Grupo Cibest SA (CIB) 2007 Q3 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, and the Executive Vice President, Mr. Sergio Restrepo, and the Financial Vice President, Jaime Velasquez. At this time, I would like to hand the call over to Mr. Londono. Please go ahead sir.

Thank you. I wish to thank each and every one of you for your interest and attendance to this conference call, which we are prepared to share with you Bancolombia's results. I would like to mention that a slide presentation is being made available in our investor relations website, which we recommend you to follow during this call.

At this time, I would like to introduce Sergio Restrepo, Executive Vice President, who is going to explain basically the latest parts of the Colombian and Salvadorian economy and financial markets. Please go ahead sir.

Thank you and good morning. Colombian economy continues its dynamic pace of growth, having a 6.9% increase in the GDP figures for second quarter of the year, where investment and consumption play a key role on such performance. Retail sales for others, increased 9.9% over the year, moderating the pace shown last year when the same month had an increase of 14.6%.

Industrial production figures increased 7.5% year-over-year on others, coming from 12.8% last year on the same month. Additionally, inflation figures have remained under control. After reaching an increase of 6.33% on April on a year-over-year basis, variation on consumer prices have come down to 5.2% increase in October.

Backed by those developments, Colombian Central Bank has, on this last quarter, paused the increasing of its overnight rate for the first time in 15 months, after having rised 325 basis points. Right now, the number is [9.25%]. Despite that pause, it can be said that interest rates continue rising, responding to the new conditions [challenged] by the recent changes on monetary policy. Therefore, we expect the long growth dynamic to moderate incoming quarters, as a direct consequence of higher interest rates.

On the other hand, Colombian's financial market, were not [essential] in terms of high volatility presented all over the world. At the end of the third quarter, Colombian peso, suffer a depreciation of 2.3%. The market benchmark Government Bond was 25 basis points above, in terms of yield. And Colombian stock exchange index was 1.9% lower from their levels registered at the end of the second quarter. However, the Bank's strategic [loan] portion to Colombian bonds market prevented the financial results against representative losses caused by the market-to-market valuation.

Going to El Salvador. Salvador economy has had a dynamic year as well. It is estimated by the government that economy's going to grow close to 5% this year, having a key driver's growth of investment and money remittances, which were growing at a pace of 6.6% at May 2007.

Free trade agreements seen in recent months by the country, has started to impact positively the dynamic of international trade and commerce. Additionally, the growth among all sector of economy has been accompanied by former job creation. The number of new affiliates to social security had increased 7.6% on a year basis at June 2007. The consumer's price inflation is under control and CPI increases expect to finish the year between 4% and 5%.

All this positive market economic environment, combined with the arrival of new interest of players, have made [often] El Salvador's financial sector a very dynamic and competitive one. Deposits of the system, as of June 30, 2007 increased 14.8% year-over-year, while loans were up almost 12% on the same period. We expect this trend to continue as a lower, real interest rates play a role in favor of the banking penetration in El Salvador.

After this quick review, I will turn again to Mr. Londono, who is going to go over the Bank's results.

Thank you. I would like to begin this review of the figures by reminding you that this is the second time Bancolombia has to give consolidated results since the acquisition of Banagricola, that took place during the second quarter of this year. For the purpose of comparison, the quarter results contains pro forma figures for the second quarter of the present year and pro forma figures for the third quarter of 2006. Some assumptions were needed in order to complete this task.

Being the most representative, that the acquisition was simulated as if it took place on June 30, 2006 applying the same multiples. Originally, an issuance of subordinated bonds and preferred shares were simulated, keeping a similar participation of the Bank funding. Those assumptions should be taken into account when analyzing the figures that we present in this report.

Having said that, let us review the highlights of the financial performance of Bancolombia for the third quarter of this year. We had a solid quarter. Net income amounted to COP316.7 billion for the period, which represents an increase of 31.3% when compared to last quarter figures. Net income for the first nine months of this year has reached COP764.5 billion, which is 44% increase, when compared with the pro forma figure of the same period of last year.

Our loan portfolio has continued its dynamic growth on the quarter, reaching COP34.2 trillion, an increase in almost 10% in the period that we are reviewing.

As mentioned, on recent quarters, we have been keeping a close eye on asset quality measures, which fortunately continue on comfortable levels. As of September 30, the ratio of partial loans to total loans was 2.77% and the ratio for allowances to partial loans was about 131%.

Net provisions for the first nine months of this year increased significantly when compared with the pro forma figure for the same period of last year, which is going to be -- we are going to analyze this factor further down on this report.

