Grupo Cibest SA (CIB) 2006 Q2 法說會逐字稿

Good morning and welcome to Bancolombia second 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, the Executive Vice President, Mr. Sergio Restrepo and the Financial Vice President, Mr. Jaime Velasquez and the Risk Management Vice President, Mr. Juan Carlos Mora.

At this time I would like to turn the conference over to Mr. Londono. Please go ahead sir.

Thank you. I wish to thank each and every one of you for joining us in attendance today’s conference call, which we have prepared to share with you Bancolombia’s results.

I would like to remind you that we have a slide presentation in our website at the Investor Relations page, that we recommend you to follow if you can. At this time I would like to introduce Mr. Sergio Restrepo, Executive President, who is going to explain briefly the latest parts of the Columbian economy and financial markets. Go ahead Sergio.

Thank you, good morning.

After the [EK] high growth of 5.13% seen in 2005, the economy grew 5.23% during the first quarter of 2006. Investment and consumption were the main sources of GDP growth, increasing 26.8% and 4.6% respectively. GDP growth is expected to remain healthy for the rest of the year. Bancolombia expects economic growth for 2006 to be 4.8% with an upward climb.

Colombian inflation kept a downward trend during the first semester of 2006. [PPI] annual variation was 4.32% in July, while by the end of 2005 inflation was 4.85%. Central Bank inflation target for this year is in the range between 4 and 5%. Consequently, the tightening in monetary [depository] could be maintained in a gradual space. In that sense interest rates could continue being relatively low supporting lending and investment growth for the second half of the year.

Second quarter for Columbian financial markets [inaudible], mainly due to external factors, the Columbian peso which had appreciated by 1.4% in the first quarter ended the quarter with a year to date appreciation of 15.3%. It is important to highlight that though as of today the year to date appreciation is 6.66%.

As you can see in slide number five the benchmark, the TES 2020 yield, rose from 7.62% at the end of the first quarter to 10.50% as of June 30, 2006. However, as of today this bond is being traded at 9.73%.

After this quick review of the Columbian economy and the capital markets, I would turn to Mr. Londono again, who is going to go over the Bank’s results.

Well, as Sergio mentioned, the Columbian capital markets were variable and high during the quarter. And the Bank’s positive operating results for the second quarter were seriously affected by the debt securities price decline. As a result of the investments mark to market, the Bank’s presented net loss of COP158b from the investment portfolio during the secured quarter. Net income during that period amounted to COP69b or what is $0.147 per ADS. Accumulating COP283b during the current year, which is $0.603 per ADS, which represents a decrease of 32.8% compared with the first half of the year 2005.

However, the Bank’s loan portfolio was very dynamic. Net loans increased 25% in a year over year basis with very positive figures in all segments, including obviously mortgages. Similarly, interest on loans presented a yearly growth of 7.7% during the first six months of the year.

The deposit mix clearly improved during the first half of the current year. Total deposits increased 20%, while interest on deposits decreased 3.4% compared to the same period of last year.

Net fees and income from services kept up the growth pace that has been typical for the last years. They amounted in the quarter to COP416b -- sorry, for the first half, increasing almost 20% compared with the same period of 2005.

And finally for these highlights, I would like to also mention that despite the financial business growth during the first six months of the year, operating expenses increased 5.2%, which is quite below the Bank’s asset growth rate.

Let’s go into more detail on the Bancolombia’s results. The balance sheet at June 30 show us, as we can see in slide number eight of the presentation, that Bancolombia’s total assets increased 17.2% over the year. This is mainly the result of the loan portfolio growth which was 25%, while the debt securities portfolio increased only 4%. You can also see the annual growth of loan that has allowed them to represent 63% of the total assets of the Bank when a year ago they were only 59%. Similarly, debt securities went from representing 26% of the total assets at the end of the first half of 2005 to represent 23% in this year.

We illustrate in slide number nine that we have had a year positive in the loan growth figures in all segments, as we mentioned before. Corporate loans were up 21.9%. Retail loans continued to be very dynamic growing at slightly above 30%. Financial leases to both corporate and small and medium size clients grew by 27.3% and mortgages increased 18% over the year. I should mention that if you take -- if we take the annualized rate of mortgages for the last quarter, for the second quarter, mortgages are growing about 49% during that quarter.

It is very remarkable that mortgage loans grew at this pace for the first time since the crisis of the nineties. This is a direct result of the new commercial strategy led by Bancolombia, which is basing a 1% per month fixed rate 10 year mortgages that we implemented four months ago, and which is just starting to have a positive effect on these type of loans.

