Grupo Cibest SA (CIB) 2007 Q4 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 very much. I wish to thank everybody for your interest and attendance to these conference calls, which we have prepared to share with you Bancolombia's results. I would like to mention, as usual, that our slide presentation has been made available on the company's investor relation website, which we recommend you to follow during this call. At this time, I would like to introduce Mr. Jaime Velasquez, Chief Financial Officer of the Bancolombia, who is going to explain briefly the latest facts of the economy and financial markets of Colombia and El Salvador. Go ahead, Jaime.

Thank you. Colombian economy continues its dynamic pace of growth, having a 6%, 7% increase on the GDP figures for the third quarter. Investment and [exports] were the main key dynamics of such performance. So we are expecting a [GDP] growth of about 7% for the last year. We (inaudible) for December increased 9.4%, and those production figures increased about 11% in the same period. Later in the year, high inflation figures were [released], mainly based on food prices. After reaching the inflation targets by almost 120 basis points for 2007, the risk of [weak] (inaudible) inflation expectations has played with food prices pressure, dampening the prospects to which the inflation grows in 2008. The key response of Colombian Central Bank was to increase twice the interest rates from 9.25% to 9.75% in recent months.

Interest rates in Colombian economy continued rising, responding to the additional two [hikes] and the key way presented at our last conference call. As suspected (inaudible) continues moderating in the last quarter of 2007, and through the first months of 2008, as a result of this scenario.

Colombia's financial market has not been [very] (inaudible) in terms of high volatility percentage all over the world. Despite this, due to continued close of foreign direct investments, the Colombian peso continues its appreciation.

On the other hand, Colombian bond markets continues to suffer the effect of higher interest rates, especially in recent weeks, as the market benchmark government bonds has been increasing (inaudible), reaching about 11.6%.

In conclusion, we are expecting a GDP growth close to 5% in the current year.

If we move to El Salvador's economy, in slide number five. GDP growth was 4.7% on the last year, having a key driver of growth of investment and money remittances. Consumer prices, inflation were stable on the last year, reaching around 5% on the year. We expect a stable macroeconomic environment this year to play a role in favor of increasing the banking penetration in El Salvador.

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

Thank you. 2007 was a dynamic year for Bancolumbia. Specifically, I would like to highlight four points. First of all, our net income increased 31% as compared to the pro forma figures of 2006, reaching COP1,087 billion for the year 2007. Secondly, our assets exceeded COP52 trillion by the end of the year, increasing 51% when compared to the figures presented at the year before. Non-organic growth explains a considerable portion of these figures, as Bancolumbia (inaudible) 2007. Nonetheless, (inaudible) posted an increase of 20.5% as compared with the pro forma figures of the previous year. Then, our efficiency, measured as the ratio between operating expenses and net operating income are a considerable improvement over the year, reaching 53%. And finally, our asset quality remains in line with our expectations. As of December, the ratio of (inaudible) loans to (inaudible) loans was 2.9%, and the ratio of allowances to (inaudible) loans was 135%.

Having said that, let's continue by taking a look at Bancolumbia's balance sheet, as of December. Please go to slide number seven if you are following the presentation. As we mentioned before, we have a net income of COP1,087 billion for the year. Let's take a look at the main elements that (inaudible) this outcome. Bancolumbia's assets increase was driven by loan/financial leases growth of 24% over the year, as a result of the momentum shown by the Columbian economy. By 2007 year end, total loans and financial leases represented 70% of the bank's total assets. Conversely, net securities decreased 30% over the year, and the bank continued to reallocate some assets, given the loan growth dynamic and the decreasing loan prices environment presented on the year.

Maintaining a low exposure in relative terms, our debt securities represented [11%] of our assets, while sovereign [bonds] still have the highest share, with about 57% of the total debt securities portfolio, followed by corporate bonds with 22% and TIPS or Columbian mortgage market securities, with 21% of debt securities. As explained in [written quotes], it is important to mention that securities -- mortgage-backed securities in Columbia are derived from Bancolumbia's security ties in exercise. Securities backed by mortgages are originated and managed by Bancolumbia, and therefore are meeting the bank's credit risk standard.

