Grupo Cibest SA (CIB) 2008 Q4 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 forward-looking statements, whether made in this conference call, in future filings, in press releases, or verbally, address matters that involve risk and uncertainty.

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, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy and various other factors that we describe in our report filed with the SEC.

With us today is the President and CEO of Bancolombia, Mr. Jorge Londono, the Executive Vice President, Mr. Sergio Restrepo, and the Chief Financial Officer Mr. Jaime Velasquez. At this time I would like to turn the call over to Mr. Londono. Please go ahead sir.

Thank you and thanks everybody for your interest and attendance to this fourth quarter results conference call. As usual, we have a slide presentation that you may follow during this presentation.

First of all, I would like to turn to Mr. Sergio Restrepo who is going to share with us, briefly, our views about the macroeconomic environment and the financial markets of Colombia and El Salvador. Please go ahead Sergio.

Thank you, Jorge. Good morning. Colombia's Central Bank estimates that GDP growth for 2008 could be around 3.2%. It is a sharp decrease from the rate of 7.5% we had in 2007. Consumption growth fell from 6.9% in 2007 to 2% in the third quarter of 2008. And public and private investment followed very different trends during 2008.

Whereas private investment continued to grow at a similar rate compared to 2007, 12% during the first three quarters of 2008 versus 13.7% for the same period of 2007, public investment was affected by changes in local administrations which caused delays in the execution of projects.

The effects of the global economy downturn have been felt, primarily, Bancolombia's retail sector as growth in export start to decelerate in the second half of 2008. It is expected that the trend will continue through 2009, although the reduction in income from exports, as well a decrease in FDI is likely to have a negative effect on GDP growth. This, in fact, would probably not be as significant for Colombia as exports account only for 20% of the GDP.

Despite the [small] prospect of global economic growth, we're expecting lower, but positive, economic growth for 2009 within the range of 1% to 3%, supported by government consumption and decreasing inflation, [room] in monetary policies, and healthy financial systems.

Since public investment slowdown in 2008 responded to a political cycle, it is likely that this expenditure component will recover in 2009 as local governments start to expand their budgets. Inflation, on the other hand, is expected to fall considerably during 2009 and to meet again, the Central Bank established target, 4.5%, 5.5%.

The decrease in inflation should be driven by falling international prices of food and energy and a lower domestic demand. The recent depreciation of the Colombian peso, though, might cloud this scenario. On the monetary policies the Central Bank has cut its overnight lending rate 200 basis points, a measure expected to gradually contribute to the real economy in the medium term. Today it stands at 8%.

Finally, the financial system has sustained solid levels of liquidity and has not been affected by maturity and currency mismatches. The private sector, then, is expected to continue having access to credit which should, in turn, help offset some of the fall in output, expenditure and employment.

These relatively favorable conditions respond largely to improved regulation of the financial system, as well as to the countercyclical restrictive monetary policy measures taken by the Central Bank between 2006 and 2008. These measures include raises in interest rates, limit on the net foreign currency dominated asset position for financial institutions, a deposit requirement on foreign debt and for foreign investment, which was (inaudible) removed, and a limit on the gross foreign exchange derivative positions for banks.

It is fair to say that Colombia's financial sector is well capitalized, it is liquid and has a proper coverage for past due loans, while, on the right hand, households have already taken great steps towards rebalancing their finances as a result of higher interest rates in the last couple of years.

And now let me move to El Salvador. And, in line with the global economic trend, El Salvador economy grew at a lower rate during 2008, and have to do, first with difficulties endured by the economy of the United States, as US is El Salvador main trading partner and its main source of remittances. And secondly, with higher food and oil prices which inadvertently impacted consumption, according to estimates from El Salvador Central Bank, GDP grew around 3.2% in 2008, compared to 4.7% in 2007.

Inflation for the year 2008 closed at 5.5%. This represent the lowest inflation rate in Central America, (inaudible) remittances stayed lower and their pace of growth posted a positive increase of 2.5% in 2008. It was approximately $3.8 billion. However, this adverse effect could be offset by a decreasing trend in commodity prices which has a positive impact El Salvador economy as this country is a net importer. Exports were dynamic in 2008, posting an increase of 17%, compared with 2007, with non-traditional exports performing particularly well.

