Grupo Cibest SA (CIB) 2008 Q1 法說會逐字稿

Good morning and welcome, everyone, to Bancolombia's conference call. With us today we have the President and Chief Executive Officer, Mr. Jorge Londono, the Vice President of Risk Management, Mr. Juan Carlos Mora, 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 and good morning. I want to thank each and every one of you for your interest and attendance to this conference call that we have prepared to share with you Bancolombia's results. I would like to mention that, as usual, we have a slide presentation in our Investor Relation website that we recommend you to follow during this call.

At this time, I would like to introduce Mr. Jaime Velasquez, Chief Financial Officer, who is going to explain briefly the latest facts of the economy in the financial markets of Colombia and El Salvador. Go ahead, Jaime.

Thank you. Good morning. The Colombian economy carried the upside [growing result] of GDP stable for the year 2007 came at 7.5%, the highest since the late '70s, driven by private consumption and investment. Booming commodities prices have played a key role in the performance of Colombia. Its trade balance and exports have surged forward at 23% rate growth in December to 29% growth in February, driven by commodities-related exports, especially to Venezuela.

Inflation continues to be a main issue in Colombia's economy, as it remains more than 100 basis points above the upper limits of the Central Bank's target, driven mainly by food prices. However, after 375 basis points increases in its benchmark rate since 2007, the Central Bank's Board of Directors maintained the reference rate and change at 9.75% in the last two meetings.

On the other hand, Colombian peso has kept appreciating over the last quarter, driven by foreign direct investment flows, which in January had the largest inflow for a month in Colombia's history. Basically, high oil costs and gold prices are attracting further investment that accounts for almost two-thirds of flows, placing pressures to the currency that has gained more than 12% year to date.

Overall, analysts' consensus converged to a lower and close to potential rate of GDP growth for this year. This is supported by recent data, suggesting that deceleration of some leading indicators and in line with a stable interest rate scenario for some months to come, as long as inflation is contained.

Let us take a quick look to El Salvador's economy in slide number six. After GDP growth reached 4.7% on last year, the Salvadorian authorities are expecting a GDP growth of 4.5% for this year, driven by public infrastructure investment and pressure by energy prices and potential political uncertainty as a result of the proximity of presidential elections. On the other hand, remittances remain increasing above 6% on a yearly basis by the end of last quarter, in trend with the 12-month growth by the end of the last year.

As in Colombia, El Salvador's economy has been experiencing some inflation pressure, driven by food and energy prices. By the end of March, CPI increase for the last 12 months was around 6%, above from the 5% estimate from El Salvador's Central Bank.

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

Okay. Thank you. As far as Bancolombia's results for the first quarter of this year, I would like to begin by highlighting two points. First of all, Bancolombia obtained COP254b of net income for the first quarter, which represents an increase of 23% when compared to pro forma figures for the same period last year, driven by double-digits growth on net interest income, fee income and other operating income, mainly derived from treasury activities.

At the meantime, operating expenses increased only 9.8%, meaning an improvement in Bancolombia's sufficiency over the period analyzed. These better results were partially offset by a higher level of provisions for the quarter as a result of an increase in the level of past-due loans and higher tax expenses as a result of the dividend income received from our subsidiaries during this quarter. Also, we have to mention that this dividend income obviously is not reflected on the figures that we are presenting to you, which are consolidated.

Secondly, the asset growth dynamic, specifically the loan portfolio growth, has been moderated in recent quarters, as expected, derived from higher interest rates in Colombia and also derived from the peso appreciation and its impact on the loan growth, as it means a lower conversion of the dollar-denominated loans, which comprised around 26% of our total loan book at the end of the quarter.

Having said that, let's continue by taking a more detailed look at our balance sheet at the end of the quarter.