Let us now take a look through the loan (inaudible) [portfolio] breakdown, which would show in slide number eight. Corporate loans continue to have the biggest share of our loan portfolio, representing 48.5%, also descending from 50% that we had in our previous quarter. In contrast, retail and small and medium (inaudible) loans reached 31.5% of the [full] portfolio, increasing its share from 29% in the previous period. Financial leases category also had slight increase on its relative side, representing 12.5% of the loan group. And finally, mortgage represents 7.6% of the total, decreasing its share from 8.5% in the previous quarter, as a consequence of the (inaudible) that took place during the fourth quarter.

In picture number nine, we represent the dynamic of the loan portfolio per segment. Retail and small and medium size enterprises continue to be the most dynamic segment, growing at a pace of 16% on the quarter and 41% over the year, followed by financial leases, with 8% increase over the quarter, and 32% increase over the year. Increase in mortgage loans, including securitizations, was 5% over the quarter, and 25% over the year. It is important to remember that Bancolumbia securitized approximately COP729 billion of mortgage loans on 2007, 50% of the mortgage loans originated by us during that year. At this point, I would like to highlight that Columbia's fundamental housing and mortgage sectors remain in good shape, as the level of mortgages to [GDP] remain below 5%, and the loan to value of the whole system continues to be close to 50%. Corporate loans, on the other hand, increased 2.1% over the quarter, and 15.7% over the year, which is itself a very healthy rate of growth, and one that has been [a light] increasing over the past two years.

Let me turn now to asset quality analysis. Coverage levels of the loan book measure the ration of allowances to (inaudible) loans increase, reaching 135%. Moreover, (inaudible) loans as a percentage of total loans increased to 2.93%, valuation which is explained by higher interest rates of the Columbian economy, and higher participations on retail and the small and medium enterprises segment, which (inaudible) have reached a bigger share of the loan book. Nevertheless, our asset quality remains in line with our expectations, given the current interest rate scenario, and we continue to monitor it (inaudible) closely, and the fulfillment of our credit policies [on its back]. As of December 31 last year, loans classified C, D and E, the lowest categories of our loan books in terms of quality, represented 3.1% of the loan portfolio.

Bancolumbia's capital adequacy as of the end of the year is 12.7%, well above the legal minimum required in Columbia of 9%, leaving us therefore with plenty of room to grow. On the other hand, shareholder's equity amounted to COP5.1 trillion, increasing 9% over the quarter, and increasing also 20.5% over the year. On the next slide, our deposits, we show that our deposits (inaudible) the year amounted COP34.4 trillion. That represents an increase of 12% during the quarter and 20.5% over the year. The average weighted costs for the deposits reached 4.8% during the last quarter, increasing over the quarter and the year as a consequence of Columbia's restrictive monetary policies that we have referred to a couple of occasions during this presentation.

In addition, deposit mix changed throughout the year, specifically, time deposits gained [participation of the] deposits, reaching 42%. In contrast, saving deposits represented 37% of the total mix, a lower share of the mix than what we had last year, which was 41%. These changes are explained on the larger sense, but the marginal reserve requirements imposed by the regulators on the third half of 2007, as the margin on the separate (inaudible) accounts, saving accounts (inaudible) requirement for time deposit changes the preference (inaudible) for these kinds of instruments.

Then we turn now to Bancolumbia's income statement. We can reveal these figures in slide number 14. Our net income presented, as we have mentioned, solid results. Total interest income increased 34% over the year. Total interest expenses increased 35% over the same period, as the posted interest rates caught up with the [tightening] cycle and the competition for (inaudible) kept adding pressure on this line of profits. Nonetheless, net interest income increased 33% over the year, driven by the long portfolio growth combined with higher interest rates.

Net fees and income from services increased 7.8% over the year, figure affected by the sale of Bancolombia's former subsidiary, Almacenar. As a result of detail, the Bank did not get income from warehouse services during the year. After taking this amount into account the net fees and income from services increased 15.5% over the year. On a quarterly basis, net fees from financial services represented a nice strong dynamic on the fourth quarter, growing 23% over the period, driven by commissions from market services and credit card merchant fees.

On the expenses side, an increase of 6.1% over the year is the result of a more strict policy concerning the subject of cost control. Specifically administrative and other expenses increased only 5.6% during the same period. In effect, despite higher provision charges, net income for the year increased 31% as compared with the pro forma figures of 2006.

