Grupo Cibest SA (CIB) 2006 Q3 法說會逐字稿

Good morning and welcome to the Bancolombia third 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, 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 call over to Mr. Londono. Please go ahead, sir.

Thank you. Good morning. I wish to thank each and every one of you for joining this attendance to this conference call which we have prepared to share with you Bancolombia's results. I would like to mention the slide presentation that is usually made available to you on the Company's Investor Relations website, which we strongly recommend you to follow during this call. At this time, I would like to introduce Mr. Sergio Restrepo, Executive Vice President, who is going to explain basically the latest facts in the Colombian economy and financial market. Go ahead.

Good morning. During the second quarter of the year, the economy grew almost 6%, driven mainly by investment and consumption. Investment reached a growth rate of 31.8%, while household consumption increased 5.3%. From the supply side, construction contributed the most to overall output expansion by growing 28.2% with respect to the same quarter of 2005.

After slight CPI increases and a 100 basis points central bank interest rate increase during the year, Colombian inflation reached 4.2%, very much in line with the inflation target for the year, which is in the range between 4 and 5%.

As you can see in the graph number five, bond prices recovered during the quarter. The most liquid bond, the TES 2020, was traded at 10.5% at June 30 and at 9.56% at the end of the quarter, and yesterday it closed at 8.95%.

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

We would like to highlight that the third quarter was a clear result of the Bank's strategy, focus on growth, reallocation of assets and lower exposure to debt securities prices, as we are going to show you in this presentation.

We are also very happy to have this conference call just after the last weekend, when we managed to integrate all the distribution and the operational platform of the new bank. This is a great event for all the people in Bancolombia. We were able to do that without any disturbances, any significant disturbances in our services. We opened the branches that were supposed to open this weekend and most of the clients didn't notice anything. But on Tuesday we, after the Monday holiday, we had a new bank that now could materialize all the benefits and all the strengths of the merger. Right now, we just have to grow on that and take advantage of the benefits of this merger.

The Bank's loan portfolio was very dynamic during the quarter. Net loans increased 9.1% over the quarter and 33.4% in a year-over-year basis, with very positive figures in all segments, including mortgages, which increased 15.2% in the quarter and 33.5% in the year.

Due to the rapid growth of the loan portfolio, investments in debt securities decreased 33% over the quarter, which represents about a 30% decline over the year. As of September 30, debt securities classified as trading only represented less than 8% of our total assets.

We expect that the current competitive environment in the financial business will put some additional pressure in the interest rate margin of the Bank. But we believe that this can be more than offset by the increasing volume during the medium term.

As a result of the recovery of bond prices, unrealized gains on available for sale debt securities totaled, at the end of the quarter, COP3.3b, coming from a figure of unrealized losses of COP56b a quarter before.

Finally, I would like to highlight the good performance in operating expenses, which increased only 1.23% during the quarter compared with the same quarter of the previous year. This increase is way below the Bank's asset growth, which was growing at almost 15%.

Now, let's take a look at Bancolombia's balance sheet at the end of the quarter. As we just said, the Bank's assets grew almost 15% during the year. We would like you to notice that this represents a significant reallocation of assets that has taken place as the demand for credit has increased.

In slide number eight you can see how the growth of loans has allowed them to represent 69% of the Bank's assets, when six months ago they were only 59%. Additionally, debt securities went from 26% of our total assets at the end of the first quarter of the year to be 16% at the end of this third quarter.

In slide number nine you can see the positive year-over-year loan growth figures in all segments. Corporate loans were up 28.6%. Retail and small and medium-sized enterprises loans continued to be very dynamic, growing more than 35%. Financial leases to both corporate and small and medium-sized clients grew 42.8%. And mortgage loans increased 33.5% over the year.

I want to spend a few words on the evolution of the mortgage segment, as we continue to be very optimistic on this business. On slide number 10 you can see that, as a direct result of the commercial strategy of the Bank implemented at the end of the first quarter of this year, the average number of loan approvals and loan disbursements has more than tripled since the beginning of the year.

Furthermore, Bancolombia has consolidated its leading position in the Colombian mortgage business, increasing its housing loan market share from 21 on December to 24% on September. Additionally, the market share of loans granted to homebuilders, which play a very important role in granting mortgages to individuals, has increased from 38% to 43% during the past nine months.

