Grupo Cibest SA (CIB) 2007 Q2 法說會逐字稿

Good morning and welcome everyone to Bancolombia's 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.

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

Thank you. I wish to thank all 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 we have, as usual, a slide presentation in our Investor Relations Web site.

At this time, I would like to ask Sergio to give you a presentation of the latest facts of the Columbian economy and financial markets.

Thank you and good morning. During the first quarter of 2007, Columbian financial markets maintained the trend seen in recent quarters. The economy kept a strong pace of growth in the first part of the year driven by investment and acceleration in consumption. On the other hand, interest rates continued in the up trend as the Central Bank maintained its monetary policy and the Columbian peso appreciated even further. The recent data confirm the exceptional performance of the economy. The annual change of GDP for the first quarter of '07 was 7.98%. Investment to GDP ratio is now at 27%, a logical consequence after investment 32% year-over-year. Private consumption grew 7.3% over the year explained mainly by durable goods driven by an increased level of confidence. Retail sales and industrial production revealed that economy maintains a line of healthy and sustainable rate of growth.

As of July 2007, inflation reached 5.77%, a figure above the 3.5-4.5% range Central Bank set as inflation target for 2007. We consider that meeting this year's target is highly unlikely given the current situation. Nevertheless, it is important to notice that inflation path since May seems to be descending, and thus consolidating expectation of further reduction during the year.

Aware of the strong expansion of the aggregate demand, Central Bank increased once again the overnight rate reaching 9.25% by the end of July. The measures taken by the Central Bank, including the deployment of an auction mechanism for monetary [tacking] and an increase in marginal reserve requirements seek to curb credit growth and ultimately to slow down economic activity. Although some of these measures have started to be felt in the cost of funding, we will like to emphasize that Bancolombia supports the Central Bank objectives as they aim to a healthy and sustainable economic growth.

As a consequence of higher interest rates and foreign direct investment flows, the Columbian peso appreciated 10% during the second quarter. However the pace of appreciation diminished in the last month due to the capital controls imposed by the financial authorities in Columbia to dissuade short-term foreign indebtedness and portfolio investments.

In slide number four, we can see the performance of bond prices, which moved in a narrow range of approximately 30 basis points during the quarter. Columbian's yield curve today is nearly flat. As we can see in TES due on 2010, right now it's 9.98%; 2014 is 10.05% and the 2020, which is the most liquid paper in the economy is 9.96%. Even though we expect a slight moderation in the economic activity as a consequence of the economic policy, we expect Columbian economy's strong fundamentals to remain due to a healthy and a very well distributed GDP growth among sectors, an improving fiscal deficit of the public sector, decreasing inflation, and an increasing level of confidence accompanied by foreign direct investments. Because of these, we believe there is a solid and favorable scenario for the financial business ahead.

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

Thank you. We would like to highlight that this is the first time that the bank releases consolidated results since the acquisition of Banagricola that took place, as you very well know, in the last month of May. During this conference, we will provide the post deal numbers. We will not compare them, rather we will use a standalone numbers of Bancolombia in order to provide tools for trend analysis. First of all, I would like give you a few numbers that could help you to quantify what Banagricola represents for the bank's consolidated financial statement.

When looking into the bank assets, we find that total assets added by the consolidated of Banagricola grew by 15%, or represent -- Banagricola represents 15%, and in net loans, Banagricola represents 15.4%, while in investment securities, the contribution of Banagricola represents 6% of our consolidated balance sheet. Then on the income statement, the consolidation of Banagricola represents 14.8% while Banagricola adds COP66.4 billion in the first half of the year.

When analyzing the standalone performance of the bank, it is important to notice that the growth momentum of the bank has been [having] continuous, as we take advantage of the opportunities the economy has given us throughout the current expansion phase. As a proof of this, the bank's net loans and financial leases increased 5.5% over the quarter and 24.4% over the year. On the other hand, investment in debt securities kept a low participation on the total assets, representing less than 12% of those, coming from 23% a year before. As we have been monitoring in recent quarters, this representative change is due to the rapid growth of the loan portfolio combined with our strategically lowest purchased funds for the rise of inflation and its consequences on the price of bonds.