Our profitability and efficiency measures improve on the quarter as a [consequence] of the solid results. Annualized return on average shareholder equity for September was 24.5% and efficiency in measure at the ratio between operating expenses and operating income for the same period, is at 55.4%.

Let's take a look in more detail to the results. The balance of Bancolombia shows the most important figure in the slide number eight of the presentation I mentioned earlier. Bancolombia's total assets amounted COP48.7 trillion, increasing 15.2% when compared with the figures of last year. The increase is mainly explained for the loan and financial business growth that I mentioned at the initial highlights and represent now 70% -- a little bit more than 70% of the total assets of the institution.

Investment securities, and specifically debt securities, has not been changed. As we mentioned earlier, we maintain a low exposure to debt securities, which represented 10.6% of our total assets. I find this time appropriate to share with you in a brief moment, the composition of our debt securities portfolio, emphasizing that we do not have exposure to US subprime mortgage assets.

The most represented portion of our debt securities portfolio by type of issue are [soluble] bonds. With are participation of 55% of the total portfolio, where bonds issued by Colombia's government account for about 40% [over the top]. On the other hand, TIPs, which is the way that we call Colombia's mortgage-backed securities, represent 18% of the portfolio. These securities are derived from Bancolombia Securities (inaudible), from which we maintain a portion, allowing us the benefit from the income tax exemption related to this kind of investment. In short, these securities help us by mortgages originated and managed mainly by Bancolombia. Therefore, meeting the Bank's credit risk as standard.

On the other hand, Colombia's fundamental [of the] housing and mortgage sectors are in quite good shape. The total level of mortgage rigidity is close to 4%, when 10 years ago, it was near 12%. The loan to value in Colombia is close to 50%.

If we go to slide nine, we show the portfolio breakdown. We can see there that corporate loans, the category with the biggest participation with percentile 50% of the total loan portfolio, reaching almost COP18 trillion, followed by retail and the small and medium-sized enterprise loans, which amounted to COP10 trillion, or 29% of our loan portfolio.

Financial leases represent 12%, reaching COP4.3 billion. And finally, but not less important, mortgages, as we were saying, reached COP3 trillion, representing now, 9% of the total of our loan book.

Slide number ten helps us to understand the dynamic of loan portfolio by segment. Corporate loans were the most dynamic segment over the quarter, growing at a pace of almost 30%. And they are showing a growth in the year of almost 17%.

Retail and small and medium-sized enterprises were up 8.2% of the quarter, and are up 32.5% over the year. Financial leases also are very dynamic with an increase of 8% in the -- 8.5% in the quarter and an increase of almost 30% when compared with the pro forma figures of last year.

The increase in mortgage loans including past securitizations was 7% for the quarter and almost 24% for the year. We are also -- we also are -- the securitized improve SOP289 million mortgages on the next [quarter], on this [quarter].

Slide number 11 show the proportion represented by loans struck by C, D and E, the lowest categories of our loan books in term of quality. It is important to note that they only represent 2.64% of the total loan portfolio, while the allowance for loan and (inaudible) losses represent 3.63% of our total book.

On the same subject, next slide show how the commerce level of the loan book measure the ratio allowances to [partial] loans increased, reaching 131%, coming from 129% on the past quarter. As you can see, we have not had big changes on the indicators, on the assurance of asset quality. Nevertheless, we continue to monitor very closely the fulfilment of our credit policies and the standards.

Slide number 13 help us to analyze some of the representative changes that took place on the right side of the margin. I'm going to comment only on the variation of the equity and the subsequent improvement on the capital [ratios] produced by, in a larger sense the capital increase undertaken on July, when we shared out around 60 million preferred shares for about $480 million.

Let us now pass to the income statement. Review for the last quarter figures. I recommend you to follow me to the slide number 14. Our solid performance is explained in good expense by our interest income. Interest on loans grew 12% for the quarter and fell 3.5%, when we compare it to third quarter of past year. The interest derived on financial issues had a similar performance from the quarter and very similar also in the year.

This growth can be explained by the loan portfolio growth, combined with higher interest rates, which we captured rapidly, due to the part that the majority of our loan book is indexed to short term interest rates. On the other hand, interest expenses increased 13.5% over the quarter and 35% over the year. As deposit, interest rates catch up with the (inaudible) cycle and competition for funding that adds pressure on this line of costs. Also, in line with the measures taken by the central [book].