Finally in the mortgage business, we would like to remind you that on October 6 the Bank securitized mortgage loans for approximately COP580b. This is part of our mortgage funding strategy.

As shown in slide number 12, you can see that despite the strong growth of loans in every business segment, the Bank's asset quality remains under control and improving. Past-due loans as a percentage of total loans reached a level of 2.4% with a coverage ratio of 144.4% at the end of September. Additionally, the ratio of allowances to loans classified C, D and E was at the level of 138.3%.

On the liabilities side, we would like you to see in slide number 13 how the Bank's average weighted cost of deposits has been stable, below 4%, despite the 225 basis points interest rate hike determined by the central bank during the quarter. In volume, checking and savings accounts increased 26 and 19% respectively, whereas time deposits increased only 17% over the year.

We show in slide number 14 that Bancolombia shareholders' equity increased 6.2% over the year. It is important to notice that unrealized gains on available for sale debt securities totaled COP3.3b as of September 30, coming from an unrealized loss of COP56b a quarter before. You can also see that the Bank's consolidated ratio of technical capital to risk-weighted assets dropped from 11.3 to 11.2, due basically to the growth of our loan portfolio. Nonetheless, it is still well above Colombia's regulatory capital of 9%.

Net income for the third quarter amounted to COP181b, accumulating COP464.6b for the first nine months of the year, which represents an annual decrease of 32.7%. As you very well know, this is explained by the drop of bond prices during the second quarter of the year, which had an impact of more than COP200b.

In slide number 16 we want you to see the movement of the net interest margin breakdown. We have made an adjustment in the methodology that we use to calculate this interest margin. The quarterly net interest income is now compared to the three month's average interest earning assets and not with the average of 13 months, as we did before. This adjustment captures better the reality of a particular quarter and also shows the real volatility that we are suffering.

Here you can see how the loan portfolio margin has been decreasing slightly during the year, reaching 7.6% for the quarter. As mentioned before, we believe this margin decrease can be more than offset by the volume increase in the medium term.

Additionally, the debt investment interest margin was 7.3% for the quarter compared with -12% for the previous quarter. This is explained by a more stable environment on the Colombian bond prices, therefore increasing the total net interest margin to 7.58% from 2.5% that we had during the second quarter.

Net provisions on loans and interest amounted to COP104b, increasing 62% compared with the third quarter. This figure includes approximately COP22b corresponding to provisions made by our consumer finance subsidiary, Sufinanciamiento, due to its very rapid growth in private label credit cards billing through the joint venture with the retail chain, Exito.

Originally approximately COP18b that corresponds to adjustments to comply to the new provisioning regulation that, as we have explained before, requires a 1% initial provisioning in all loans, while obviously increasing provisions very significantly during periods of high growth, as the current stage. We believe we will have to do approximately COP55b more provisions before July 2007.

Talking about fees, during the first nine months of 2006 net fees have presented a positive performance amounting COP635.7b, which represents an increase of 14.4% over the year. As you can see in slide number 18, net fees represented 25% of the Bank's total income and 50% of the Bank's operating expenses.

In slide number 19 you can see the fast growth of the Bank's business of private label credit cards previously mentioned, outperforming the number of regular credit cards for the first time. The private label credit card business is growing rapidly in terms of both billing and outstanding plastics. This business is a source of opportunities which we know can be costly in the first stage of the cycle.

On the other hand, we have been losing ground against the market in the regular credit card business. The billing increased 18.6%, resulting in a 21.1% local market share from 22.9% a year ago. And the number of outstanding credit cards increased 20.2%, resulting in a 15.2% local market share compared with a 16.8% at September 2005.

On expenses, as we told you in previous calls, the Bank has implemented a cost control policy which we expect to improve our efficiency ratios, not necessarily by cutting costs but by growing in the credit business in real terms while growing operating expenses at inflation rates or lower.

In slides 20 and 21 you can see how the Bank's cost control policy is in effect, as the accumulating operating expenses increased only 3.8% compared with the similar period of the previous year. Merger expenses totaled less than COP40b for the quarter, of which approximately COP8b correspond to advertising, as we are now in the final stage of the merger and are close to launching our new corporate image. At this time the most significant merger expenses left are the ones related to advertising strategy, which accounts for approximately COP35b.

The Bank's efficiency, measured as operating expenses over average total assets, was 5.68% during the quarter and 5.46% during the first nine months of the year. On the other hand, operating expenses to net operating income efficiency ratio was 58.8% during the quarter and on an accumulative basis it reached 64.8%.

