Grupo Cibest SA (CIB) 2005 Q3 法說會逐字稿

Good morning, and welcome everyone to the Bancolumbia third quarter year 2005 earnings conference call. Today's call is being recorded. With us today we have the president and chief executive officer, Mr. Jorge Londono; the executive vice president, Mr. Sergio Restrepo; and the financial vice president, Mr. Jaime Velásquez. At this time, I would like to turn the call over to Mr. Londono. Please go ahead sir.

Good morning, and thanks to 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. I would like to mention that our slide presentation has also been made available on the company's Investor Relations website, at bancolombia.com which we recommend you to follow during this call.

At this time, I would like to introduce Mr. Sergio Restrepo, executive vice president of Bancolombia, who is going to explain briefly the latest facts on the Colombian economy.

Good morning. First of all, I would like to comment on the political environment. As you probably know, the Constitutional Court upheld the amendment allowing the presidential re-election. On October 19, the court said it had not found procedural flaws with the amendment that was approved by Congress last year. However, the court must still rule on the constitutionality of the re-election estitute(ph), which is a reform to the electoral code approved by Congress aimed at guaranteeing fairness in the presidential elections in the event that sitting president is allowed to run. This ruling is expected to be issued by mid-November.

Now I would like to invite you to open the presentation on Page Number 4 to talk about the facts about the Colombian economy. During 2005, the Colombian economy has had a positive performance. In the second quarter of the year, the economy grew 5.3, which represents the highest annualized growth for the last seven years, with the financial sector representing 5.8% of the GDP after growing 26.9% in a year-over-year basis. Near terms, the fundamental economic variables have behaved positively. Consumer prices remain at low levels, 5.02% as of September. And yesternight(ph) we released numbers of October 5.27 and 4.66 for the 10 months.

In the centralized computers(ph) economy is in trying to achieve this year's inflation target between 4.5 and 5.5%. These positive perspectives are being reflected in the confidence of the (inaudible - accent). On the other hand, liquidity in the market has allowed the interest rates to continue its downward trend throughout the year. Purchase party(ph) price, at 117% in August, maintains a competitive level in spite of nominal revaluation. Unemployment decreased approximately 200 basis points compared to the previous year, reaching a level of 11.2 as of September.

The external sector continues to be a source of opportunity for the Colombian economy. During 2005, international trade has presented an important (inaudible - accent). The exports and imports have grown 34% to $11,800 million U.S. and 28% to almost $11 billion U.S. respectively with a commercial surplus of roughly $1 billion U.S.

Finally, regarding the finance sector, the Colombian Superintendency of Banking has realized some changes to the methodology of the general allowance for the loan portfolio. Beginning October 2005 and until July 2007, adjustments should be made to the current general allowances until they amount up to 2% of the gross loan portfolio. Today's loan portfolio size is approximately 160 billion pesos of additional allowances for the Bank to do during the next twenty-one months.

After this quick review of the Colombian economy, I will turn to Mr. Londoño again who is going to go over the Bank results.

Thank you. As you probably know, these are the first cost-measure consolidated results released and in order for these results to be comparable, we used Pro Forma figures based on simulation exercise for periods previous to the merger. So every time that we mention past results they need to be understood as Pro Forma figures. We would like to remind you that the merger with Conavi as a whole -- that we merged with Conavi as a whole and we shall continue(ph) banking activity after the spin-off of that institution.

As far as Bancolombia's result, we would like to highlight the following points that can be seen in slide number six. During the third quarter, net income amounted to 270 billion pesos or $0.647 per ADS (ph), accumulated 690 billion pesos during the current year or 1.658 per ADS which represents an annual increase of 25.7%. The Bank loan portfolio keeps outperforming the GDP goals. Net loans increased 10.6% in a year-over-year basis with very positive figures in corporate and retail segments with the exception of our increasing mortgages due to securitization held in December, 2004. The investment debt securities portfolio increased 5.9% continuing the process of relocation of Bank assets to the loan portfolio.

Regarding the income statement in a year-over-year basis, accumulated interest for loans increased 13% while the interest of investments boosted more than 21% due to the increase of the Colombian bond prices. Net fees and income from services maintain its positive terms. They amounted to 556 billion pesos during the year increasing 20.5% compared to the same period of last year. It is important to highlight that during the third quarter there were some non-recurrent provisions, operating expenses and merger expenses as we will try to point out during this presentation.

