Grupo Cibest SA (CIB) 2006 Q1 法說會逐字稿

Good morning and welcome, everyone, to Bancolombia First Quarter Year 2006 Earnings Conference Call. Today’s call is being recorded. With us today we have the President and Chief Executive Officer, Mr. Jorge Londono, Executive Vice President Mr. Sergio Restrepo, Financial Vice President Mr. Jaime Velasquez and Juan Carlos Mora, Risk Management Vice President. At this time I would like to turn the call over to Mr. Londono. Please go ahead, sir.

Good morning. I wish to thank each and every one of you for your interest and attendance to this conference call that we have prepared to share with you Bancolombia’s result. I would like to remind you that in our Investor Relations section of our website Bancolombia.com there is a slide presentation, to which we will be referring during this presentation.

At this time I would like to introduce Juan Carlos Mora, Risk Management Vice President of Bancolombia, who is going to go through the presentation of the latest facts in the Colombian economy. Go ahead, Juan Carlos.

Thank you, Mr. Londono. Good morning. At this time I would like to say that during 2005 the Colombian economy had the best performance in GDP growth of the last decade. The economy grew 5.13% in 2005, results not seen since 1995 when the economy grew 5.2%.

This entire year is explained mainly by the astonishing growth in investment, which led to an investment to GDP ratio of 23.1%, the highest since 1995, and to an increase in the level of GDP that improves the outlook for long-term sustainable growth.

Colombia’s economic recovery appears likely to continue over 2006 as sentiment remains favorable, supporting solid growth of investment and consumption. Analysts’ consensus expects economic growth for 2006 to be around 4.8%.

In general terms, the fundamental economic variables have behaved positively. Colombian inflation kept a downward trend in the first quarter of 2006. CPI [inaudible] valuation was 4.11% in March, while 2005 inflation was 4.8%.

Central bank inflation target for this year is in the range between 4 and 5%. This meeting on Friday, April 28, the Central Bank raised interest rates by 25 basis points, setting overnight rate at 6.25%. The move was necessary to keep inflation under control as the economy expands at its fastest rate in a decade.

In regard to the financial markets, there has been an increase in the peso/dollar exchange rate and an increase in the sovereign debt yields. Since the end of February the Colombian peso has lost more than 4% and the Colombian bonds yield has increased almost 180 basis points. This was caused by the institutional investors’ portfolio position towards foreign exchange, given the movements in the U.S. bond rates.

We expect [the FDA] between Colombia and the United States to consolidate over the long run. This should have a positive effect over competitiveness and productivity, and be a promoter of foreign-backed investment in Colombia, in order to exploit our relatively good endowment of human capital and our strategic geographic position as an export platform.

In the Congress elections -- in the Congress elections Uribe’s supporters won the majority of the seats, which should consolidate approval of the structural reforms.

After this quick review of the Colombian economy, I will pass to Mr. Londono again, who is going to go over the Bancolombia’s results.

Thank you. Before going over the main points of Bancolombia’s results, we want to highlight two important factors that should be kept in mind when reading the first quarter report.

First, comparisons must be made between the same quarters of different years, because the seasonality of financial businesses in Colombia. Second, the unconsolidated results of the month of March, released on April 12, 2006, include dividend income from the bank’s subsidiaries, which obviously we have eliminated when consolidating the financial figures. As a result, during the first quarter of 2006 consolidated net income was lower than unconsolidated net income.

Additionally, we think it is important for you to know that the government repaid Bancolombia the total loan facility extended to it, which amounts to $250m, thereby affecting our corporate loan growth figures. With that, we would like to go to the numbers.

We have the following highlights in this report. Net income for the first quarter of 2006 amounted to COP214b, increasing 20.5% as compared with the COP175b of the pro forma for the same period in the previous year.

The bank’s loan portfolio keeps outperforming the GDP growth. Net loans increased 10.5% in a year-over-year basis, with very positive figures in retail, and small and medium-sized enterprises and financial business.

On the other hand, the investment debt securities portfolio increased 11.8% over the year.

Regarding the income statement, interest on loans increased 7.2% during the first quarter of 2006 compared to the first quarter of the last year, while interest on investment decreased 9.8%, explained by the Colombian bond prices again. Nonetheless, net interest income increased over 10% in the year.

Net fees and income from services presented very positive figures. They amounted to COP206b during the first quarter, increasing 20% as compared to 2005. The result of this figure [inaudible] with an annual return on equity of 25.1% and an annual return on assets of 2.8%.

Let’s go in detail on the figures of Bancolombia for the first quarter. As you can see in the slide number seven of the presentation, we had positive growth figures over the year. Bancolombia’s total assets increased 9.8% over the year. Net loans increased more than 10% and investment-based securities increased almost 12%.

