Grupo Cibest SA (CIB) 2008 Q3 法說會逐字稿

Good morning, and welcome everyone to Bancolombia's conference call. Today's call is being recorded. Please note that this conference call will include forward-looking statements, including statements related to our future performance, capital position, credit related expenses and credit losses. All future-looking statements whether made in this conference call or in future filings, or press releases, or orally, address matters that involve risk and uncertainties.

Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general economic and business conditions, changes in currency exchange rates and interest rates, and introduction of competing products by other companies, lack of acceptance of new products or services by our targeted customers, changes in business strategy and various other factors that we describe in our reports filed with the SEC.

With us today we have the President of Bancolombia 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. Thanks to everyone for your presence at this conference call that we have prepared with the results of the Bank during the third quarter of this year. As usual, I would like remind you that we have a slide presentation in our Investor Relations website that I invite you to follow during this presentation.

On these turbulent times we have prepared as much information as possible to allow you to project the impact of the current events of financial world on the performance of the economies in which we are active, and consequently on the performance of the Bank in the near future.

I would like to first -- to ask Sergio to present to you the situation of the economy in the region and particularly in Colombia and in El Salvador.

Thank you, Mr. Londono. Good morning. From a historic perspective Colombia is very prepared to deal with the more challenging environment of the global economy. By increasing interest rates, controlling foreign indebtedness and speculative inflows, and maintaining a firm focus on inflation we believe the Central Bank has contributed to protect the long-term growth. At the end, regardless of the reasons, Central Bank policies helped to lower local risks amidst the current state of financial markets.

A monetary policy with less liquidity on higher interest rates has managed to accomplish a reduction in the rate of loan growth over the past year. Exchange rate flexibility with mechanisms of volatility control has also allowed to the accumulation of high levels of foreign currency reserves. Capital controls have sheltered the local market from the global turbulence. Although Colombian markets have suffered from peso depreciation, falling local bonds and equities, they seem to have been modest compared to other economies in the region.

Economic growth at the second quarter of this year was 3.7. The lower growth is mainly explained by lower public and private consumption along the year. The rate of growth of private consumption amounted to 3.1, while the rate of growth of government consumption was 1.7, affected basically by government spending cycles, as local authorities took office at the beginning of 2008.

We expect that government consumption -- those local consumption to regain a higher pace towards the end of this year. On the other hand, the rate of growth of investments continued to surpass the rate of growth of the aggregate economy, and it should have an effect on Colombia's future potential growth and performance of inflation. As of today the present levels of external indebtedness are 14% to GDP, and the total debt to GDP is 43%. That means that only a third of the total public debt is foreign currency. And only 19% of this portion will mature, become due within next two years.

On the other hand, Colombia's financial system find itself with a higher level of allowances, varied capital ratios, and a lower exposure to foreign funding. Recent measures, liquidity in Colombia has been normal, and the Central Bank has room to take some measure in that front if needed. At a meeting held October 24th, Colombia Central Bank modified the existing ordinary reserve requirement as follows,11% for the main deposits from a former 11.5%, and 4.5% for time deposits under 540 days in the year-and-a-half from the existing 6%. The Central Bank estimates that this move with free liquidity worth some COP1 trillion, being one of the measures implemented for assuring an adequate liquidity scenario in Colombia for year-end.

Now, brief ideas in El Salvador. Inflation as of the third quarter of 2008 accounts for 8.7, mainly due to the constant hike in oil prices, which directly affected food prices and agro industrial production. With oil prices plunging back after the third quarter, inflation is expected to slow down. Despite more challenging economic environment in US, family remittance reached 2.9 billion as of September 2008, increasing 5% as compared to the figures as of September 2007.

Likewise, as of August, Salvadorian exports were growing 18.6% year-over-year, while total inputs were increasing 17% during the same period. The only thing we will have in this scenario is the -- from the next elections that will be held in January and March next year. So after this quick review of the economy I would turn to Mr. Londono again who is going to go over the Bank results.

Okay, thank you. And just to go into the Bank results, I would like to begin as usual by summarizing what we consider the highlights of our figures. We had a solid quarter with COP367 billion in net income. That is 16% increase when we compare it with the third quarter of last year.