Now let's take a look at the Bancolombia result and balance sheet as of September 30, 2005. As you can see in slide number 7, we had positive growth figures. Bancolombia's total loan increased 2.3% over the quarter and 10.6% over the year.

In slide number 8, you can see the annual growth figures in almost all type of credits. Corporate loans were up 2.3%, return loans 28.4% and financial leases maintain its robust growth with an increase of almost 29%. This quarter, also for the first time, you can see a significant amount of mortgages in the Bank's loan portfolio. Most of them, almost all of them, coming from Conavi. In a year-over-year basis there is a decline of this type of loan due to the mortgage securitization that we mentioned about, with trust of approximately 230 billion pesos. That took place on December 20, 2004. Additionally, in slide number 9, we can see that the Bank's past due loan, as a percentage of total loans, reach a level of 3.2% with a coverage ratio of 130% as of September 30, 2005. Nonetheless, as we have said in the past, we prefer to focus on the ratio of allowances to loans classified C, D and E, which at the end of the quarter was at a level of 119%.

In slide number 10, we can see that the Bank's funding mix has improved. Interest bearing deposits were up 11.7% over the year while non-interest bearing deposits increased 26.3%. Besides there was an increase of almost 31% in savings accounts while the time deposits decreased 3% reducing therefore our cost of funding.

We can see the shareholder equity in slide number 11. And you can see in that picture that equity went up 9.5% over the quarter, increasing 23.7% compared to the end of the same quarter of last year. Even though we realized gains on debt securities of approximately 40 billion pesos due to our reclassification held in September on realized gains, that is still high, amounted to 96.3 billion pesos due to the market of these debt securities classified as available for sale.

So September 30, the Bank's consolidated ratio of technical capital to risk-weighted assets was at 11.6%, well above the Colombia's regulatory tropical ratio of 9%.

Now regards to income statement, as we just mentioned, net income, year-to-date amounted to 690.3 billion pesos, which represents an increase of 25.7% compared with last year. This is very well illustrated in picture number 12.

In slide number 13, we show that during the first nine months of 2004, net interest income amounted to 1,543 billion pesos, increasing almost 20% compared to the same period of last year. Interest from loans continue its positive trend increasing 13%. Interest on investments were up 21.2% due to the positive performance of debt prices, year-to-date and to the reclassifications of bonds from available for sale to trading explained above in this presentation.

Since the net interest income grew at a faster pace than the interest earning assets, the net interest margin for the accumulated period went from 7.4% to 8.2% in a year-over-year basis.

Provisions of loans and interest amounted to 64.1 billion pesos during the quarter, with an increase of more than 46.5% compared to 2004. This increase is explained mainly by 16 billion pesos of adjustments of Conavi's loan portfolio to Bancolombia's Credit Risk Management Policies. Recoveries of previously charged off loans and foreclosed assets kept a positive turn amounting to 77.2 billion pesos in a year-to-date basis.

The income generation continues to be one of the Bank's main strategies. Accumulated net fees amounted to 555.6 million pesos with an increase of 20.5% over the year. You can see that in slide number 15. The income represents 45% of the operating expenses and 80% of the Bank's net income.

In slide number 16, you can see the strong dynamics of Bancolombia's credit cards. The billing increased 17.9% and we have come to have right now 22.9% local market share in billing.

Operating expenses are presented in picture number 17. You can see operating expenses increasing 40.7% during the year, amounting to 1,224 billion pesos. This increase is explained mainly by 40 billion pesos of non-recurrent amortization of deferred charges from Conavi.

And at that result, you can see in slide number 18, efficiency-reaching levels of 55% and 6.5% if we consider it in relation to assets.

This is the presentation that we have prepared for you and at this time, we will very happy to try to answer whatever questions or comments you might have.

(Operator Instructions). Your first question comes from the line of Louis Adimon (ph).

Good morning, everyone. I have two questions. One is how much do you believe that the increase in fees for the quarter which was quite impressive at 18% was recurring and how much do you attribute to the impact from the merger? Also, concerning the DBA acquisition of Guarnarad if you are concerned with the high competition, the potentially higher competition from foreign players and if that changes your strategy at all in the mortgage business? Thank you.