In a general perspective, the income and revenues regenerated by the bank had a solid performance in the quarter. The net interest income represented an increase of 11% over the quarter and 227% as compared to the second quarter of 2006 when, as you remember, bond prices affected this line of income statement. Despite a higher deposit cost due to the Central Bank measures, our net interest margin was 7.4%, improving from 6.8% in the previous quarter. Additionally, the efficiency during this quarter is 58.2% improving from 60.9% in the previous quarter.

When looking into the quality of assets, stability is probably the best description. Past due loans to total loans stayed at similar ratios, 2.7% and the allowances to past due loans remain close to 130%. We would like to highlight that the allowances for loan losses increased 8% over the quarter and 26% over the year, keeping similar ratios of growth with the loans and financial leases portfolio.

Finally, I would like to highlight that the bank concluded recently the public offering of $400 million subordinated notes due on 2017. Additionally, on July 2007, Bancolombia concluded its public offering of preferred shares. As a result of this issuance, the bank increased its equity in approximately COP928 billion or approximately $480 million. Most of this equity increase took place in July and therefore is not reflected in the June's consolidated balance sheet that we are reviewing at the moment.

Now, let's take a look at the balance sheet at the end of the semester. Bancolombia's total assets amounted to COP45 trillion. On a standalone basis, the bank's total assets at the end of the second quarter of 2007 amounted to COP38 trillion, representing an increase of 4.4% over the quarter and 13.7% over the year. This is explained in a measure -- in a longer extent on the -- for the loan and financial leases growth that I mentioned on the initial highlights, allowing them to represent 69.1% of the bank's total assets, when they were 63% of the total a year ago.

The loan portfolio breakdown shows us that corporate loans is still the category of the highest participation. This amounts to COP15.8 trillion and represents 49% of the total. Follows the retail and SMEs enterprise loans, which represent 29.3% of the loan portfolio, and then the financial leases that represent 12.4% of our loan book.

As you can see on the slide number eight, on a standalone basis, corporate loans increased 2.7% over the quarter and 17.3% over the year. Retail and SMEs increased as well representing 8.3% variation over the quarter and almost 38% over the year. Financial leases were not the exception. They increased 4.1% in the quarter and 28.7% over the year.

Despite the good performance of all categories, the most dynamic one continues to be mortgages, increasing 10.3% as compared with the end of the first quarter and almost 50% as compared to the end of the first half of 2006, after taking into account the COP900 billion of mortgage assets securitized in the second half of 2006. Due to our solid loan portfolio growth, we have been keeping a close eye on the asset quality, which remains at similar ratios seen in recent quarters.

The slide number [one] summarizes the evolution of some of the most relevant indicators on this matter. In addition to the figure represented on the highlights, it is important to notice that loans classified CDME comprise 2.5% of total loans and the ratio of allowances to those loans at the end of the quarter was 138.4%.

Bancolombia's -- on the liability side, Bancolombia's total deposits amounted to COP21.5 trillion, where interest bearing represents 85% and non-interest bearing do for 15% of the total. The stability of total deposits on a quarterly basis was the situation on a standalone basis, representing a minor decline of about half percentile point. When the behavior of deposits is analyzed on an annual basis, it is found that an increase of 16.5% took place, which is not a rare figure when we look at it in comparison with the growth of our assets. As a consequence of the new composition of the deposits and high interest rates in the economy, the bank's average weighted cost of deposits mix increased to 5.16% from 3.91% as you can better see in slide number ten.