Net provisions shown on slide number 15, amounted to almost COP600 billion for the year, increasing 158% over the year, driven by regulatory adjustments and higher recurring provisions due to a combined effect of high interest rates and higher retail on the small and medium enterprise proportion in the loan book. These regulatory changes can be summarized as follows; Colombian banks applied a new methodology to calculate provisions for commercial loans based on a reference model developed by the regulator -- meaning provisions at the outset of the loans.

Some changes presented on the applicable allowance percentage formula for consumer loans which increased these percentages for loans classified A and B. In other words, the best quality of loans that require some provisions.

The adjustment of Banagricola allowances to Bancolombia's regulatory frame, meaning additional [non-procuring] provisions, changes from the methodology to classified restructural loans, and it's a direct offence affecting provisions, specifically affecting provisions on the fourth quarter. I would like to highlight that 40% of the allowances are made up of loans classified as A, Colombia's highest quality, composed by performing loans.

In picture number 16 we show net interest margin breakdown. Net interest margin increased over the quarter reaching 7.2%, coming from 7% on the third quarter of the last year, and from 6.9% posted on the fourth quarter of 2006. Despite the recent trend we consider it appropriate to expect net interest margins to (inaudible) slightly throughout this year 2008 as a result of tighter competition for funding in the economy.

The last quarter of this year results are in line with our objectives. Specifically, our ratio of operating expenses to net operating income decreased from levels above 60% last year, reaching 53% on the average for the last year. Our medium term objective is getting this ratio below 50% in a couple of years. Our efficiency, measured as operating expenses over the average total assets, also improved, reaching 4.8% when calculated for the same period. Our return on equity was 24.4% for the year, improving from the 20.3% that we posted in year 2006.

Finally, in picture number 18, we summarize the evolution of our market share in Colombia. Our loans market share increased almost 1% reaching 21.7%. Our deposit market share represented a slight increase of about half a point reaching 19.2%. Financial leases, this experiences the resources of competition, that new players have entered the market, reducing Bancolombia's share of that business from -- to 44% from 46%. Nonetheless we continue to be very well positioned to maintain our leadership in the financial leases market.

At this time I would like to thank you for your attention, and stress that we are more than happy to take your questions and comments.

(OPERATOR INSTRUCTIONS).

Our first question is from the line of Mario Pierry with Deutsche Bank. Please go ahead.

Good morning. I have a question with regards to provision charges. As you mentioned the sharp increase in provisions was related to adjustments to Banagricola's book, changes in regulation, as well as a change in the long mix of the Bank. So I was wondering if, going forward, then, should we expect our provisions to grow more in line with long growth?

I would assume that the adjustments to Banagricola's book have been completed and that you are now also fully compliant of the new regulations. Is that fair to assume?

Thank you very much, Mario. Banagricola's adjustment is being made on the main lines, but it's not completed yet. We still have to make slight adjustments that we believe that we are going to make in the first half of this year. But the bigger part of it has also already taken place. So we believe that, yes, in the coming months most of the growth of provisions are going to be in line with the growth of our portfolio, since what has taken place is the adjustment to the new Colombian regulations that I describe in detail, and the impact of the Salvadorian additional adjustment is going to be rather small.

Okay, thank you.

You're welcome.

(OPERATOR INSTRUCTIONS).

And our next question is from the line of Alonso Aramburu with Santander. Please go ahead.

Yes, good morning. Just to follow up on the guidance question, you gave us guidance on the tax rate. It seems like this quarter you expect this tax rate was a little bit higher than the previous quarters. Do you think that's a level that will be sustainable for the rest of the year, or is that going to change?

No, I think that that should be quite stable. What happened in the last year is -- in the last quarter is that, well we had some increase in expenses, some (inaudible) taxes. because we produced higher income than what we were projecting at the beginning. So we had to make some adjustments in that, but no, there shouldn't be any changes that we foresee for the rate of taxation within this year.

So in effect this tax rate of around 29% is frankly what we should expect for '08?

Certainly, Alonso, yes, that would be right.

Great, thank you. And just one further question, can you tell us what the different growth rates were between Banagricola and your Colombian assets as far as loan growth?