In the slide number eight you can see the positive year-over-year growth figures in all types of credit. Corporate loans were up only 0.9%, less than 1%, because of the loan repayment we mentioned before. But we -- but would have grown approximately 6% if we take off that effect of that repayment.

Retail loans continued to be very dynamic, growing 24.5%. Financial leases towards corporates and the small and medium-sized enterprises grew 26.4%. And this is quite remarkable because [CP] is already above a growth of about 50% in the average for the last two or three years. And mortgage loans increased 7.3% in an annual basis in relation with the first quarter of 2005.

As we mentioned during the last conference call, Bancolombia implemented a new commercial strategy, based on a 1% per month fixed rate 10-year mortgages, which is starting to have a positive effect on this type of loan.

Besides this, Bancolombia has also managed to maintain a good commercialization of all its parts, showing profit at [inaudible].

As shown in slide number nine, the bank’s past due loans, loans as a percentage of total loans, reached a level of 3.1% with a coverage ratio of 125% at the end of March. Additionally, this ratio of allowances to loans classified C, D and E, that is non-performing loans, was at the level of 125.8%, very similar to the ratio of allowances to past due loans. Charge of loans for the quarter amounted to COP31b.

We would like to see on the slide -- get to see on the slide number 10 how the bank’s deposit mix has changed during the last five quarters. The deposit mix reached an average weighted cost of 3.67% during the first quarter of 2006, and that is a very favorable decline in the cost of funding.

Checking and savings accounts increased 22.5% and 3.3% respectively, whereas time deposits decreased 3.4% over the year in a time in which we have considerably increased the duration of our funding to time deposits.

In slide number 11 you can see that Bancolombia’s shareholders’ equity went down 5.3% over the quarter. This is due to the dividend payment for COP369b approved during the shareholders’ meeting at the end of the quarter. As you probably remember, the issue was dividends of COP2,032 per ADS per year, and that is entirely accounted for in that bit. Nonetheless, this represents an increase of 21.3% of our equity as compared with the first quarter of 2005.

Unrealized gains, on the other hand, on investment debt securities increased 18% over the year, amounted to COP51b at the end of March.

You can also see that the bank’s consolidated ratio of technical capital to risk-weighted assets reached 12.7%, well above Colombia’s regulatory capital ratio of 9% and in line with our long-term standards and goals.

We have -- as we have said, net income for the first quarter amounted to COP214b and represents an increase of more than 20% compared with the same period of 2005. You can see the evolution of our net income in the slide number 12.

Slide number 13 shows that during the third quarter of 2006 net interest income amounted to COP458b, with an increase of almost 10% compared with the same period of the year 2005. And this was a result of an increase of 5.7 in total interest income and a slight decline in the total interest expense.

Net provisions for loans and interest amounted to COP64.2b, increasing 46% compared with the previous quarter. These provisions include approximately COP50b that corresponds to adjustments to comply with the new provisioning regulation that was explained previously. It is a regulation that forces us to make provisions in new loans of 2%.

On the areas of fees and services income, contributions to income from the various sources of fee generation continued to demonstrate a positive trend. Net fees amounted to COP206b, increasing also 20% over the year, as you can see in slide number 15. This fee income represented 50% of operating expenses and 96% of the bank’s net income. On a quarterly basis, net fees decreased 3.1% due to seasonality.

In slide number 16 you can have appreciate Bancolombia’s credit card dynamic, which has presented a healthy growth. There’s been an increase of 22.3%, resulting in a 21.5% local market share. And the number of outstanding credit cards increased 13.1%, resulting in a 15.7% local market share.

As we have mentioned before, Sufinanciamiento, our consumer finance subsidiary company, is working with the retail chain Exito, which is the largest retailer in the country, in a joint venture to sell private label credit cards. The result of this effort can be seen in the growth figures of this slide number 16, not only in outstanding cards, which are growing faster than regular credit cards, but also in total billing.

Other operating income totaled almost COP85b during the first quarter, increasing over the quarter due to non-recurring events. First, the bank sold through the Colombian Stock Exchange a part of the stake it held in Corfinversiones, now Compania de Suramericana de Inversiones, which was received from the spin-off of Corfinsura. Since Colombian regulations do not allow us to have equity investments in non-financial companies, the Superintendency of Finance gave us a term of two years to sell these holdings.

Second, dividend payments, mainly from Proteccion, Concesiones CCFC and Titularizadora Colombiana, amounted COP19.5b.