The shareholder equity reached COP3.6 trillion, representing an increase of 4.3% over the quarter and 11% over the year. In the slide number 11, you can see that the evolution of the bank consolidated ratio of technical capital to risk weighted assets. Even though the ratio of technical capital to risk weighted assets was 11.85% at the end of the quarter, we estimate that this figure will get close to 14% -- just above 14% after taking into account the equity increase that we already mentioned that took place in the month of July.

Regarding the income statement, you can appreciate in slide number 12, Bancolombia's net income for the first half of 2007, included Banagricola, totaled COP447.7 billion, representing a 58.1% increase when compared with the COP284 billion for the first half of the last year. On a standalone basis, the net income for the second quarter of 2007 totaled COP181.3 billion. This represents a decrease of COP9.3 billion over the quarter and an increase of COP162.6 billion over the year. The net income on this quarter was affected by a high level of provisions for loan and interest losses, which amounted to COP146 billion in the quarter, increasing 96.3% quarter-over-quarter and COP117.2 billion year-over-year.

In slide number 14, we can find the evolution of the provision estimating that COP78.5 billion of the quarter number are part of the increased costs by the adjusting of the provisions to meet the Superintendency of Finance most recent requirements. This is a situation that we have been mentioned in previous calls.

And the slide number 15 refers to the net interest margin breakdown. The evolution of the loan portfolio margin was in a positive terrain increasing to 8.4% during the last quarter, despite a higher cost of funding, which proves the dynamic repricing of our loans and financial leases. On the other hand, the debt investment securities interest margin rebounded to 4.6%. As a result, the total net interest margin increased from 6.8% to 7.4% over the quarter.

And, let us now take a closer look to the net fees and income from services. They amounted to COP537.4 billion during the first half of this year. The net fees and income from services due to the consolidation of Banagricola were COP103 billion in this first half of the year. Having said that, let us proceed to Bancolombia as a standalone basis analysis, where net fees and income from services amounted to COP220.2 billion during the second quarter, increasing 2.8% as compared to the first quarter of 2007 and 4.7% as compared with the second quarter of the previous year.

It is important to notice that these figures are affected as compared to the second quarter of last year and to the first half of the same year due to the disposal -- to the sale of Almacenar, whose revenue income was included in the fees in the previous year. If we deducted that number from the previous quarter, the real increase is 13.6 year-over-year. On the other hand, in the brokerage fees, there is a decline -- a decrease of 8.4% on the quarter and a decrease of 26.7% over the year affecting directly the fees and income from services line. These were mainly due to the less dynamic Colombian capital market this year, when we compare it to the first half of 2006.

In the slide number 18, you can see the first -- the fast growth of the bank business of private label credit cards outperforming the number of regular credit cards. The private label credit card business is growing rapidly in terms of both billing and outstanding cards. We believe this business is still a source of good opportunities for growth. On the other hand, in the regular credit card business, the billing increased 28.6%, and results in a 22% local market share as compared to 21.7% from the previous quarter. And the number of outstanding credit cards increased 24% and also results in almost a 15% local market share of plastics.

Operating expenses amounted to COP1.1 trillion during the first half of the year, where the operating expenses added by Banagricola amounted to COP124 billion for the first semester. During the first half of the year, Bancolombia's efficiency ratio as calculated by the -- efficiency ratio was 58.23% and also during the same period, the efficiency ratio measured by total assets was 4.97% of expenses as compared to total assets. On a standalone basis, the operating expenses get to COP493.5 billion, representing an increase of 4.9% when compared with the first quarter of this year. However, they represent an increase of 19.6 when we compare them with the first quarter of last year.

Slide number 21 show us not only the efficiency figure of the bank, including Banagricola, but the standalone basis ones. We can see that the efficiency ratio for the quarter as calculated to operating expenses -- of our operating income was 58.19%, improving from 60.87% in the prior quarter.

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

(OPERATOR INSTRUCTIONS) Your first question comes from Tito Labarta with Deutsche Bank.