Okay. Very good. Quite interesting questions. There is in the income -- the fee income doesn't have any significant non-recurrent element. I think that that is just the reaction of the market. The market is performing very well and the strategy that we have maintained for the last few years of concentrating a lot in the development of the fees and the fee income generating part is showing good, good results. And there shouldn't be any change in this trend in the near future.

On respect of mortgages, we are very pleased of the interest that has been shown in Guarnarad. Very important institutions of the country and multinationals have done a very interesting push for the Bank and it came to be sold at what appeared to the analysts of the market to be a very good price. I think that it speaks well of the perception of the market, not only by us, but by everybody.

Certainly, it is going to send an increase in competition. We see that evolution very much in line with what we were expecting. If you remember the arguments that we presented for supporting the integration, the merger that we did with Conavi and Corfinsura, one of the main justifications of it was that the mortgage market should be expanding in the near future. The fact that we will have new participants with good portfolio, with a lot of assets into this market in private hands, I think it is good news. That will put new competition, new activity into the market and that will help us a lot in changing the attitude of the consumers that have been quite afraid of the perils(ph) of long-term financing of housing. So, we will be - - they will keep us busy but I think that the general effect on the market is going to be positive, Louis. Thank you.

Excellent.

Your next question comes from the line of Mario Pierre (ph).

Good morning, everybody and congratulations on strong results. I have a couple of questions. First is a follow-up on fee income. Yes, we see very strong growth, widespread growth but I was wondering, that ATM fees fell 17% quarter on quarter, so I just wanted to get a little bit of clarification on why that happened and if you are feeling that this is increased pressure from regulators or what caused that? The second question is on the - - on your effective tax rates is quite low this quarter, about 13%, where do you see your tax rate normalizing? And then finally, on loan growth you showed to us a slide that -- definitely that the economy is performing quite well. How fast do you think your loan portfolio can grow over the next couple of years? Thank you.

Very, very important questions. I will start by the two last questions and I will ask Sergio to comment after that on respect of the ATM fee. The tax rate, we believe that we are going to be this year in total tax rate of about 20%, which is in line with what we presented in one of our projections of the benefits and the shelter from the point of view tax rates of the integration.

On the matter of the growth of the economy and the projected growth of loans, we are optimistic. We believe that the growth of the loan portfolio is going to keep at a multiple of the GDP growth. We see the GDP increasing a little bit for next year and we will consider that it would be very reasonable to believe that we will be able to grow at around 14%, 16% in our loan portfolio during 2006. Unless anything happens, anything unexpected happens with the economy, I think that that wouldn't be too difficult to achieve. Now, Sergio, could you comment on the ATM fee.

Certainly. Mario, one of the biggest increases in fees have been through the stockbrokers houses. They have been performing extremely well and our investment banking operation in Concour (ph) is doing quite well also. So both of them are really pushing fees up. If you compare it on a year-to-year basis, growth is still 20%, which is much normal if you want to call it so. So, it has been a very good quarter in terms of these two entities that I mentioned.

Perhaps, Mario, you also referred to what has been know publicly about the interaction with the supermarkets and retailers with the matter of fees on plastic money and credit cards and debit cards. That is certainly having an effect on us, but as you saw in the presentation, we are maintaining a very strong pace of growth. So, we believe that one thing is going to relate, to compensate, with the other and the normal trend is not going to be that significantly affected.

Okay. Let me follow-up in two questions. On the tax rate, you mentioned 20% for this year. Where do you expect the tax rate in 2006? Because I think that most of your tax benefits would be realized already in 2005. And then, on the loan growth, you mentioned 14% to 15%. Is that growth in nominal terms or in real terms?

Okay. The tax rate, you are absolutely right. Most of the benefits are going to be gained during the first year and next year we will be getting a normal rate of taxation of about 30%, which is still a lot lower than the regular taxation of Colombia. As you remember, we have the benefit of stable tax conditions that was gained by Colombia some years ago, and that is going to produce some production. And also, the operation in Panama is free of taxation, so that also helps a little bit.

So it will be reasonable to expect something close to 30% for 2006. Now, on the growth, yes, I will believe that that will be on real terms.

Okay, thank you very much.

You're very welcome.

Your next question comes from the line of Paul Tucker (ph).