Finally, the Salvadorian financial system remains solid and has continued to promote lending through the private sector. The loan growth for last year was around 6.5%.

And after this quick review of these two countries, I will turn again to Mr. Londono who's going go over the Bank's result.

Thank you, Sergio. In a very challenging scenario, Bancolombia deliver strong results during 2008, expanded its main business areas, maintained a strong balance sheet in terms of coverage of loan losses, solid liquidity position and adequate capital base. We can see those figures illustrated in slide number four.

Net income increased close to 19% during the year, while the Bank maintained a profitable operation with an average return on equity close to 24%, adding value to our shareholders. The year ended with a higher than expected loan growth of 18%, where the main contributor was corporate loans with 22% growth, while personal loans grew only 13.5%.

The growth of our net income, and the prudent dividend policy, determined the growth of our shareholders' equity to COP6.1 trillion with an increase of 18% with respect to the end of last year, 2007.

The markets where we operate have been strongly affected by the economic turmoil, and growth has declined sharply, as Sergio mentioned before. But, nevertheless, we managed to execute a strong quarter with a considerable amount of provision charges that determine our increase of coverage from 124% to 135% of past due loans coverage.

And also, in spite of non-recurring costs that weighted in a net amount of 19% of our income before taxes, we maintained a healthy growth during the fourth quarter of the year, with an annualized growth of loans during that quarter up 20% and annualized growth of deposits of 34% during the quarter. At the end we maintained a dynamic position and a very strong liquidity of our institution.

Higher efficiency also helped for our results. It is important to mention that we achieved 47.8% efficiency ratio coming from 53% efficiency in the year 2007.

At December 31 and the end of the year 2008 mortgages amounted to COP3.4 trillion, or 8% of gross loans. Also, as usual, we note that Bancolombia securitized about COP233 billion during the fourth quarter. And therefore, if we want to assess more adequately the dynamic of this specific segment, it is good to look at the outstanding security loans and the outstanding loans of the balance sheet. If we made those calculations the segment will record an increase of 3.2%, compared with the third quarter, and of 20%, if we compare it with the previous year. We maintain a strong position, in our view, of mortgages, and we expect that this is one line that could grow very rapidly, even under the circumstances of 2009.

Favored by a more liquid environment in Colombia, we continued to benefit from the above trend of client deposits. In the fourth quarter, our deposits experienced a dynamic evolution and grew close to 9% in the quarter. And in addition, average weighted cost deposits remained stable during the period, helped by seasonal behavior of non-interest deposits which increased almost 25% in the quarter, excluding the cost of funding mix.

Notwithstanding tighter general liquidity conditions for the dollar funds in the fourth quarter of the year, deposits denominated in such currency, increased also 2.6%, benefitting from a reallocation of funds by some of our clients. While US dollar interbank borrowings also increased 19% in the same period, as proof of our strong relationship with our corresponding banks. Nonetheless, in line with our strategic objective of maintaining a very solid liquidity position, the amount of liquid assets in dollar denominated assets exceeded the amount of interbank and overnight borrowing in $280 million by the end of the year.

All-in-all, our business model is not dependant on wholesale funding. In fact, the ratio of net loans to deposits, including borrowings from development banks, finished the year close to 96%. While Bancolombia continues to have one of the cheapest funding costs in Colombia and in El Salvador, benefit from our deposit oriented franchise with more than 6.4 million clients and 7.2 million savings accounts and half a million of checking accounts. These are all elements that are determinant of the stability of our funding and the cost advantage that we have mentioned.

Rule changes concerning valuation methodologies for derivative instruments, established by the Colombian Regulators, resulted in a reduction of the current value of derivatives, which negatively impacted the income from derivative financial instruments in a total amount of COP98 billion, which affected with the line of other operating income.

On the other hand in the same last quarter of last year, we recorded non-recurring gains in sales of investment securities for COP55.5 billion related to the sale of Multienlace, which we agreed on the beginning of the year and had finished the payment in that quarter. And that is also accounted for in the same line of our income statement.