Good morning. A few questions, first, could you just comment on your level of provisions given the sharp increase in the quarter, what do you see as sustainable for the remainder of the year to stay around this level or to -- is there any one-off? And the second question, just on -- to clarify on Banagricola numbers, is that -- include just their results since May or is that their full results for the first half of the year? And then, if you can provide any guidance for the remainder of the year, including the numbers? And then, finally, just an update on the legal proceedings that have been going on against you, if you can give any update on that? Thank you.

Could you repeat the last question please, Labarta, the last question on the legal proceedings?

Yes. Just the last question was the legal proceedings related to the merger that had been going on with the Gilinski family?

Okay. First, on the level of provisions, what happened is that we have been taking into consideration the legal -- all the latest decisions of the Superintendency that were making us to get new provision in our past due loans at new levels, and we already almost finished the actualization of those figures at the end of the first semester. We are already at the new level required by the Superintendency. So, we believe that from now on, we are just going to be more stable figures of total provisions, and they will move only in accordance with the quality of our loans that we have said in previous occasions. We believe that there might a slight increase in non-performance or past due loans as we move higher into retail and consumer credit as compared with our corporate and SMEs figures.

I am sorry, just to follow-up on that, does that mean the levels of the second quarter will be the steady level for the rest of the year or were they like extraordinary provisions in this quarter and then the steady level would come down to previous quarters?

Right. It's more the second one. Actually, the second quarter was affected by the last leg of actualization to the Superintendency requirements. Right now, we -- that actualization is over and the figures will be more in accordance with the growth of our book.

Okay.

Okay. Now, on the Banagricola, yes, the figures that we present incorporate all the first half of the year of Banagricola figures. This is how we do it in our Colombian GAAP, and from now on, what we will have from Banagricola is that it will represent almost 15% in the balance and a similar figure close to 15% in the profit of the bank. We are very optimistic of the increased speed of growth of the Salvadorean and the Central American economy in general. And just as a sample of it, tomorrow, we are going to have the ceremony of the subscription of the free trade agreement with those -- the main countries of Central America.

Now, on the legal procedure, we are in the process of expecting the review of the situation by the General Attorney's Office in which we are expecting the General Attorney's Office to review the decision of last January when they re-opened the case and the bank has presented a reconsideration of that measure that should be decided in the coming months. So, it's difficult to say when that is going to be decided. But, as we always say on this, we are absolutely clear that the bank can support this decisions and the process that was followed during the merger of BIC and Banco de Colombia at any instance, as we have done successfully in the previous decisions of many courts previously.

Okay, thank you.

You are welcome.

(OPERATOR INSTRUCTIONS) Your next question comes from Valerie Fry with Merrill Lynch.

Yes, hi, good morning everyone. The question that I have is regarding the goodwill. You are indicating in your press release that as a result of the Banagricola acquisition, you have accumulated goodwill of around COP752 billion. My question is, how is this goodwill going to be amortized over the next few years, is it going to be over five years, ten years, or what would be the methodology to use? Thanks.

Hi, Valerie, this is Sergio. Yes, indeed we will amortize that in 20 years. We will use the method of an increasing -- exponential increasing. Therefore, that will have an impact of roughly US$1 million per month during the first year, and they will keep on increasing that every year up to the final year it will be something like $5 million in the 20th year.

Okay, thank you very much.

You are welcome, Valerie.

At this time, there are no further questions. I would now like to turn the call back over to Mr. Jorge Londono.

Well, I would like to thank everybody again for the attendance to this presentation, in which we have presented our first consolidated figures with Banagricola. We have illustrated the part of the good performance of growth in the Colombian economy despite the fact of the Central Bank measures, and also we have presented the good performance of our net interest margin, of the quality of our assets and the efficiency and the profitability ratios of the bank.

We also will be happy to answer any further questions. And the contacts that we provide in our press release, and I have to remind you that from now, we have Juan Esteban Toro as our IR manager in the telephone numbers and the addresses that appear in that press release. Thank you very much and good bye.

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