You can go to slide number eight in our presentation. Our balance sheet structure did not change much at the end of the last quarter. Net loans and financial leases represent around 71% of our total assets. As I already mentioned, net loans and financial leases continued to slow its pace of growth. By this time of the year, our net loan book was growing at around 35%, growth that has come down to around 29% when we compare with the pro forma figures for the first quarter last year. It is important to highlight that our Colombia market share remained stable over the period, close to 21.5% in terms of net loans.

Also, net investment securities participation on assets remained stable. They represent around 11% of our total assets. And from those, debt securities account for about 96%.

When measured in its denominated currencies, loan portfolio growth shows a slightly higher growth in the quarter. Peso-denominated loans grew by 3% in the quarter, which is 29% over the year. And dollar-denominated loans, when we measure them in dollars, grew by 4% and 19% for the year, respectively.

Bancolombia's loan mix had slight changes over the quarter. Corporate loans represent now a slightly lower percentage of 47% of our total loan book, while retail and small and medium-sized enterprise loans reached a little bit higher percentage, with about 32% of our total book. Financial leases represent 12.5%. And finally, mortgages represent 8% of our total loan book.

We can see, in slide number 10, the dynamics of our loan portfolio. And what we can derive from that is that the increase of small and medium-sized enterprises and retail loans has declined a little bit during this quarter. The most dynamic segment was mortgages. This is in accordance with the phenomena that we have been describing of a slowing down in the pace of growth of our total loans.

Asset quality at the end of the first quarter and past-due loans accounted from 3.4% of total loans, increasing from 2.9% registered at the end of the last quarter. The higher levels of past-due loans are explained by two factors. On the first place, as loan growth is covered, past-due loans for a period grow faster than total loans. Secondly, higher interest rates have a direct effect on the level of delinquencies. However, it is important to highlight that this asset deterioration has been accompanied by higher margins, which has helped to protect the Bank's profitability.

The coverage measured by the ratio of allowances to past-due loans decreased to 115%, coming down from 135% in the prior quarter. But still they remain very well above our target level of 100%.

Allowances for loan losses represent 4.15% of gross loans and financial leases, while non-performing loans represent 1.86% of them.

Bancolombia's deposit breakdown presented some changes over the period. We can see them in slide number 13. The deposit breakdown has evolved, showing that time deposits and saving deposits have been gaining participation over the quarter, reaching 44% and 38% respectively, while checking accounts, partly because of seasonal effects, have been reduced, reaching only 17% of that [structural funding].

The deposit mix change over the last year is mainly explained by the higher effect -- by the higher marginal reserve requirements of 27% in savings and checking accounts and 5% of time deposits imposed in the second quarter of last year. These reserve requirements makes more attractive the funding through time deposits. The marginal funding cost of those time deposits is much higher -- is much lower compared with the saving accounts.

Overall, funding costs kept slightly increasing, while deposits reached a cost of 5%, 20 basis points higher than one presented last quarter. However, Bancolombia has one of the lowest funding costs of the system, due in part to our broad base of customers and its large ranking branch network.

Bancolombia's 11.9% ratio of capital adequacy remains in a comfortable level, well above the legal minimum requirement in Colombia which, as you know, is 9%. In addition, shareholders' equity, by the end of the quarter, amounted to COP4,921b, decreasing 5.3% over the quarter as a consequence of the dividend payment of COP447.5b, approved in the general meeting of last month of March.

Let's now review Bancolombia's income statement. Those figures appear in slide number 15. Net interest income increased 29% when we compare with the first quarter of last year, driven by total interest income increasing 37%, but offset slightly by the interest expenses, growing at 47% over the same period.

As mentioned before, on a year-over-year basis, net interest margin increased from 6.3% to 7%, driven by the loan growth combined with higher interest rates on the loan portfolio. Moreover, the first quarter was a solid quarter for loan interest income when compared to the pro forma figures for last year.

Net fees and income from services grew around 15% year over year, while other operating income for the quarter was four times figure, reaching COP135b, driven by an outstanding performance of income related with forward contracts, which more than offset the exchange loss presented as a result of the strong peso appreciation. Bancolombia continues to benefit from its broad base of customers and its bigger contract size capacity, maintaining a leadership position on the peso/dollar exchange market.