Thank you and good morning everybody. I wonder, you gave some numbers and maybe I didn't fully understand, but could you clarify on the trading gains? What was the total amount of trading gain that you booked in the quarter? And then could you also illustrate what that gain would have been had you not made the switch in your portfolio towards trading securities? And at the same time, could you also let us know why you decided to make that switch?

And then the second question is just regarding the new provisioning requirements from the Central Bank. Again, I wonder if you could just fully clarify what that means for you over the next 21 months in terms of timing of extra provisions?

Okay, yes. On the first question -- actually what we do is that we, on a year-over-year basis, we re-classify our portfolio. It's not - I would say it's not a strange decision that we have made. It is a thing that we do by this time of the year every year with the classification of the portfolio.

We move some of our assets from to trade in from available for sale. And that's what (inaudible - accent) that it takes some money out of our equity and into our profits, which again, go to increase the equity. So it shows a little bit in the profits and what it shows as we mention in that chapter was about 40 billion pesos, about 40 billion pesos was the result of that movement.

It appears that some increase in the interest income of our investment securities. Now, on the other hand, the impact of the 2% on the regulation action in Colombia, it is not the Central Bank that regulates that. We have our separate institution which is the Superintendency of Banking Code. But if it's going to be applied in the next 21 months. I mean, it's going to be applied in the following manner, it will be applied 1.7%. Well, in other words, 70% of the increase is going to go in the next 12 months and 30% of the increase is going to go in the 9 months following that.

It then depends on how much we go our loan portfolio during the coming year and I think it's some regulation that is understandable and speaks well about the caution of the regulator and the supervising body in Colombia. We are leading through a good expansion process and we foresee that as a reasonable, understandable measure. We just are going to apply it in accordance with that regulation that I just described.

And just a follow-up on that one, just to remind us of the total amount then, you need to take 160 billion extra, you think?

Okay. We are very well provisioned. We have the bank provision well above the legal tender. And then you can see -- if you have the presentation, you can see the total amount of our loan portfolio right now, which is already covered with 1%, so we have to make 7 points of that. The total loan portfolio at this time comes - one second - total loans is 17 trillion, 245 billion pesos. So we will be putting 0.7% during the next 12 months in addition of provisions so of that plus the goal. Plus the goals of that.

Okay. And those are tax deductible?

Unfortunately, not. That's why we are not going to anticipate any bump on -- we may move on that. We will be doing on that in accordance with the regulation. We don't plan to anticipate it because as I mentioned, we are already above the legal requirements, so there is no need to hurry up.

Okay, thank you. And maybe just one further follow-on question. In the quarter, I think you took around about 20 billion of special merger expenses. Now, if I go back to the presentation that you had around the time of the merger, you gave a very detailed breakdown of merger expenses year by year, well, for integration, technology building costs and so forth. Do you expect to take those expenses in one line in the income statement or do you think - will they just be spread throughout, you know, general personnel costs and so on?

Most of them are going to be presented as merger expenses and I believe that that will ease the job for you to -- in understanding the balance sheet. Of course, it becomes a little bit difficult after a while to recognize what is directly responsible for -- from the integration point of view on what is the normal movement of the bank. But those expenses that are related to integration, we'll try to present them in our single line.

Right. And so would it be reasonable to think of 20 billion per quarter as a reasonable estimate of the ongoing level of charge?

It's not going to follow a regular pattern in the coming months. I will want to think through that yearly estimate that we made in our past presentation because right now for instance, in which we are presenting a lot of the expenses are related with some purchases, some expenses on technology and mostly some expenses on salary and in the identification of people that were laid off. But further on, we have - we will have some real stage and some technology investments and expenses, so it's difficult to project them in a month-to-month basis. That is not going to be following a very regular pattern.

That's very good. Thank you very much.

You're welcome.

(Operator's Instructions) Your next question comes from the line of Alex Lyon (ph).

Yes, good morning. I would actually like to ask a couple of questions: one regarding the funding mix and what the plans are and what the exact effect of the merger is in this funding mix and the action trust expense going forward, what do you expect?

And on the other hand, there have been some measures for quality of loan portfolio and capital and equity that have been probably a bit worse if I may say after the merger than before the merger. So I just wanted to gauge what is your level of comfort or target going forward for these measures?

Okay, very interesting points. First, on the funding mix, yes. We believe that this improvement of the funding mix is the result very much of the measure. Conavis' network is extremely efficient in capturing savings accounts and capturing them at a low interest rate.