However, many of these margins remains above the level seen during the year 2006, which we will refer again later in the presentation. On the other hand, maintenance fees and income from services have not had this year as dynamic as the one that we have had in other sources of income. This is explained in part by the sale of (inaudible), the warehouse services business whose fees used to account for this line of income and represented about 6.5% of the total fees last year.

Additionally, brokerage fees have not performed as expected this year, as (inaudible) consequence of the less dynamic Columbia capital market. Despite this, I would like to note that the net fees and financial services for the quarter increased 4.5% when compared to the second quarter figure, showing an incidence in annualized rate of increase not seen in recent quarters.

Operating expense is 4.5% almost, when compared with the second quarter figures, and now only up 3.7% when compared to the third quarter of last year for a pro forma basis.

Personnel related expenses decreased 1.3% over the quarter, and are increasing 9.7% over the year. Administrative and other expenses show a decrease of 5.2% of the quarter and an increase of 2.5% when compared with the same period of last year. We are aware of the need of this proof -- of improving further our efficiency ratios and we continue to work actions that help us to achieve this goal as we have described in previous conference calls.

Slide number 16 shows the performance of provisions charges we have made during the year, the necessary adjustments, to fulfil the requirement established by Colombian superintendent of finance on this matter, which have been becoming more rigorous in terms of provision challenges in recent years.

These challenges include the use of a reference model for commercial loans that modifies the established way of calculating provisions for this category and was implemented for the third time in the third quarter of this year. In order to meet these parameters of the reference model, new provision challenges had to be made over an already outstanding performing loans, contributing to higher provision challenges on the quarter.

Additionally, some changes represented on the quarter concerning the applicable allowance percentage formula for consumer loans, which increased these percentages for loan classified E and B. Those are performing loans and loans that are part (inaudible) and [credited]. Also, the regulators that made the Banks to adjust the allowances [one GNP] decided to apply the whole adjustment in the third quarter of this year. Therefore, contributing also to higher provisions. On the other hand, the adjustment of Banagricola's allowances to the Colombia's regulatory frame, has continued on this third quarter of the present year, meaning also additional and non-recurring provision for the quarter, even though these are only charged for consolidation purposes.

In short, leaving aside the current provision charges related to the normal development of the credit business, the level of provision charges on the quarter is explained in a good extent for the implementation of legal requirements of the subject and the provision generated by Banagricola's adjustment to Colombian legal status. Being all these effects, magnified by the loan growth has its direct effect on provision charge on the [piece].

This is one additional position to be made here, and it's -- there is another position to be made here and is the implementation of the reference model for commercial loans to abuse our tax benefit. Given the part that [GNL] provision charges related to this credit category [and] also the old method of calculation, were replaced with individual provisions, or provisions attached to each specific loan. Thus, the tax benefit is presented because individual provisions are tax deductible, while general provisions are not. That is the reason behind the decline presented on income tax expenses in this quarter.

Slide 17 shows the performance of the net interest margin for the quarter, which came up to 6.9%, a slight decrease from the 7.02% of the one that we calculated in the pro forma figure for the second quarter of this year. Despite these results, we expect net interest margin to compress in a moderate pace, as composition for funding will keep adding pressure on the cost of deposits in our biggest market of Colombia.

Solid quarter results allowed us to improve most of the main ratios, as can be seen on the slide 18. Our ratio of operating expenses to net operating income for the first nine months is 55.3%. That's still above our medium term objectives. On the other hand, our efficiency measures, associated expenses, over average total assets reach 4.89% when calculated for the same period.

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

(OPERATOR INSTRUCTIONS).

The first question comes from the line of [Juan Alderro]. Go ahead, Juan, your line is open.

Okay. Hello?

Yes. Go ahead.

Are you listening me now?

Go ahead.

Okay. My question is here in reference to the new modification introduced to the transaction cost. What do you think about the client's satisfaction results of these changes and the revalues? The importance of these changes in the revalues for the Bank for the next year in the short term?

No. Actually, what is presented to the market recently is a newer structure of the segmentation of some of our savings accounts, which are taking care of different profiles of customers. In other words, we are reducing the number of free transactions for some of the clients. We certainly believe that that is not going to impair the growth of our number of clients and, as you know, already about 5.5 million clients, and the biggest growth of that is coming from the increasing number of payroll accounts that the Bank is serving.

Okay. Thank you very much.

You're welcome.

And your next question comes from the line of Alonso Aramburo.

Yes. Thank you. Good morning. I was wondering if you could, just going back to the provisions, if you could tell us what level of provisions came from Banagricola, from the consolidation of Banagricola this quarter, and what should we expect going forward as a level of provisions on a more normalized basis for the next quarters?