As you can see, the Bank's operating performance continues its positive trend as we take advantage of the sound economic scenario of the country.

At this time I would like to thank you for your attention and please present your questions. We will be happy to take your questions and comments. Thank you.

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of Jason Mollin with Bear Stearns.

Hello, everyone. I have two questions. My first question is related to the very strong loan growth that Bancolombia has been showing, over 30% year-over-year. And an important part of that has come since the second quarter in the corporate segment. We saw almost 29% growth, as you showed in your presentation. And I'm curious what your view is on the mix -- on the loan mix going forward, if we should expect corporate lending to slow down after this increase when we saw the volatility in the local markets and therefore the impact on the total growth? And if you think actually that the growth you're seeing in the retail and SME segment, now at about 35%, is sustainable over the upcoming quarters?

And my second question is related to the outlook for fee income. We saw that, as you showed in the nine months, you had something like 14% growth year-over-year for fees. But that is a significant slowdown from the 20% we saw in the second quarter kind of range. If you can give us your expectations and maybe talk about the competitive environment, and if we're seeing pressure on the pricing for financial services in Colombia?

Okay, very interesting. On the first question, yes, the corporate sector had a long period during particularly the second quarter, but a long period of lower demand, lower growth respective to the rest of the sectors. So the third quarter was a particularly good quarter in the sense that we have started to see the demand to pick up and probably we started to take advantage of some pent-up demand that were built during the period of -- at the beginning of the year.

We don't expect that growth to go down dramatically but probably it wouldn't be possible to maintain a rate of growth as we had during this third quarter. I think that during the long term -- the medium term we could expect a growth of 15%. Actually this might sound high for international comparisons but you have to keep in mind that since the crisis of the end of the last decade we have not really experienced a significant increase of the corporate credit. Only now we are perceiving it and we are just recovering what we lost in the end of the last decade.

Now, on fee income, yes, the growth in the last quarter was lower than in the nine months of the year or in the 12 last months. And, yes, competition has been high but nothing that is changing significantly the expectations of the Bank. 14% was entirely in line with what we were expecting to grow. And we believe that the now finished integration will increase significantly the possibilities of the Bank of growing more aggressively into the market of fee income.

Thank you very much.

You're welcome.

The next question comes from the line of Mario Pierry with Deutsche Bank.

Good morning. I also have two questions. The first question is, as you showed that you have been reducing your exposure to debt securities the last couple of quarters, I was wondering if you plan on selling more or you feel comfortable with the levels now.

And then the second question is related to there has been a lot of speculation recently about someone joining or acquiring an equity stake in Bancolombia. I just wanted to hear directly from you guys what is your view on that. Thank you.

Okay. Thank you, Mario. The first one, is we believe the debt exposure is rather low at the moment. We believe that we have reduced it more in accordance with the increased demand for credit in the economy and the funding requirements of the Bank. But we believe that, for managing our businesses of market makers for the government and the treasury business, that it is very important for the Bank. We will feel comfortable at around 20% of our total assets in investments. So, I would say that the current level is rather low.

Now, on the speculations, we, as most companies, never comment on market gossip. We have been forced, it is quite funny, in Colombia there is a regulation that sometimes requires us to comment on this gossip. And the Superintendency has asked us a couple of times to make a comment on this matter. And we made a very straight and very strong comment because it was not the comment of the Administration of the Bank but rather the Administration of the Bank just says what the controlling shareholders are saying. And the controlling shareholders said, as you can read in those press releases, that there is no agreement, no doubts and no intention of selling control.

Actually, just to comment on that matter for us, that all the team of the Bank is working so hard in getting the results better, it's a little bit sad when the press people said that the price is going up because the people think that the Bank is going to be sold. Actually, we were and are absolutely convinced that the prices of our shares are going up because the Bank is going up.

Alright. Thank you very much, very clear.

[OPERATOR INSTRUCTIONS]. Your next question comes from Paulo Ribeiro with Bear Stearns.

Good morning. I'd like to talk a little bit more about the integration that you've just completed -- announced you completed. Can you give us some more color if there is anything else left? You said there was technological integration. But things like the branding I expect maybe that you've announced there may be some changings or you're going to stick to Bancolombia or -- and how that rollout will be with your branch network and your clients?