If we look at the previous quarter, the second quarter of this year, it shows a slight decline, which is more than explained when you take into consideration that in the second quarter we registered the non-recurring income derived from the VISA and the Multienlace transactions, which together amounted to COP41 billion. Loan growth during the quarter is moderate. However, it was still at 18% over the year, and 7.3% over the quarter.

Deposits, and this is a very good news, grew more than what we are growing in loans and in assets, at 21% over the year. Five-year loans remain stable at 3.5%. And we have an increase in allowances of 12% in the quarter. That has put our coverage in 124% coming from 120. Efficiency is [swaying] in very good levels, below 50%. We have 46.4% efficiency, which we consider a nice figure in the current times.

We have some increase in our investment portfolio, and that is a decision that is entirely in line with the very strict and very careful management of liquidity risk that we have put in place in the Bank. With this growth in investments our total asset growth was 19% for the year. It is important after this quick review of our periods to look at the impact of depreciation in the growth that -- which you will read in our figures and our press release. Actually we have 13.6% depreciation during the quarter that we are reviewing, during the third quarter this year.

So let me go and see how the growth was when we take off the impact of this depreciation. The peso-denominated loan portfolio, which accounts for about 71% of our total portfolio, grew during the quarter 4%, and it has shown a growth in the year in pesos of 16%. The dollar-denominated portfolio that has 29% growth rate is with a growth of 2% and 18% growth over the year. At the same time, as I mentioned, in investments the --- we have some growth, and the part of investments that grew faster was the dollar-denominated investment that grew 13.6%.

Let's take a look in more detail to the loan portfolio structure, and how it has performed during the last quarter. We have in the slide number six a good presentation that allows you to see how the loan portfolio has performed. When we look at the loan portfolio, as we consider that is more [elusive] to you to look at it by type of client, we find that we have in our corporate clients 48% of our total loan portfolio, that is about COP20 trillion. That increased during the quarter slightly above 10%, 10.2%, and is showing an increase over the year of 13.5%. The retail, and small and medium enterprises accounts for about 32% of our total loan portfolio, and that is [COP13 trillion]. That part of our portfolio increased 5.3% during the quarter, and it still shows a very dynamic growth during the year of more 30, 30.7%. But as you can see, during the last quarter the growth in corporate was much more dynamic than the growth in retail and small and medium enterprise.

Financial leases is COP5.3 trillion, and it grew 3.8% during the quarter, and is accounted for 22% growth during the year, and mortgages is 8% of our total portfolio. It is COP3.4 trillion. If we include the part that we have securitized, it is COP5.2 trillion, and it is growing at 23 -- very stable 23% growth over the year.

Asset quality has stabilized. We must remember that we started to increase very dramatically the level of provision -- the level of provisioning of our institutions since more than a year ago. And we also have put in place measures for monitoring our portfolio and for monitoring our approval process.

The charge-offs of this quarter were about the average of what we have been doing. In this year we had COP132 billion in the quarter of charge-offs. And we are coming to 4.4% of allowances over gross loans. Let me make some comment about the Colombian regulation in the accountancy of past-due loans, which -- I think that is adequate at this time. As probably you know, past-due loans in Colombia are all the facilities -- all the total facilities that have past-due of more than 30 day in any quarter.

So if we were to measure us, we believe that it's more the standard of the region of taking 90 days and 120 for mortgages. Our total past-due loans from the gross consideration will be 1.8%, and we will have total allowance of about -- of over 200%.

So we believe that we have been doing, as it is shown in slide number nine, a good job in the total allowances. We have been protecting the Bank permanently for the last one year-and-a-half. And as I mentioned total allowances to total gross loans are at 4.3%. And we have fastest growing growth in allowances than what we have in past-due loans.

We have been able -- and this is very important -- to maintain -- in this scenario of increasing allowances, we have been able to maintain our net interest margin. In other words, we have been able to manage pricing, in a way that has maintained our net interest margin in a growth part.