Third, due to the sale of Abocol by our investment bank company Colcorp, previously disclosed on January 2, 2006, the revenues from commercial subsidiaries are not entirely comparable.

In slide number 17 you can see the operating expenses increasing just 4.3% during the year, amounting to COP409b. However, on a quarterly basis it registered as a 12.7% increase, due to the fact that the fourth quarter 2005 figures incorporated the sale of Abocol by Colcorp, as we mentioned before.

Finally, in slide number 18 you can see Bancolombia’s improved its efficiency ratios when compared with the first quarter of the last year for the same period of 2006. Operating expenses to net operating income went from 59.2% to 55.9%. And operating expenses over average total assets went from 6.2% to 5.4%.

This is the presentation that we have prepared for you. And at this point I would like to invite you to ask any questions you might have.

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

Good morning, everybody. I have a couple of questions. First, if you could provide us with an update of your merger integration? How is it going according to the plans that you presented to us about six months ago in terms of headcount reductions and integrating the branches of Conavi Corfinsura?

Second, according to my numbers, your net interest margin would have compressed, even excluding the lower securities gains in the quarter. So -- and I mean it would have compressed about 20 basis points from the previous quarter. I wanted to have an idea from you why that is happening. Is this a result of competition or how do you see the competitive environment now in Colombia? Thank you.

Okay. Thank you, Mario. Yes, just going into an update of the merger, we are happy with the advancement of the merger. We have reprogrammed the integration of the branches, because we wanted to give the bank the organization, the capacity to implement innovation in our commercial leg. One of the main innovations that we are -- were introducing was the mortgage market new program that we mentioned; we had a reduction in rate.

These handover activities in the small and medium market loans and in family -- in the family sending of money from abroad and the [inaudible], these areas have made it possible for us to take a little bit more time to integrate branches. We are planning to end the integration of branches by the month of November this year.

So we are happy in the sense that most of our -- or all of our expectations have been met. As you probably remember, we were not expecting a reduction in headcount. That was not the aim -- the central aim of our target for the merger.

So that has not been significant. On the contrary, due to the expansion of micro-credit and the expansion of mortgages, we have slightly increased our commercial force. And we are proceeding with also this increase. We are progressing on the integration of the network.

And right now, for instance, with this new program of mortgages, we are selling mortgages in the entire network. The Bancolombia network, who didn’t sell mortgages previously, from the beginning of last week is starting to sell mortgages very successfully. And this is a rather complicated product to sell, so we are happy with that.

Now, on the other question, you are absolutely right. The net interest margin is having a slight decline but we are experiencing a very solid growth of credit demand. I think, if you take a look at these areas and you take into consideration the repayment of the government that we mentioned, you can see that the demand is very solid in almost every -- in the entire portfolio of loans.

So I think that that is going to compensate one with the other. And we also are finding ways of funding the bank more effectively. So we don’t see any real risk of that.

Okay. So if you can then just share with us what is your loan growth forecast for this year?

Well, as you may well know, we have not the tradition of revealing our projections. But I think that you can take a look at the Colombian economy and, if everything goes as is planned, we believe that there might be a good growth. There shouldn’t be any reason why it shouldn’t be at around 15% for this year.

Okay. Thank you very much.

You’re very welcome, Mario.

Your next question comes from Fabiana Oliver.

Hi, how are you. Hi, everyone. Thanks for the call. And my question is on the recent increase in interest rates. And I am sorry, I was late for the conference call, so I don’t know if you comment on that. But if we are going to see any relevant impact in the second quarter on the debt portfolio?

Yes, Fabiana. We have experienced an increase in the interest rate of our sovereign debt in the recent weeks. And that is a result of the movement of institutional investors to recompose its portfolio to more -- to a higher percentage of U.S. dollar denominated investments, because of the increase of the credit rate that we have been seeing. And that has had an impact on the Latin American market, in Colombia in particular.

We also believe that there shouldn’t be any reasons why these profits should become something very big. And that I don’t think either that it is going to have a strong impact in the entire system of interest rates in the country. There might be slow increases in some of these that we charge on loans, but nothing too significant.

Okay. Thank you.

You’re welcome.

Your next questions come from Ben Laidler at UBS.

Hi, good morning. I’d just like to talk a little bit about acquisitions, non-organic growth. You put in a bid for Megabank, or you lost. Would you be able to talk a little bit about the thinking behind that, and what you hoped to gain from that acquisition, to what extent you feel that there are holes or gaps in your product portfolio? We have the privatization of Grand Banco coming up, just what you could potentially see out of that? Just a little bit -- and I guess, just on the regulatory side, how big do you think you can get in the Colombian financial system without the regulator becoming concerned, without potential demands for more capital etc., etc?