Okay. Thank you very much, Alonso. Yes. Obviously, this is a calculation that is very broad and we have to keep into consideration that there is not a precise number. But, anyway, we have measured the total impact of the provision, and that means that the part coming from Banagricola amounts to almost 20% of what we did in the last quarter, while the part of the Bank amounts for about 40% of the total provisions.

And, going forward, should we expect -- I assume we are not going to see the same level of provisions given that you have some one-offs this quarter, what is roughly the level that we should expect for the next few quarters, for the next quarter?

Okay. Banagricola also required some provision but the most parts of it are already done. In other words, Banagricola is already almost in compliance with these provisions. We made this quarter, I think, compliance with Colombia regulation. There is still a small portion of it to come in the next quarter. Obviously, the growth of the loan portfolio is very high, and as the new regulation is implied that we have to make provisions immediately when we make the disposement of the loans, the level of provision is going to increase in accordance with the growth of our loan portfolio for the future.

Okay. And on your taxes, given that you got -- you had lower taxes this quarter because of the deductibility of some of these fruitions, should we expect that going forward aswell?

No. Unfortunately, not, because the benefit was derived from the application of general provisions toward specific provisions. So we are expecting that from now on at the level of taxation is going to be close to 30%, which has been the normal level of the Bank.

Okay. Great. And I guess just one last question, can you give us what was the breakdown of loan growth between Columbia and El Salvador?

I think -- I don't have that figure precise in my mind, but I would be very happy to send it to you over e-mail.

Great. Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of [Marcilia Fedaldo].

Thank you. Good morning. I have two questions. The first one is about a couple of figures, expected figures. Which is the expected return average equity you expect to have for next year once the interest rate adjustment by the Central Bank are performed?

And the other one is related about the medium term objective of operating expenses to net operating income, which is the figure you expect to reach in this sense?

Okay. Thank you. Do you know, we don't present projections but we are happy with the figure that we are presenting this year, and this certainly allows you to make your own guesses and your own projections and operate your own models. We believe that this figure that we have presented in return on equity of 24% plus is sustainable, and we were happy with the outcome obtained and profitability of the Bank. In the other hand also in the efficiency we are coming down in the figures, and as we mentioned in the presentation, we are not satisfied with that. We know that we still have a lot of work to do in that respect. And we are assuming that imposing discipline in expenses inside the Bank, and also improving our operation framework, our technology, and going forward in our Six Sigma program, and from both activities we hope to achieve a better performance going forward in the future.

Okay, thank you. My other question is about (inaudible). How is this business going in Colombia, and if you are set to implement the same figure, the same business in El Salvador?

We are very happy with the performance of this new figure of branch, or [transaction] operation, that allows us to reach small towns and areas of big cities, and we are very happy to realize that we are in a very high level of transactions for this non-banking correspondence that they are calling Colombia.

That's -- what the main effect that we have arising from that is that we are delivering very low cost transactions, which allow us to increase our [bancalization]. In other words, that allows us to give to the Bank groups of customers that otherwise won't be profitable and won't be sustainable. We will have to get into the analysis of the convenience of this type of distribution in El Salvador. It's an entirely different scenario. It's a different country. And Banco Agricola has an extraordinary good retail distribution framework. So we will have to see whether this type of system is applicable there or not.

Thank you very much.

Thank you.

Your next question comes from the line of [Petu Librato].

Hi, good morning. Just a quick question. I noticed that FX gains increased significantly in the quarter from previous quarters. Just wanted to get a sense of what drove that and if you have a sense of potential impact going forward? Thank you.

Sorry, Petu. Could you repeat that, because we didn't even get that? Sorry, Petu.

Sure. Just the FX gains were significantly higher this quarter, and then previous quarters. I wanted to get a sense of what drove that and if you have any expectations if that will continue going forward? Thank you.

Okay, yes. We had very good FX gains in this period, but that is very volatile. As you have seen, the volatility on this line is mainly a result of the volatility of the market. We do better when there is some movement as it was the case of this quarter. But everybody wish to have higher stability, and that probably reduces our margins in the month.

Thank you.

You're welcome.

And I'm showing no further questions at this time.

Okay. We want to thank you very much for your attendance to this conference call, and as usual, we would like to tell you that we would be more than happy to present to you more explanations, or any further questions that you might have. And the name of the persons that are ready to talk to you are at the bottom of the press release that you received yesterday; Sergio Restrepo, Jaime Velasquez, and Juan Esteban Toro. Again, thank you very much.

And this concludes today's conference call. You may now disconnect.