During the fourth quarter also, operating expenses increased 26%, and that operating expenses were negatively impacted by also our non-recurring items. AgriBank recorded a special provision for fidelity bonuses for the first time. Previously we accounted for that expense on an ongoing basis. That item represented COP31 billion, and that explains about a third of the quarter-over-quarter variation in operating expenses.

I would like to close by summarizing some of the main ideas that we have discussed in these conference calls. We are realistic, indeed, from the market standpoint we see that 2009 is expected to be a challenging year again, for the world economy, and also including Columbia and El Salvador, where we have our main operations.

Yet, it is also fair to say that we observe today very strong financial sectors in both countries, which have proven to be in a good position to face the challenging global environment. We definitely believe that it is fair to express that Columbia's financial system is in a relatively good health. It has sustained solid levels of liquidity, it's well capitalized, and has not been affected by the elements that have determined the current financial turmoil.

We would also like to stress that Bancolumbia delivered solid results in the previous year, expanded its business, and maintained a strong balance sheet, increasing the reserve for loan losses, while at the same time, focusing on maintaining a solid liquidity position and adequate capital base. We definitely will continue to focus in these very important pillars of our strategy. We could expect credit costs to remain high during 2009.

Also, it is quite difficult to perceive how it will compare to the already relatively high credit costs presented in 2008. We could expect some gradual margin contractions, as part of a new accommodative interest rate scenario in Columbia. Also, as you see, this margin was increasing during the year 2008. So we don't expect that it is going to decline, on average, significantly during 2009. And also, we have shown our ability to maintain adequate spreads to manage these movements in the rate of interest.

We will remain vigilant of our asset quality, focusing in finding a good balance between growth and a rising risk environment. In line with this, we could expect loan growth for this year to be below 10%. Bancolumbia's management team will continue to work diligently to position our franchise to benefit from our competitive advantage and a strong balance sheet.

At this time, I will be happy to take your questions. Thank you.

(Operator Instructions) We'll pause for just a moment, to compile the Q&A roster.

And your first question comes from the line of Lucas Ramirez with Merrill Lynch.

Hi, thank you, gentlemen, good morning. I have two questions regarding credit quality. My first question is on provisioning, which was up pretty substantially in the fourth quarter. And, given what you're seeing in terms of the potential deterioration in asset quality going forward, I was wondering if you consider this level of provisioning of the fourth quarter a reasonable run rate for the next two or three quarters? That's my first question.

And second, on credit quality on El Salvador, can you comment on the trend in credit quality there in your business, Banagricola, in the fourth quarter, and what would you expect in 2009, there, as well? Thanks a lot.

Okay, thank you very much, Lucas. Yes, we increased significantly the provisioning level during the last quarter, and our policy tends to lead us to maintain that level of provisioning during the year. It certainly has some movement from quarter to quarter, depending on the speed of deterioration of assets.

But the important thing is that we are expecting that deterioration of our loan book is going to be, basically, in the same trends of 2008 during 2009. And therefore, we should maintain a similar level of provision, and perhaps some slight decrease in the presentation of past due loans for the year end 2009. We are not seeing anything dramatic going on, and I think that that is valid, as well, for Colombia, as it is for El Salvador.

Okay, and just a follow-up. Do you see material deterioration in asset quality in El Salvador in the fourth quarter?

No. It was the same trend that has been presented during the year. As Sergio mentioned, the Salvadorian economy grew very slowly, and probably is going to present a negative growth during 2008. But the economy has some sectors that are performing well, and in general, there is not a calamity going on in any significant area of the economic activity.

Okay. Thank you very much.

Thank you, Lucas.

And your next question comes from the line of Mario Pierry with Deutsche Bank.

Hi, good morning, it's actually Tito Labarta. Just a couple of questions. First, a follow-up on the provision on the asset quality for this year. Does that mean you expect provisions to remain in line with the fourth quarter provisions, represent around 4.5% of your loan portfolio? Do you expect that to be the run rate for the year, or do you mean more the coverage ratio to maintain around 130%? If you could clarify that.

And then second, how do you see the lower interest rate environment in Colombia will affect your margin this year? Thanks.