In slide number 10 you can see that the Bank’s [new] loans as a percentage of total loans reach a level of 2.7% and the coverage ratio is 130.7% on June 30 of this year. Additionally, the ratio of allowances to loans classified C, D and E was at -- all of the same level, 129.6%, very similar to the ratio of allowance to [private] loans. This is the result of both the positive evolution of our clients and the Bank’s rigorous policy of charge of loans that are fully provisioned. Charge of loans for the first quarter amounted to COP57b.

In slide number 11 you can see the dynamic of the debt securities portfolio, which at June 30 had an internal rate of return of 8.6% with a total duration of approximately 23 months. It is important to remember that our average cost of deposit for the second quarter was 3.6%. These calculations are based on the total Bank’s portfolio with Panama portfolio, which represents about 94% of the total portfolio of the consolidated organization.

Now, on the liabilities we would like to see -- you to see in slide number 12, how the Bank deposit mix continues to improve. The deposit mix reached on average weighted cost, as I mentioned before, of 3.64% during the second quarter, the lowest since the merger took place. Checking and savings accounts increased 30% and 29% respectively, while time deposits increased only 7% on a year over year basis.

In slide number 13 you can see that Bancolombia’s shareholders’ equity was stable during the quarter, increasing 9% over the year. Or rather its losses on available for sale debt security totaled COP56.3b as of June 30, 2005 due to the decrease of securities prices mentioned before. You can also see that the Bank’s consolidated ratio of technical capital to risk weighted assets dropped to 11.3%, due basically to the solid growth of the loan portfolio. Nonetheless, it is still well above the Colombia’s regulatory capital of 9%.

On the income statement, as we mentioned before, net income for the second quarter amounted to COP69b, decreasing 71.7% compared with the same period of 2005.

If we look at the net interest income in slide number 15, it shows that during the second quarter net interest income amounted to COP183b, decreasing 65% compared with the same period of the previous year. Interest and loans increased 8.1% but interest on investment securities dropped 169% due to the [Sovereign] bond rise and decline. However, the Bank partially hedged this drop of prices with a long foreign exchange position with -- that represented a gain of more than COP60b during this period. That gain is accounted for in other operating income.

In slide number 16 we want you to see the net interest margin breakdown and how the drop is explained by the bond prices effect. During the quarter the net interest margin for the loan portfolio was 8.7% and for the debt investment portfolio was minus 12.6%. These figures not only include the mark to market losses, but also the accurate interest on investments.

Net provisions for loans and interest amounted to COP67b, increasing 4.7% compared with the previous quarter and 53.6% compared with the second quarter of last year. These provisions include approximately COP8b that correspond to the cost of the yield provision and regulation that we have explained in the previous conference calls.

Fee income stays inline with the expansion of the credit risk. Net fee income amounted to COP210b, increasing almost 20% over the year. As you can in slide number 18, during the quarter net fees represented 51% of the Bank’s operating expenses.

In slide number 19, you can see the fast growth of the Bank’s businesses of private label credit card as a result of our joint venture with the retailer, [Exitor]. Regulatory cards billing also doing very well, increased 16.6% resulting in a 20.7% local market and the number of outstanding credit cards increased 14.7% resulting in a 15.5% local market share in plastics.

In slide number 20 you can see the operating expenses and how the Bank’s cost control policy is starting to show a positive effect. The operating expenses were stable during the quarter and increased only 6% during the year, totaling COP412b. As a result of that, the Bank’s efficiency measure as operating expenses over average total assets was 5.63% during the quarter and 5.58% during the first half of 2006. On the other hand, operating expenses, the net operating income efficiency ratio went up to 88.7% during the quarter. In a six month accumulated basis it reached 68.7%.

We have then reviewed our results and we show this positive trend of the growth of the core business of the Bank. And we are literally showing that the Bank is taking advantage of the sound economic scenario of the country.

At this time I would remind you to ask any questions that you may have.

Rebecca, would you please ask the attendants if they have any questions.

[OPERATOR INSTRUCTIONS]. And your first question comes from Mario.

Good morning. I have two questions. The first is on the loan growth and you show the Bank has been posting very strong loan growth. But I was surprised this quarter with the strength in lending to corporates. Corporate growth had been sluggish in the previous quarters, just wanted to understand the dynamics of the growth in the corporate portfolio this quarter.