I don't have the figures in my head, I will be happy to send them to you. But certainly we grew more dynamically in Colombia than in El Salvador. We are optimistic of the capacity of the Salvadorian economy to support the stresses from the international crisis, and certainly in Central America as a whole and in El Salvador in particular, there are good prospects of growth in the coming years. So in the mid term we are looking optimistically to the rate of growth of that economy and therefore to the demand for credit.

Great, thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS).

Our next question is from the line of Jose Restrepo with Interbolsa. Please go ahead.

Good morning, Dr. Londono. I want to know if -- which will be the impact of the remittance decrease in the growth rate of the operation in El Salvador? Because we see in slide number five that -- in the chart in the bottom that the growth rate in remittances is decreasing. And you said that the dynamic in El Salvador was due to very good remittances and investment in this country, so which will be the impact?

Yes, thank you very much, Jose. As a matter of fact the impact of remittances on the Salvadorian economy is quite weak, because remittances are coming from a population of about three million Salvadorians which are living in the United States and that remain in a very good quality of immigration status, which is higher than the rest of Latin America, and therefore they have good access to better work opportunities. Certainly, that is going to be affected. Unemployment is going to increase in the United States. Also, I believe that that increase is going, for the figures and projections that I see, very slowly. And the Salvadorian community, given its good immigration status, should not be affected very hard.

I would like to highlight also that, from the income point of view of the Bank, the total volume of remittances is not so income -- so strong income generator, but it is a strong determinant for the performance of the economy, and that decline that we foresee should not affect the economy very hardly, it will have some effect, and we hope that the growth that the economy is having in recent years would be an element to sustain the Salvadorian economy above those bad effects of some decline in the remittances.

Okay, I have another question, in [Print Colombia]. Do you think that it will be the date to begin to increase your investment portfolio due to the difference between rates in the United States and Colombia and other countries due to the increase in the reference interest rate from the central bank?

Well, actually, we're more investing in a more conservative way, we are not so speculative, although I appreciate your argument, but we, what we look at is just the possibility of maintaining a portfolio that meets two objectives. First, is to allow us to be a [market maker] for the [golden] data and for the [target bonds], a measure of which is possible in Colombia, and secondly to support the needs of the Bank's eventual access to special funding needs that require us to have those [papers] to [our balance], but certainly we don't anticipate any speculative move in our investment line in the near future.

Okay. And my last question will be with the acquisition of Banagricola, you acquired an insurance company and a pension fund manager. These houses are for sale, especially related with (spoken in Spanish), the members of the same economic group?

Well, we have expressed from the beginning that we are attempting to maintain the same strategic line that we have in Colombia in Central America, and that is that the Bank concentrates in universal banking, not including insurance. We nevertheless are not in a hurry to make a move. If we do make a move, we will make it with our shareholders through Americana, but we are in the process of slowly analyze and review the opportunities of the Salvadorian market and the position of the Bank, and the (inaudible) sale of (inaudible) business, and we will make a decision based on those facts.

Okay. Thank you very much.

You're very welcome.

Our next question is from line of Daniela Aslund, with Credit Suisse. Please go ahead.

Hi, good morning. I would like to know if you could give us some guidance about what you expect your loan portfolio to grow in 2008 and which segment you think it will grow the most? Thank you.

Okay, we, as we mentioned, we are expecting that the economy is going to be growing at around 5%. Therefore, given the last performance and the demand for credit, we believe that the growth for the sector will be between 15% and 18% loan growth for the year. We are optimistic also that we are going to be able to perform well in market share, but that is something that remains to be seen.

(OPERATOR INSTRUCTIONS)

Mr. Londono, there appear to be no other questions at this time. Do you have any final remarks?

No, thank you. I want to express again my gratitude to everyone that was attending to this conference call in which we have presented the results of the last quarter of the year, and the figures for the entire year that show very good performance of the Bank in total income, as well as strategic consolidation of our position up in Salvador, and also of the merger with the mortgage bank and the investment bank that we performed in the last couple of years. So thank you very much, and if you have any additional questions, please contact Mr. Jaime Velasquez or Mr. Juan Toro, whose telephones are on the press release that we sent to you. Thank you very much, and goodbye.

And this concludes Bancolombia's 4th quarter earnings results conference. You may now disconnect.