Okay. Thank you, [Mario]. Yes, during the last quarter of last year, we increased significantly the level of provisioning. So we don't expect the average level during the quarters of 2009 to be as high as they were in the last quarter of 2008. What we are seeing, and we are expecting, is something on the average similar in the year 2009 to 2008. So it will be at a deterioration of, let's say, something between 2.5% and 3% of our loan portfolio. That is going to represent an increase in our party loans at the end of the year, and also a significant increase in our provisions.

Now, on margins, what we expect is that the rate of interest is going to keep in decline. And that is a scenario that send to us some challenges to maintain the margins. And, when we look at last year, we took the advantage of the scenario of raising interest rates, and we managed to end up 8.5% interest margin. So we probably won't be able to maintain that 8.5%, but we are going to maintain the average for the year. And we are going to be moving around the 7.5% margin. That is what we have maintained for the last couple of years.

Okay, thank you.

And your next question comes from the line of [Steve Yuan] with Trilogy Advisor.

Good morning, thanks for having the call. I'm just wondering if your asset quality continued to accelerate, and having a problem, in a declining interest rate environment, are you able to increase the net interest margin to potentially offsetting some of the credit costs?

And second question is, this asset quality issue, is there any particular sectors being weak and having problem? Thank you, bye.

Thank you. Actually, it's a matter of what the market allows us to do. By the book, we may say that the cost of [quality] is determined by the cost of the money, the cost of managing the institution, and the cost of risk. But not always, you can make that cost, you can incorporate into the cost that you are offering. It's the difference of the market.

Certainly, we have lines as auto loans, which had a higher deterioration, and we have to try that in accordance with what we have seen for the future. And we will maintain an adequate cost in a long-term basis, probably not taking into the cost all the increase determined by the deterioration.

But what we have shown in the past is that the Colombian economy has allow us to manage the margin on the average in a very good level, been able to incorporate the increasing average risk of our loan portfolio.

So the answer to your question is, yes, we believe that we have the ability to increase -- mainly the main increase in the costs are due to risk.

And your next question comes from the line of Andreas Jimenez with Interbolsa.

Yes, good morning, gentlemen. Basically, I would like to actually know that, in the current environment that we're having in interest rates, and that the Central Bank actually more of a trend to actually keep on reducing to the end of the year, your investment portfolio, I saw that in the fourth quarter, was actually 0.8%. Were you expecting a higher actual margin on that side? During the year, what are you actually expecting? Because I've been seeing that you guys have been actually quite active in the margin, in actually picking up paper. And I was expecting that you would have a higher margin on that side, and be able to actually have a higher, a more sustainable 8.5% on the top line.

And my second question would be, what's your actual duration inside the portfolio that you currently have in investments? Thank you.

How was the second question again, Andreas, please?

Yes, the second question would be, the actual duration that you actually have currently in your investment portfolio, as I've been seeing that you have been securitizing a lot of the mortgage side, and actually repurchasing that paper inside the market, and taking it to [hold for] security. Thank you.

Okay, sure. Thank you very much, Andreas. Let me make some comments about our investment portfolio, and what we are foreseeing and the performance of it. I'll start by the total duration of our portfolio right now is 2.4 months. And actually, what we have been doing, in the near past, is concentrating and maintaining a portfolio which is being calculated in accordance with our model of liquidity risk.

Certainly during the last quarter, we saw an increase, because as we mentioned, we had a good performance of our funding, and it was core funding. And also, that determined some temporary increase in our portfolio, which was beneficial in the scenario that you are mentioning, of declining interest rates.

But we are not planning to manage a speculative portfolio, if we may say so. We maintain our policy of managing a portfolio in which we can operate the market, in which we can perform our role of market (maker for the Colombian debt. And also we can perform a good job in the distribution of other assets. It might be that the corporate market develops also ahead in this year, and we will attempting to play a role on that.

So I believe that the margin of our portfolio might be good, because the rate of interest, as you mentioned, are going to be in a declining path, but we are not planning to make that a main part of our business.

Okay, thank you very much.

You're welcome.

And your next question comes from the line of [Mark Lane] with Lazard Asset Management.