And then the second question is related to your cost control. As you mentioned, despite all the increased business activity, we’re seeing costs remain relatively stable. So, I wanted to know what is your outlook and if this reflects also some cost savings already from the [inaudible] margin? Thank you.

Okay, yes, Mario, thank you.

You are absolutely right. We are very pleased to see that the corporate demand of credit is picking up. As you remember, we have been mentioning the last quarter that we were experiencing a very low demand in the corporate area, except for the leasing operations. But now we are very clearly seeing an increasing of the demand of corporate sector. That I believe is inline with the good time that the economy is living and the good prospects of growth that the business community is perceiving for the country. We certainly hope that this is going to be the case for the rest of the year and we are perceiving a good demand for the coming months.

Now on cost control, we -- this is also a new development that we wanted to highlight. I think that the effects that we are showing are related to both. As we mentioned, some policies of cost control that we have been putting into effect for the last quarter that are showing good results. And also, some positive outcomes are for savings that are derived of synergies of the merger.

We believe that we are not going to experience very dramatic reductions in the future. But we certainly believe that we are going to be able to maintain costs stable, while the Bank’s total assets keep on growing and becoming more, therefore, making a favorable impact in deficiency of the Bank.

Okay. I just want to follow on and -- on the question on the loan growth. We note -- or we notice that loans are 17% already from the end of December last year, just wanted to get from you what is your outlook for total loan growth this year and next year.

Well, we are not certain of how much it could be. But right now more on the 20% than on the 15% that we were saying at the beginning of the year. We are a little bit more bullish now and we believe that a growth of about 20% could be something reasonable.

Alright then, thank you.

Thank you very much Mario.

The next question comes from the line of Ben Laidler.

Hello, good morning, two questions. One just following up on the corporate loan growth question previously, could you just talk a little bit about where -- which sectors you’re seeing particularly strong demand from and which sectors you’re not?

And the second question would just be on I saw very strong recoveries during the quarter. Is there anything one off in there or what would the normalized recovery of provisions be going forward?

Okay, one of the main components of the growth of corporate demand was the volatility of the capital markets. Certainly, that contributed a lot because some of the big private debtors have -- had to postpone the entrance to the capital market. But that could have been the reason for, as I mentioned, part of the growth of this quarter. That is not, certainly, the -- exclusive support of the [review of the market]. We expect that the corporations, particularly medium sized corporation, which are not really good for issuing in the market, are showing an increasing demand and that will be present for the coming months. There is demand in infrastructure, in transportation system, in communications, in sectors like that that I believe that are going to going far, lots of investments in the near future.

So, we believe that this growth of corporate demand could have some stability. And in this short term effect of the market I believe that the volatility is still going to maintain some of the private companies out of the market for a while.

That’s great. And just on the recovery of provisions, a big number in the quarter, was there anything one off in there? What’s the recurring number going forward?

Okay, yes. We had in the quarter a big recovery which was the [rise] of a payment of a municipal center. Cali had a big credit facility and they made a payment that allow or force us to reclassify that facility. And, therefore, we recover some of the provisions in there.

I don’t know what is going to happen in the future. But anyway the economy is doing well and we recover over 130%. So, we believe that we are going to keep a dynamic line of recovery and also a dynamic line of new provisions, because of the new regulations and things like that. So, we shouldn’t expect a deterioration or big movements in that line of net provisions.

Great, thank you.

And we expect certainly to maintain the coverage at around 120 to 130% as we have shown in this quarter.

Great, thank you very much.

You’re welcome.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Andres Jimenez.

Yes, good morning gentlemen. My -- I actually have two questions. And my first question would be for how long or how more do you have a non-operational income this tax provision? And how going forward are you going to have the possibility of keeping to actually increasing operating debt in the bottom line? That would be my first question.

And my second question would be are you seeing that the mortgage business in -- on the mortgage line, is that actually going to keep on affecting negatively your margin on loans going forward with this rate of 12.68% effective per year, or 1% per month? Is that going to continue or are you actually going to stop that going forward? Thank you.

Okay. Very interesting questions, both of them, let’s go into the first point.

Non-operating income that -- the one that you have mentioned, the one that you have detected, which is the rise of returns of tax provisions, we expect to stop, because actually the reason that we had that was because we were realizing losses in our investment portfolio. And we were recovering tax provisions. So, we certainly are very eager to lose that line of income in the coming months.

And we believe that this is what we are going to experience, because the volatility of the market, as you know probably much better than us, is diminishing and the rates and the portfolio that we are keeping are now very high. And we don’t foresee it’s a significant adjustment hopefully in the future. So, we are going to have profits on that portfolio as we are expecting and our provisions are going to be inline with the results.