Also in our investment, even though the volatility, we had good performance in our investment. We have our investment limited to what we consider is adequate for managing the risk of liquidity of the Bank. We have sales of our portfolio in mark-to-market. But even if you look at our non-realized gains and losses, they have remained stable during the year, and we have obtained, as I mentioned, some nice profit in the last quarter out of our investment.

I have to strengthen the fact that we have a very important -- very significant competitive advantage in our funding cost and the structure of funding of our Bank. Average weighted cost of deposits is 5.4%. That is 250 basis points below inflation. We show that in slide number 11. But also the funding is growing, as I mentioned in the highlights, at 21%. So that has allowed us to also maintain the growth part in the net interest margin.

In the slide number 12 we show that our total funding, including domestic development banks, and the tenth-year subordinated debt that we have issued, plus our core deposits are below 100% of our total loans. So we have from out of our 6.4 million clients a good base of funding. We have in Colombia something like 4.5 million checking accounts, and about 6 million of savings account. And also in El Salvador, we have 1 million savings account and about 600 checking accounts. So that is our retail support, a whole -- a retail support for our funding that makes the institution not dependant at all in the wholesale funded for the support of our operation.

The capital ratio has remained well above the regulation. It's at 11.3% for the end of the quarter. The revenues are growing in every line, at a very good pace at double-digit growth. Net income is growing at 29% and that has been an effect of the growth of our portfolio, and also the growth of our interest rates, as I mentioned before. The non-interest income also grew 23%, and other operating income grew at almost 22.5%.

I would like to summarize just mentioning that we have our return on average equity for the third quarter of 26.7% and 25.1% in the annualized -- if we annualized the first nine months of this year. The efficiency remain close to 46%, and the Bank continues to focus very rigidly in cost control, and making productivity gains.

Some final considerations that we should expect is that given the lower growth environment on focus shifts to our more selective loan growth (inaudible) where corporate clients will probably play a more active role. As you can see that was true in this quarter where corporate clients provided us the bigger part, the biggest chunk of our growth.

We are also committed to balance the growth with the expected rise in risk. In other words, we will continue to keep a close eye in asset policies. At the same time, we see our branch-based deposit franchises with more than 6.4 million clients and their stable deposits as a competitive advantage to perform well in this new financial environment which is part of this new world that we have (inaudible) to live in with the current financial crisis that we are passing through.

We will continue to monitor cost control and productivity gain as part of our efforts. The bank is currently in the process of changing its core technology system, which we expect that will bring productivity gains after it is totally implemented.

At this time, I will be very happy to take your questions and the comments. Thank you.

(Operator Instructions) We will pause for just a moment to compile the Q and A roster. Our first question does come from the line of Tito Labarta with Deutsche Bank. Please go ahead with your question.

Hi, good morning. Could you just comment on what is your outlook now for loan growth next year? I know you benefited a lot this quarter from the depreciation in the peso, but how do you see it for the next year given the slow down in GDP growth, and then also how will you see that affect your asset quality? In other words could you see your NPL ratios increase more [with respect to] how high could they increase next year? Thanks.

Okay. Thank you very much. I -- we believe that under this current circumstances it is quite difficult to project loan growth. We will say that we are very conservative in the outlook of loan growth for the next year, and we still don't have total clarity of what will be the growth of the economy.

Let me say it simply that we believe that we will have growth during this next year, but it will be -- still we don't have the total framework of what had happened out of the turmoil to be able to project the growth for the next year. Some of the analysts have been projecting something between 3%, 3.5% for the next year. We believe that that is possible, but we would rather abstain for about a month and see how things have settled down to project the growth.

But that would also allow us to give some thoughts at what will be the growth of our loans. And as I mentioned at the beginning, we are very conservative and we expect that the growth probably will come mainly from the corporate sector. We have 10% growth of the corporate sector in this quarter, and we consider that that is a very positive sign for the Colombian economy, because that corporate loan is part of investment projects of the corporate sector that is going to guarantee some growth of the economy, and some growth of the demand of credit for next year.

But please understand that at this time it is difficult to give you a figure of our expectations.

Okay. And then -- and just to clarify the 3% to 3.5%, that was referring to GDP growth, and then also on the asset quality?