And also if in this process you think you could see more synergies. I know this was not a merger driven by synergies but if you found some synergies or some cost cuttings that you can comment on? Thank you.

Yes, thank you. Yes, I believe that we can say that the integration as such has finished. Although we used to express that a merger is like a construction of a house, that it never finishes. We have lots of things that we must do, as a consequence of the size and the nature of the Bank that is coming out of the merger. For instance, we are reviewing the long-term prospects of our technology and operational architecture and we hope that in the coming years we will be able to significantly modernize it and put it in line with the best standards of banks, like the international.

But the main task of the integration, the task of having the Bank as a single unit, with all the products and services, with 700 branches, with 1,300 ATMs and with lots of means of distribution, is now achieved. And all our team is now working in the same platform and all our clients are getting the benefits of the new Bank.

This is very important from the commercial point of view because we have been giving our clients, let's say, like early advantages of the merger, some new transactions, some new products, some new campaigns and so on. But from now on we have the ability of actually put to our clients our universal bank as the one that we were dreaming when we conceived this integration with Conavi and Corfinsura.

We are very happy to just realize that we managed to do this integration without stopping, on the contrary accelerating the growth of the institution. We have grown the number of branches that we had at the beginning of the merger. We have grown, obviously, our -- the size of our assets. We have grown the number of employees. I don't know if that is so good, but anyway we have grown it because we have many more branches now. And we have a larger institution with also very significant profits, of course. Like, for instance, we already have in our Bank about 20 additional ATMs to be installed in the coming four months. And we are also planning to open new branches that we have already announced in the coming semester. So we are taking advantages of the opportunities that the development of the economy is offering to us.

Just more specifically, if you could comment on the brand. Are you going to change the brand or are you going to keep them separately or maybe they have been integrated already? But I expect maybe that you could even change your brand.

And also in terms of the product, if I remember correctly there were some pricing differences, for example, in deposits between the different units that you had, Bancolombia and Corfinsura and Conavi actually, and if that has been harmonized? If now, with this integration, all products are the same, the pricing is the same and if that was a positive impact for you?

Okay. Just starting by the second part, in products and pricing we have made the most of the job of the integration. We already have a portfolio that includes some of the products and services but we are gaining a lot in a more sophisticated, more detailed segmentation of the market that was not possible in the previous institutions. We now have a segmentation that makes our commercial activity much more efficient and that is probably something that is going to mature.

And we are just throwing out to the market some details like, for instance, since this week we have a National Check. That is quite interesting in a country like Colombia, our check works as a local check anywhere in the country. I understand that can happen in many countries around the world. You don't have to pay fees when you receive a check of Bancolombia in many towns or many locality of the country; it works as a local check. So we are making some of those adjustments, trying to present a better institution to our clients and a more competitive institution to our clients.

On the brand, we have announced -- there's a lot of expectation about it in the local market. We have announced that we are going to make a review of our corporate image. And you will have to understand that we won't be more specific about it because we expect to do a big announcement of it in the coming weeks.

Thank you very much.

You're welcome.

Your next question is a follow-up from the line of Mario Pierry with Deutsche Bank.

Yes, just a couple of follow-up questions. One was on your tax rates. We noticed that you paid an effective tax rate of only about 17% this quarter, while you have been paying close to 30%. Just wanted to know your outlook for the tax rate of the Bank, especially also as there are tax reforms being discussed in Colombia. Do you think that we could see a lower tax rate next year?

And then the second question is related to you posted a loss on your net FX position this quarter and I think there was a strong gain the previous quarter. Just wondering what kind of exposure do you have right now to the currency?

Okay. Yes, there are changes coming on on the tax regulation in the country. Actually, there is a new project which is being liberated yesterday and we wouldn't be able to give you a very precise view at the moment. But anyway, let me remind you that the Bank enjoys a contract of tax stability that doesn't make the Bank liable to new taxes in the coming three or four years. So, we believe that we are going to have some stability. As a matter of fact, what you say is true. We have been showing figures that one quarter with the other are not exactly in line but we believe that a total taxation of the Bank of around 25% will be something reasonable to expect.

Now, in the foreign exchange position there is a technicality on the valuation of the swaps that shows some losses on this quarter while we show very high profits on the previous quarter. But it's not exactly that there is a volatility in the outcome of the business. It's just more the result of the technicality of the valuation. But if you are interested on it, my colleagues will be happy to explain it to you on the phone.