Now in mortgages, you are right. It is absolutely true that the new program of mortgages and the offering of this program to all debtors is having an impact on the total rate of our loan portfolio. That effect has been almost done at the moment, because most of the portfolio is now at the new rate and obviously right now what we have is the growth. But even though it had an effect, the growth that we are deriving for that is very dynamic and the rates are very good, because we have a rate of interest, which is at 12% -- 12.5% and the cost of our funding is 3.5%. So, the margins are absolutely right.

And there is an important effect on this new program at this new rate, which is that we allow the mortgage portfolio to grow. The people -- before the market was pre-paying mortgages as soon as they could, because the rates were too high. Right now, pre-payment is being reduced almost to zero and the growth is at 49% annualized rate. And I think that is going to be even higher hopefully in the coming quarter. So, this more than justifies the reduction, which I repeat is mainly already being taken and impacted the total rate of our assets.

Okay, thank you.

You’re welcome.

[OPERATOR INSTRUCTIONS]. And your next question comes from [Arthur Gomez].

Sir, is it fair to say that the last quarter was, despite all the volatility in Columbia, was a great quarter other than your mark to market on your investment portfolio, because it seems like everything else had pretty good results attached to it?

Absolutely. I will subscribe absolutely that statement. We are very happy with the quarter. It was a very good quarter and the only problem was something which has entirely out of our management, which was the volatility of the market. But in the things that we can manage I feel confident that we have obtained good results and the management has been correct.

Let me ask you just a follow up, is it still true that the investment portfolio has an average life -- I think I was told earlier by the Bank that the average life of the investment portfolio is about 28 months, A. And B., during this period of volatility did -- have you added to that portfolio when you thought the yields on those instruments were attractive?

Okay, yes. We -- the total -- the duration of our portfolio is 23 months, a little bit below. And we have not added. On the contrary, we have reduced drastically all our portfolio and for that we are just taking the opportunity of this increase in demand of credit. So, we are doing what we have always wanted to do to change portfolio investment for credit portfolio.

Very good, sir. Thank you very much.

No, you’re very welcome, Arthur. Thank you.

Right, thank you.

Your next question comes from [Fabiana Alana].

Hello, this is Fabiana speaking. I had to step out from the call for a while, so I apologize if you have answered the questions I have, the first of which is credit growth. What should we take into account for the year after the strong growth we saw year to date?

And second, on the bond portfolio after the recent measures from the Columbian Government, some actions on the security in the market, what are you expecting for the third quarter?

Okay. Your second question on the loan portfolio and the impact on the -- from the securities market, I can go only to [it]. I will later ask you to repeat to me the first question, which I didn’t get adequately.

We believe that the loan demand is going to be dynamic at first and even though the market is -- equity market is doing well, I don’t see that the main debtors are going to be able to capture that opportunity, making new programs of equity or going directly to the debt market. I believe that we are going to perceive an increase of demand and that the Bank is going to benefit in the short term. But the most important thing is that that is not the only factor behind the increase in the demand.

I think that the main factor that is determining the increase of the demand of the corporate [case] in particular and in the loan portfolio in general, because the consumer portfolio is the most dynamic, is the growth prospects of the economy. I believe that the 30% growth in consumer credit is a mixture of the confidence of the people that is showing that they can get into buying durable consumer goods and things like that using credit.

And in the corporate side, just remember that we are -- we hope that a close state of time in our free trade agreement, and the companies, and the producers, and the business community is getting ready to take the opportunities which are offered from the loan portfolio.

I hope that I answered your second question and if we -- if I can ask you to repeat the first one please.

Don’t worry. It was only on the loan growth in the loan book -- the growth in the loan book for this year. I think I missed your answer.

Okay, yes. We mentioned before that we were expecting that the growth for the year is going to be more in the 20%. We were predicting at the beginning of the year, something 15 to 17%. But now we are a little bit more bullish and I -- we believe that it is safe to predict a growth of about 20%.

Thank you very much.

No, you’re very welcome. Okay?

At this time sir you have no further questions.

Okay, thank you. I want again to thank you for your interest in this conference call in which we presented the second quarter results of Bancolombia. And if you have any further question I want to remind you that you can call the officials of the Bank, which are registered at the bottom of the first page of the press release that you received yesterday -- this morning -- yesterday morning, sorry.

Thank you and I hope to hear from you in the next quarter.

This can close today’s conference call. You may now disconnect.