Operating expenses maintained a stable outcome over the quarter, registering a slight increase of 0.3% as compared with the figures of the last quarter of 2007 and an increase of 9% (sic - see press release) when we compare it with the first quarter of last year, as a result of cost control programs being correctly implemented by us.

In effect, net income of COP254b is higher than the pro forma figures obtained for the first quarter of last year, despite considerable level of provisions and higher taxes on the quarter.

On slide number 16, the net interest margin breakdown is presented. Loans net interest margin of the first quarter was 8%, while net interest margin from debt investments decreased, registering a margin close to zero. Despite this, debt securities performance brought the net interest margin decrease only from 7.2% to 7%, due to the low exposure that the Bank has in debt securities.

Total net provisions for the quarter ended at March 31, 2008 amounted to COP173b, increasing 146% as compared with the pro forma figures of the first quarter of last year, driven by the loan portfolio, stricter provisions according to regulation and higher level of past-due loans on the first quarter of this year. This figure also represents an decrease of 18% when we compare them with the figures of the last quarter of 2007.

Finally, about efficiency, Bancolombia's ratio of operating expenses to net operating income reached 48.5% during the first quarter of this year, which compares favorably with the 59.9% that we registered in the first quarter of 2007 pro forma figures. This same positive trend can be seen in the ratio of operating expenses to average total loans, which decreased to 4.6% on this quarter, coming from 5% in the first quarter of 2007.

At the end, return on average equity for the first quarter is 19.7%, remaining stable as compared -- when compared with the 19.6% registered in the first period of last year.

I want to, at this time, to cordially invite you to the Bancolombia Day event that will take place in the New York Stock Exchange on May 12. This event is going to be held from noon to 2pm and is by invitation only. Please contact the event organizers to confirm your [assistance] to this event, if you have not already done so. The phone number is 212 406 3691. Or contact our Investor Relations office for more information.

At this time, I would like again to thank you for your attention and we will be happy to take your questions and comments. Thank you. We are ready --

Thank you, sir. (OPERATOR INSTRUCTIONS). And your first question comes from the line of Mario Pierry with Deutsche Bank.

Hi. Good morning. Just if you can comment on the deterioration in asset quality, is that something you think will continue? So how much worse could it get and what type of impact do you think that would have on provisions for the year? Thanks.

Okay. Thank you. Yes, we believe that we are going to have some more deterioration during this year. However, we still don't see that this is going to reach to critical levels. There is no macroeconomic signs of increasing in the unemployment or bubbles in the prices of any assets, like real estate assets or things like that, which are the main drivers of a rapid deterioration of our quality.

We are going to have more deterioration because of the effects that we have mentioned, in that as the total loans grow a little bit slower, the pace of growth of past-due loans remains faster than the growth of total loans for a while. And also because the newer structure of our loan portfolio that includes a little bit more retail and small and medium enterprises also will show us higher past-due loans.

But the fact will remain true that we will be able to show a net interest margin that will absorb significantly this deterioration without affecting markedly the outcome and the net income of the Bank.

And just on the second part and how would this impact provisions for the year?

Well, we believe that we are going to grow in line with what was maintained. We keep our target of maintaining provisions of 100% of our past-due loans. And that means that in the new regulation we will have a projection of our provisions very much in line with what it has been in the last two quarters.

Thank you.

Thank you, Mario.

(OPERATOR INSTRUCTIONS). And your next question comes from the line of Alonso Aramburu with Santander.

Yes, good morning. I was wondering if I can ask just a follow-up on the provisions question. Do you have any adjustments that you still need to make, regarding the change in regulations last year?