Okay. Thank you. Very, very interesting question. Yes, we placed a bid for Mega Banco and we didn’t went into pushing it too hard, because we had kept to the principal that we are going to make acquisitions that, in our view, are increasing the value of our shareholders. And, therefore, that application was an acquisition that would have given us some greater strength in consumer loans, and in micro-credit activity.

Which are -- this one is [inaudible] activity. It’s one that we have been developing and that they plan to develop. But it’s not a gap that we have in our portfolio. We already have very active areas in both of those businesses, the three I have mentioned.

Sufinanciamiento in consumer finance is very active and is drawing new businesses, and it’s very modern in the way that it’s facing this market. And also we have been trying to develop our new area of micro-credit, and we are strong believers that that is good for the bank and good for the country. And we will [keep on] doing this.

We -- your question implies and makes me -- or gives me the opportunity of making quite a strategic statement. We believe that, with about the 20% that the bank has in the Colombian financial market, our growth by solid acquisitions in Colombia is not only the most important alternative. It doesn’t mean that we should not look at the opportunities of acquisition.

I think that the management of the bank has the responsibility of looking at all those opportunities, and just thinking on how to perform them in a value-creating way. And we plan to remain in that way. But not necessarily that will be our preferred option for growth.

Right. If I could just get one follow up, have you looked -- have you been looking more at potential acquisitions outside of Colombia? Would you say that was more the focus today, rather than non-organic growth in Colombia?

Well, certainly from my side, but there is a sense of that much interest specifically in Colombia. We are forced to look outside the country. And that is in line with our perception that globalization is going on, but those are even more difficult. So we have to take our time at doing this.

At this moment, nevertheless, I would like to stress the fact that our main responsibility is to perform the remaining process of this merger successfully. And that is our main concentration at this time.

Right. Thanks very much.

You’re welcome. Thank you.

Your next question comes from [Arthur Barnett] [inaudible].

Sir, your earnings growth over the course of the last three quarters seems to be diminishing. In fact, the absolute earnings are diminishing, it appears. And if you strip out the performance of your loan portfolio, which you put directly into earnings, and just go to regular core bank earnings, has the momentum slowed or are you still seeing appreciation?

And then the second -- my second question is the 3.1% of non-performing. That’s up dramatically, since the merger obviously, but do you think that, in the background of the strong Colombian economy, is where you are going to remain or is that something that works itself down over time? Thank you.

Yes. Thank you for your question. In fact, you are absolutely right. If we look at the last three quarters, we can see that decline. But as we mentioned, there is a strong seasonality. And we therefore believe that it is more important, for comparison purposes, to look at the first quarter of 2005 and first quarter of 2006.

We don’t believe there is a decline in the good moment of the Colombian economy. Growth is going on at a similar rate and this is having increased impact in the growth of the demand for credit. So probably we are not going to see that growth close to 100% that we were experiencing in [leasing] activities in the previous two or three years.

But we are growing, on top of that, at a very healthy 20%. And we believe that there is a reaction of consumer credit and a reaction on new areas which are very profitable for the bank in the fee generation area.

So I think that, if the comparison is made in a year-after-year basis, we are confident that the Colombian economy is still giving us opportunities to grow and the bank is in a good position to take advantage of them.

Non-performers.

Now, with the non-performing loans, yes, we are at 3.1%. That is slightly higher than before. But we mentioned probably in our previous conference calls that the levels of 2, on just the slide below 2, that we had stated was not really in our model.

There is a slight deterioration. We are not worried about it. We don’t think it is a trend that is worrying us, or should worry us. And that’s how we have perceived that our [commerce] in the financial sector [and also] look at them.

Can I ask one final question, sir, if you don’t mind?

Yes, go ahead.

What return on equity did you have in the fourth quarter? And what return on equity is a realistic target for the bank, for the Group?

We -- our goal, as we have mentioned, is to have 20% return on equity. I don’t recall at the moment our last quarter, our fourth quarter of last year return on equity. Probably the fourth quarter was much higher because our financial -- because of the seasonality the fourth quarter is very high. The return on equity was 29.3% at the fourth quarter of last year. But, again, this has to be seen on the perspective of the seasonality of our quarterly results.

Thank you very much, sir.

You’re welcome.

There are no further questions, sir.

Okay. Thank you again for your questions and your interest in this conference call, in which we presented our first quarter results. We are showing that the bank keeps a good dynamic. It is obtaining the results in line with the expectations for the evolution of the Colombian economy.

If you have any further questions, I would like you to remind that you may call the contacts that are here in the first page of the press release that you received yesterday. Thank you and goodbye.

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