Good morning, gentlemen. Could we go back to the significant deterioration in credit quality you mentioned in 4Q? Could you just share with us which particular segments were hit worse than expected, whether it's mortgages, SME, or was it just lumpy corporate loans?

And my second question is, is there a desired level of provision coverage going forward, given the length and depth of this slowdown is somewhat unknown? Can you share with us your thinking around any desired levels? Thanks.

Okay, thank you, Mark. During the last quarter, most of what we saw in the deterioration was the figure of coverage that increased very rapidly, because we increased coverage from 124% to 135%. But certainly, there was also a significant deterioration, and the main line, as I have intimated, was auto loans that deteriorated significantly.

What happened there is the transportation activity has been declining a little bit, and some loans to transport equipment have been showing bad performance. But again, we believe that that pattern is not going to be increasing significantly in the coming months. That is an element that somehow is going to behave with the same line from now on.

On coverage, if you remember, in the past years, we have maintained our coverage at about 120%. Right now, with the [feels] that we have of higher deterioration, we believe that it is wise to increase it slightly. And that is why we have maintained it at 130%, which gives considerable strength to our balance sheet. We attempt to maintain that type of level, of coverage of 130%, close to it or around it, for this year.

Thank you.

You're welcome.

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

Yes, hi, good morning. A couple of questions. Just going back to the last question, can you let us know what percentage of your portfolio is auto loans? That will be my first question.

I don't know, Alonso. Auto loans represent a very small percentage about --

2% to 3% of our loan portfolio.

Around 2% to 3%, and let me see if I can calculate it. It is COP1.3 billion, from COP44.6 billion. So, auto loans is a small percentage, it's only 3% something percent.

Okay, thank you for that. And just going back, again, to asset quality, I'm trying to put a number on the non-performing loans. Do you think NPLs reaching 4% this year will be a reasonable assumption for you?

I believe that it might be around that figure. That will be a reasonable assumption, increasing to 4%, 4% and a little.

Okay, great. And just, finally, on expenses, if you can give us what your sense is about FX expenses growth and operating expenses during '09? And specifically, also, regarding the fidelity bonus provision that was booked in fourth quarter. Is that something that we should expect to have in every fourth quarter, like it happened this year?

Okay, I'll start by the fidelity bonuses, and then I'll go later on to our provision of efficiency. Fidelity; the adjustment that we made in the fidelity bonus, was that we were accounting for it in an ongoing basis. In other words, this is a bonus that we pay every five years to our workforce, and we were accounting for it in cash terms, in some sense.

And now, we decided to make a provision. So it was just a once-occurring item. We already booked a provision for that, and for now on, we will end up accounting on a cash basis. The annual cost of that fidelity bonus is not going to change, and that is about COP12 billion (inaudible).

And will that be booked every fourth quarter, I didn't understand at all?

No. We had to book the total provision of a payment that we make of about COP12 billion. But we make a provision of it, because as it is earned by the employee during five years, what we decided was to make an actuarial provision of it of about COP30 billion this year.

But again, what we are going is to maintain that provision from now on, and we are going to account COP12 billion a year increase in that provision, as we were doing before, of COP12 billion a year expense in payment. We [built up] the balance line of that provision, but that is a one-time action.

In a monthly basis.

And we pay in a monthly basis.

Okay. Great, thanks.

Okay, very good.

And your next question comes from the line of Lucas Ramirez with Merrill Lynch.

Hi, thank you. I just have a follow-up question on your expenses in 2008, which were up 17% year-on-year. How much of that COP2.6 trillion of operating expenses was due to the technology upgrade that you are doing at the Bank, and how much do you still expect to spend in 2009, regarding the technology upgrade?

Okay. Yes, the technology upgrade is an important process in the [year]. The accumulated expense of that was almost COP31 billion, COP30.9 billion. We believe that it is going to go on for about that same level, for the coming two years, that is.

Okay, thank you.

You're welcome, Lucas.

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

Hi, good morning, everybody. I wanted to ask two different questions. My first question will be, you are making big provision during '08, especially in the (inaudible) quarter. We can expect a huge recovery of provisions in the next few years, for example, in 2010, 2011 when, if this asset deterioration won't happen in the future, will be my first question? I think it will reflect in higher net income in those years.