Yes, Tito. That is, 3.5% also is what some of the analysts -- between 3% and 3.5% is what some of the analysts have been projecting of GDP growth for next year. It is just a coincidence that this 3.5% is the same figure that we have for five-year loans in our bank.

Okay, thanks. And then just a follow up on the asset quality, I mean do you think it could deteriorate further for next year? How much could it deteriorate, any ideas on that? Thanks.

Actually what we have been doing is just to strengthen our path of provision. And in the current circumstance what we show is that the bank is able to make provisioning of about 2.2, 2.3% of total loans during the year. And we very much feel comfortable that that will allow us to maintain the coverage of the bank in the neighborhood of 120% as we are keeping it at the moment.

We have not seen any sign of catastrophic acceleration in the deterioration of assets, but we cannot give like a projection of how much the past-due loans for the economy are going to be in the next year.

All right, thank you

You're very welcome.

(Operator Instructions) Our next question is from the line of Alonso Aramburu with Santander. Please go ahead with your question.

Yes, good morning. Just a follow up on the previous question. Can you give us maybe some sort of outlook on your net interest margin, and what would happen if the Central Bank starts slowing on rates, which seems to be the case for the beginning of next year? And the second question would be on the IT CapEx that you are doing, when is that expected to be completed, and what is the total amount of the CapEx for the 12 months?

Okay. In net interest margin, we believe that it is -- it could maintain a net -- stable net interest margin. Even so, as you say, we have this positive sign of probably the Central Bank is still lowering a little bit the rate of [intervention]. But we don't see possibilities of increasing it further, but neither of decline in the net interest margin. We could maintain the net interest margin at the current levels. But if you check at it historically, they are quite high. And it is more than what we expect it to be in the midterm. In other words, probably in the next two years what we see is a slight decline of the net interest margin. But we expect that in the current circumstances with the -- probably decline and the rate of intervention of the Central Bank we could maintain it.

Now, probably Sergio can help me with the IT and the CapEx.

Certainly. As we have mentioned before, the budget for these IT CapEx is around $120 million, and it would be a split over three years. That means that next year will be an expenditure of around $40 million.

Okay. I hope that answers your question, Alonso.

Yes, that was very clear. How much do you book of that CapEx in '08?

In '08, I don't have the figure with me Alonso. But we can go back and send it to everyone --

Great. Thank you.

-- how much will be the figure in the books. The thing is, what we are trying to do is, whatever we can [expend], we will do it. And we try not to keep -- I mean, we try to keep as low as we can in our books. And basically what regulators ask us to do. Otherwise, it will be expense.

Okay, that's great. Now, I was just trying to see what the incremental expenditure would be from '08 to '09, but that's great, you can give to me later.

Okay.

Okay.

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

Good morning everybody. I want to -- I have two questions. The first is, how much will be the synergies related with the new headquarters that you are next to open? And the second one, I have heard a rumor that -- about you're getting a general license to operate in Panama, is that true or you had that in your plans?

Okay. About the headquarters, actually we have -- we presented you when we started the project some figures, in which we show that we are expecting some savings out of the fact that right now we are operating our general direction. The headquarters of the Bank we are operating in 15 different locations. And that is pure madness.

We will be very happy if we hadn't had to make such a big investment, but certainly that investment is an investment that is going to create value, both because it is allowing us to manage more efficiently our facility, our real estate facility, because we are going to be more efficient having all the direction in the same place. But also because, as you know, in Colombia, Jose, we have a good tax rebate of investments that apply to this particular investment, and that makes it very sound financially for the bank.

And on the other [part], we keeping looking at opportunities, and we keeping looking at possibilities. And certainly Panama is an interesting location, and we keeping -- evaluating opportunities in that area. But there is nothing that we are at the moment prepared to share with you on those efforts. There is nothing concrete in which we are working at the moment.

Okay, thank you.

Thank you, Jose.

(Operator Instructions) Our next question is from the line of [Mark Leen] with Lazard Asset Management. Please go ahead with your question.

Thanks. My only question on net interest margins, that has already been dealt with. I've got a question on deposit composition. We've seen a migration towards time deposits. Can you give us some color? Did they migrate from your checking savings accounts, or was there an active campaign to get deposits from outside your -- from outside your banking -- from outside your bank?

