levels are you forecasting for the bank on that pro forma basis?

Well as we mentioned in the synergy analogy, we believe that some increase could be obtained as a result directly of the merger. But in our previous presentations, we have shown that on the average in the Conavi business as a whole, we also are expecting some reduction of the interest margin that could affect the institution as a whole, that could affect the sector as a whole.

So I wouldn't be so bold as to refer to add up the margins, the profitability that we are obtaining today, with the synergies that we are analyzing, I wouldn't see the [processes] in our more conservative position, thinking that we are in a good profits of growth. But we believe that margins will be on the attack by the competition I was describing earlier and by the new infants to the market and so on and so forth. And also because of some discussion among the industrial sector and the retail sector on our fees. And other incomes that could be reduced in the coming months. So I would say that growth is going to be good, margins are going to be under attack but the outcome we believe is going to be positive.

Okay. Thank you very much.

You're welcome.

Your next question comes from Alex Lyon of Ramirez & Company.

Hello.

Yes.

Hi. Mr. Londono thank you. I have a couple of questions just following from the previous question, where you say that margins are going to be under attack. On page 24 when you show revenue synergies and savings, there is 1 item that is by increasing the NIM, the net interest margin I believe?

Yes.

How are you expecting to create synergies from that? And when you just said that the margins are going to be tight.

That's very good. If you look at our performance in the last couple of years, you can see that the bank has managed to maintain and sometimes marginally increase our net interest margins as a result of some activities, from the management that have been in 2 ways.

First improving our structure of volume, and giving more weight to lower costs or no costs [indiscernible]. And on the other hand also taking the opportunity of increasing faster those lines of higher interest as retail loans, and also leasing which is higher than the corporate loans.

We believe that under the circumstances that are offered to us by the mergers, with its increase in the number of our retail banking clients and professional banking clients. And also the opportunity of having a more, a wider portfolio we certainly believe that there is opportunities of going on with the practice of management, that is going to allow us to grow over this lets say sort of hostile environment [indiscernible]. We will go on with the easy and with good results as we progress with the practice of better structure of targets and better structure of liabilities.

Okay. Thank you.

You're welcome.

And the second question, if I may, is in terms of cross selling, what levels of cross selling did you have before with Bancolombia? And if so and what are you expecting in the future with the merger?

They have actually merged when you try to give the figures of cross selling because everyone measures them in a different way. We have for our internal control close to 3 of cross selling. Its much lower, I don't have the figure in my mind of what is this result in the merger, but it's about 1.5. So it is reducing almost to a half the cross sales.

Of course, we do not attempt to grow to Bancolombia's cross sell in a short-term. And probably it's not easy to grow even in a mid term because it is a different group of clients. Those that are coming up particularly and the ones that are coming up from Conavi, which is the entity [indiscernible], they contribute the larger number of clients. But definitely we in our projections, what we are believing is that what percentage of those clients of Conavi, something like 15% of the clients of Conavi, we will be able to make during our number of months, a couple of years coming on we will be able to give a similar cross sell to what we have in Bancolombia.

Okay. Thank you.

You're welcome.

At this time there are no further questions. Mr. Londono I hand the call back to you.

Okay. Thank you very much and I would reiterate my closing remarks in advance. So thank you very much again and we will be happy to answer any additional questions. Thank you.

At this time there are no further questions. This concludes today's Bancolombia's second quarter 2005 earnings conference call. You may now disconnect.