And the second question will be, which will be the use of these bonds that you are issuing, these subordinated bonds? Do you have the need to [report] your equity base to have higher capital equity ratios?

Okay thank you, Jose. We are not, right now, looking at a possibility of recovering of provisions. Because as I mentioned before, we foresee that the deterioration of our loan book is going to be, during this year, in the same line of 2008.

Nobody knows what is going to happen in 2010. Certainly, when this process of deterioration starts to recover, there will be a significant movement of that. But we rather abstain of projecting when is that going to occur.

On your second question, we are taking the advantage of the current liquidity situation of the country and we decided to go on with an offering of subordinated bonds. We believe that the market is right for that offering and certainly, being those subordinated bonds, that could impact our solvency and our capital adequacy.

But as I mentioned before, we are not precisely in need of that, since we are well above 11%. And we had yesterday our general shareholders' meeting, and the shareholders unanimously approved our distribution, which is in line with our dividend policy, but is slightly more strict than what it was in the previous years.

So the Bank is maintaining a very prudent dividend policy that keeps us with a good capital level. But certainly, these subordinated bonds, if we are successful in the offering that we are doing today, are going to help.

Okay thank you. And a last question will be, how have been the behavior of Panama (inaudible) Puerto Rico and Miami with this international turmoil in terms of loans and deposits?

We are performing very well, and we are very satisfied that our clients are moving deposits to our operation. And I think that under the current market conditions, the offering of whitepaper (inaudible) sort of investment books that we have, looks attractive to our clients. And Colombian clients also look at Bancolombia as a very well-known operation, and they know what we do, they know where we invest money, and they find our offer attractive.

So we are happy with that and we have gained the advantage of maintaining a good position of liquidity in dollars, thanks to the performance of those units. And also thanks to the performance of our relations with correspondent banks that have been increasing again the facilities offered to ourselves.

Okay.

Thank you.

(Operator Instructions). And your next question comes from the line of Rusty Johnson with Harding Loevner.

Hi good morning, the question I have regards to the shifting of demand, clearly to the corporate side and away from all others. Could you explain where the demand pull on the corporate side is? Are they basically refinancing their balance sheet as they, say, lose capital in the international global markets? Are they really using credit for growth for GDP, or are they just refunding, given that you now have a balance sheet that you could actually provide them with credit? So maybe we can understand why the strength in the corporate side is divergent from the weakness in the retail side?

Okay. Certainly, it's an important element to look at. We have seen a rather good quality demand of our corporate sector. Certainly, there is a higher preference for liquidity that has determined some increase and certainly, there has been a movement of foreign finance debt to Colombian finance debt.

We, nevertheless, believe that there is also a significant part of it that is the ongoing development of investment projects in which they have been involved and they are maintained.

So it is not just a matter of short-term effect. It is a matter of the Colombian economy maintaining some dynamics and maintaining some increase in the total output, obviously not at the levels that we were enjoying in 2007, but some reasonable levels so far.

We maintain our expectation that there is going to be a positive growth during the 2009. And as usual when the economy grows, the financial sector has the opportunity of growing, even at a multiple of what the GDP grows.

Okay thank you.

You're welcome.

And your next question is a follow-up question of [Mario Pierry] with Deutsche Bank.

Yes. Could you just tell us what is your outlook for fee income growth this year? And then I think you also mentioned that you were going to [look] for your efficiency ratio, if you have a target for that? Thanks.

Fee income last year was not the most dynamic element in our P&L, but I believe that we may be finding something around 14%, probably a little bit higher than what we have in 2008. That will be reasonable from what we have already experienced in the first two months.

Sorry? Okay. I believe that we don't have more questions. I want to thank, again, everybody for the attendance to this conference call. And as usual, I would like to call your attention that, if you do have any further questions, or you require or any precision in the information, the department of Investment Relations is going to be ready to send you, or anyone of us who the telephones appear in the press release will be more than happy to attend any further questions.

Thank you and goodbye.

This concludes today's conference call, you may now disconnect.