Okay. No. Actually, that has been a general phenomenon in the economy. When the Central Bank has started to restrict liquidity slightly, all the system started to [breath] a little bit heavier on time deposits. And so we did. But as we show today, we still maintain our preeminence of our lower cost deposit base, out of checking accounts and savings accounts for funding the bank.

When we look at what we did in time deposits, it's just the time deposits that we normally get from out of our customer base. It's not like part of any new effort, as you wanted to know, any new effort of looking for new clients that make us time deposit. It is just the usual suspects and the usual clients that we every time get.

Just what happened is that as interest rate -- the interest rate has increased, then it becomes more attractive for our corporate clients and our wealthy clients to make time deposits rather than savings accounts, so things like that. And that also make part of the explanation of that shift. But it's not been very significant. Still the core deposits come out of checking accounts, savings accounts, and so on.

Thank you.

Thank you.

Our next question is from the line of Andres Jimenez with Interbolsa. Please go ahead with your question.

Yes, good morning gentlemen. Basically, two questions. One, I saw recently that you guys absorbed Sufinanciamiento. And I wanted to know if actually going forward you're going to actually keep on absorbing other of your subsidiaries, internally and also internationally. That would be my first question.

My second question is if you actually at this time of the year already have some guidelines on what your strategies are going to be for next year, especially in the expansion of the local market. I see that there is a lot of banks that recently have been actually opening different branches around the country. Recently in the press it was there. And I would like to know if that's going to be one of your strategies knowing that international competition has become a little more fierce especially recently with the merger of (inaudible) and (inaudible) and their actual interest in jumping into the Columbian market. Thank you.

Thank you Andres. Well, the announcement about Sufinanciamiento is just part of our normal management of our financial structure in the world. In other words, what we are having is the assets of Sufinanciamiento being funded directly into the book of the bank, which is the more efficient way of doing that. So we maintain Sufinanciamiento as we have had it for the last years since we acquired it about three or four years ago.

And it -- that is the arm in which we operate the consumer credit, but not necessarily is the book in which we more efficiently can maintain it in the middle term. So we -- keeping moving those assets to the bank, whenever it is possible or it is required for funding purposes.

We have been expanding our network. We have more than 700 branches. We have been talking about that very frequently. For the next year, we plan to be very aggressive in the expansion of our ATM network. We expect to increase 300 ATMs. That is our response to the increased demand for transactions.

We believe that the bank is very well positioned to serve the market of Colombia in the sense that our network is very balanced with the distribution of population in the country and also with the distribution of businesses in the country. Probably we will have to make some additions in our branch. We every year make it, but nothing too dramatic apart from this that I am telling you in ATMs.

Okay. And a follow-up question. Would it be any interest of the bank actually expanding more internationally knowing that the price, the momentum is there, where there is cheap assets that actually can be acquired, and the bank actually has a nice solvency ratio?

Yes Andres. My colleagues were making me -- they reminded that I didn't answer that part of your question. Actually we -- that is how our [payment] work, and we are always real quiet in looking at opportunity. We have to see that these, as I mentioned at the beginning, that turbulent times price of assets are low, but also the risk is high. So we have to keep what has been our discipline up to the moment, we have to keep in identifying opportunities. We are certain that we are going to be able to create value for our shareholders. And at the moment we are not specifically looking at anything, but we maintain discipline of evaluating everything that is presented to us and all that we find, that is any possibility of being acquired. It's a permanent strategy of the bank, but nothing specifically that we are to mention at this moment.

Okay, thank you.

Thank you, Andres.

(Operator Instructions).

Okay. If we don't have any more questions I want to close the conference call. I want to again stress our gratitude to everybody for the presence in this conference call. And just sum up by saying that we are very pleased with the figures of this quarter, and that we are taking a very strong management for leading the bank through the turbulent times that we are living. And we believe that we are doing so successfully up to now. Thank you very much.

Ladies and gentlemen this does conclude today's conference call. We'd like to thank you for your participation and ask that you now disconnect.