Yes. Thank you, Alonso. No, as a matter of fact, this is a quarter in which we have not experienced any change of regulation and we don't have any additional adjustment to make. We have our portfolio in line with the new regulations. So that's why I say that it might remain rather in line. We might have, in the coming July, the application of the new model of provisions for the consumer credit, for the consumer portfolio. But that is going to have a very low impact on our provisions because they are very much in line with that new regulation.

Great, thank you. And regarding adjustments due to the consolidation of Banagricola, there's some of those -- hello? Sorry. Regarding adjustments to the consolidation of Banagricola, do you have some of those adjustments left?

The consolidation of Banagricola, from the point of view of provisions of the Colombian regulation, is already completed.

Great. That's helpful. And just one last question. Do you think that the level of loan growth you've experienced this quarter, around 21%, do you think that's sustainable for the rest of the year?

I think that it might be going to roughly be between that 15% and 20% more than the 21% that we experienced during this quarter. We have maintained that view; our view is unchanged. In other words, first quarter is still a little bit higher than our projections.

Great.

Okay. Thank you, Alonso.

Your next question comes from the line of Jose Restrepo with Interbolsa.

Good morning. I want to ask two questions. First of all is that do you believe that this effective tax rate will continue during the year, because according to my calculations it's around 38% and I believe it's too high?

And a second question will be do you expect that operational expenses keep this growth pace during the year, at less than 10%?

Okay. On the first question, Jose, no, that calculation for the tax relation is too high. Actually, what we were trying to explain is that during the first quarter we have a [wheel] effect. We have to pay taxes on the total amount of income that includes the Colombian balance. In other words, we have to credit the taxes on the dividends received, while on the consolidated balance, as we presented to you, we do not show that impact. We are projecting a total tax for this year of about 31% for the consolidated figures.

Could you please repeat to me the second question? It's related to expenses. What is --?

My second question was if you expect that the operational expenses rate growth will be lower than 10% or less than two-digit growth.

Certainly we do.

(Multiple speakers).

Yes, Jose. We are satisfied with what we have achieved and we believe that we could maintain our expenses at around 9% this year.

Okay. And a final question will be which will be the impact in the FX trades and all the treasury business of this government bond swap that the Colombian government is planning to do, this COP2 trillion swap it's trying to convert from pesos to dollars? Which will be the impact in the treasury business, if you can give us a guideline, please?

Well, it's probably too early to say, but I think that that is a measure in the line of what might be helpful. We certainly will be eager to make some of those derivatives that are allowed by this new regulation and we just have to wait and see how that is going to impact the market trend. But certainly, that should be helpful.

Okay, thank you.

Thank you.

Your next question comes from the line of Mark Lane with Lazard.

Good morning. Can you characterize the competition you're seeing in the deposits market? My interest is typically the interest expense line will probably be more important, going forward, given where loan growth is expected to be.

And can you share with us your outlook on deposit pricing and also your strategy in growing deposits in light of that?

Okay. Very good, Mark. Thank you. We are still feeling that the market is presenting to us a reasonable liquidity. Nevertheless, the regulation on reserve requirements has forced us to go heavier into term deposits -- time deposits, rather than on savings account. And therefore, our total cost of funding is increasing. That is like a policy, a strategy that we have been able to apply in accordance with our desire, which optimizes the cost of our funding, but doesn't eliminate the increase in that cost.

We have also started to perceive that the long-term rates of interest have started to decline. So we are looking with moderated optimism that this curve of increasing of interest probably is reaching its highest part. In other words, what we feel from that is that we have already managed to incorporate the cost -- the increased cost of funding through our rates of interest of our assets and therefore we have defended the margins of the operation, and that for the duration it's not very likely, at least not significantly likely. And we don't feel afraid of that perspective.

Thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS).

Okay. It appears that there are no more questions. And once again to thank you for your attention and remind you that, as usual, if you have any further question or another comment, you can contact the IR Manager, Juan Esteban Toro, and Jaime Velasquez or Sergio Restrepo at the phone numbers that are shown in our press release that you received yesterday.

Thank you again.

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