Okay. I can call them later, then. Just to go back on the tax rates, though, you're saying that your effective tax rate should be closer to the 25% this year. And if I'm not mistaken I think you paid closer to 30% last year. Why the drop? Is it because you have more revenues coming from the Panamanian operations or why are we seeing a lower effective tax rate?

There is some tax efficiency being gained. Some of what you mentioned, profits made in areas where they are not taxable, and also the securitization of mortgages helps us a lot. So probably we are gaining tax efficiency from last year to this year in a perceptible manner and we will see what happens to the next year. Actually, last year we were at 27% total taxes. So it's a slight decline in what we are seeing for us in this year.

Okay, thank you very much.

You're welcome.

The next question comes from Andreas Jimenez with Inversionistas.

Yes. Good morning, gentlemen. I actually have three small questions. First one would be you mentioned the securitization of COP580m. Knowing the efficiency of an increase in rates or the yield and a reduction in --

Sorry. Could you probably get closer to the phone? I am not listening to you well. Could you repeat your first question, please?

Yes, yes. My first question was you mentioned the securitization of COP580b from your mortgage line. Knowing the efficiency of an increase in yield and the reduction of provisions that that actually requires, are you planning to actually securitize more would be my first question?

My second question is what are you expecting on the line of RoE for the end of the year?

And my third question would be an inquiry that several of my clients actually have actually phoned me or asked me during the course of this presentation yesterday, is knowing that you have already been nine months out of the year and even though your last quarter is your strongest the expectations are that you are going to run shy a little of your net income. Is that going to actually moderate to have a higher payout ratio to conserve your dividend? Or are you going to touch into reserves to be able to pay out the same dividend that you paid last year?

That would be my three questions, thank you.

Okay, thank you. Yes. The first line on securitization of mortgages, actually more securitization of mortgages are very good business for the Bank, because it allows to get some taxing benefits and also helps the funding strategy of the Bank. We did a significant volume of securitization during the beginning of this month -- no, sorry, during the beginning of October because we were at that time in a very high uncertainty about the future of this regulation, which now is probably a little bit more clear.

But we will be more than happy if the market is ready to go ahead and securitize more of our mortgages. Particularly we would like to see how the market will receive our securitization of peso-denominated mortgages, which is like the new portfolio that we have been building and that will be a good way of improving our structure of funding mortgages for the institution.

The second two questions are a little bit more difficult because, as we usually mention, we don't like to make projections. But what I will say on return on equity is that even though the second quarter of this year was a difficult one, the growth makes us optimistic that we will keep in recovery the profitability of the Bank and the value creation of the Bank. And we still stick up to the target of 20%.

Now, on dividends, that is something that is more in the hands of our shareholders. I would like to believe that they also, as the Administration does, are going to give a detailed look at the future of the institution and the growth prospects of the institution. But it is not in the hands of the Administration but in the hands of our shareholders.

Okay, thank you.

You're welcome.

The next question comes from the line of Ben Laidler with UBS.

Hi, good morning. Just wondered whether you had any concerns about the impending tax reforms. The corporate tax rate may come down a bit but there seems to be a few issues in there specifically on a special increase in taxes on mortgage payments and also on pension contributions, which I guess could have a negative read through for your business. Any concerns there at all?

Yes. I am very sorry but, as you know, yesterday a new project was presented which already is the outcome of an agreement among the different political groups and the government. And we haven't had the chance of really getting the complete text of that project and its strategies. So we know that there are changes in that matter. Some of it has come up to the press. But we would rather not to make those projections until we have the opportunity to study it and to see how much of an agreement is already back in the new project.

Thanks. Bye.

At this time there are no further questions.

Okay. Thank you very much. We are again very grateful for your presence and your interest and all your questions during this presentation. We will be happy to answer any additional questions that you might have. As usual, Sergio Restrepo, Jaime Velasquez and Mauricio Botero in the phone numbers that are listed at the bottom of the first page of our press release for today.

And we would like to highlight that the results of the quarter were favorable, that we are happy with the way that the Bank is taking advantages of the growth of the economy, and that also we are very happy with the outcome of the final stage of the integration that took place during the last weekend, in which we managed to integrate all our infrastructure with fortunately no problems and no particular difficulties.

Thank you very much.

This concludes today's Bancolombia third quarter year 2006 earnings conference call. You may disconnect at this time.