Actually, we have so far maintained a process of improving the costs of our savings accounts for the whole entity. It has declined a little bit. It was - if we say look at the cost of our funding, the total cost of our funding has declined slightly as a result of this positive movement in the volume and in the interest recognized on savings accounts.

We will try to maintain that in the near future and we expect that the liquidity conditions of the economy will remain stable -- are going to remain stable. We are going to manage to success on that. Now, on the quality of profits, it's very good that you asked that. That requires a bit of explanation.

Certainly, when we merge with the portfolio of mortgages, we find that the past due loans in the portfolio of mortgages was much higher than what it was in the total number of loans apart of that previous to the merger. And then the merger presents a deterioration on that figure. On the other hand, it's important to say something that we haven't mentioned.

It is that we usually every year make a charge off in the month of March and in the month of September. This year, because of the situation of the merger, we had to postpone the cleanup, the charge-offs, to the month of October. So it will be April to appreciate that in the non-consolidated figures that we are going to present next week on Bancolombia's operation. But we feel comfortable.

Actually, we knew that this further diversification of our portfolio will produce increase in past due loans, but on the other hand, we believe that it is reasonable without changing our policies to have a higher level of past due loans when we have a more diversified portfolio with a very good participation of mortgages into it.

And let me tell you that the weight of our mortgage portfolio in our total loan portfolio is about the same that it rates in the Colombia economy, the financial sector as a whole. So it gives us the possibility of being quite aggressive in the presentation of opportunities for growth in mortgages, and also, in the design of problems(ph) that try to present a better risk of credit for our customers. We can assume more risk of credit in our portfolio because of the diversification of our assets.

Okay, thank you. And in terms of capital of equity, where do you see that going? I mean, would you like to go back to levels of 13% that you had before?

Well, I think that we are moving very well to take the opportunity for growth of the economy. And our target is very much in line with 12.5. We would like to go up to - out on 12.5 which is the figure that we internally present as adequate.

Excellent, thank you.

Okay, Alex.

Your next question comes from the line of Juan Gomez (ph).

Yes, good morning. This is related to the efficiency ratios. If you could please provide an update on the savings in costs that the bank expects from the merger and how will this reflect in the efficiency ratios in coming years?

Okay, yes. The efficiency has moved probably during the last quarter, but we do have a lot of expectations in the effects of the merger. If you look at the figures that we presented in picture 18, and you take them on an accumulated basis, actually we are talking of 50% and less than 6%, respectively, in our efficiency wagers. But if you look at the presentation that we move - that we did last quarter, what we were expecting about synergies of the merger, then you can see what the possibilities are and what objectives we are setting.

That is what the administration of the bank is attempting to capitalize on and to gain, a higher efficiency that is going to be appearing gradually as the merger develops and grows in the middle of next year. We will be showing what we have been able to gain into that.

Okay, thank you.

Your next question comes from the line of Deanna Delgado (ph).

If I'm not mistaken, I heard that you expect that the economy will keep growing next year. Could you give us some predictions of how much you see that growing next year? Is there any way you can capture it in terms of net income or whatever? And what factors could be behind the growth that you expect for your bank next year?

Okay. Actually, we believe that the current growth of 4% has been impacted positively by what has been known of the last quarter, which was more in the line of 5%. That is a very good development and we believe that that could be in line with what is going to happen next year.

But most of the analysts have still maintained silence on respect to the projections of next year. That's something that we still have to wait on how well they are going to come. When the TSC, the - sorry, the free trade agreement is going to be signed and what are the terms of that agreement at the end that are negotiated.

So there is still some elements that we have to weight, how we're going to vote(ph) to be able to get a prediction on the growth of next year. But what I was trying to explain is that we are optimistic. We don't see any reason why the upward trend that was presented in last quarter is going to be diminished. We believe that that is going to be the line of evolution, but we still don't have a precise figure of our expectation of next year's growth.

At this time, there are no further questions.

Okay, thank you. I want to thank you again for your presence in this conference call in which we presented our results for the third quarter and the advancement of our process of integration. As usual, I will like you to know that if you have further questions, you can call Mauricio Botero (ph) or Jaime Velasquez or Sergio Restrepo at the telephone numbers that appear on the press release that we distributed as the basis for this conference call. Thank you and goodbye.

This concludes today's Bancolombia conference call. You may now disconnect.