Grupo Cibest SA (CIB) 2009 Q1 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 the 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 were described in our reports filed with the SEC.

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

Good morning. I wish to thank everybody for your interest in attending this first quarter results call. As usual, we have a slide presentation in our corporate website in the investor relation page that we believe is quite useful for follow during the presentation.

Today, we would like to start the presentation by taking a look at our results which appear in page two of our slide presentation.

As we can see, despite decelerating economic environment in the economies where we are working, we are able to maintain the Bank's profitability, while strengthening our capital base, and also maintaining an underlying business expansion, with market share gains during the first quarter of this year.

However, some deterioration of asset quality was experienced, which we [contained] with an addition of reserves for loan losses. Let us take a look in more detail to our quarter results.

We can see them in page three of your presentation. Net income for the quarter was COP311.1 billion, that is COP395 per share, or at the rate of exchange at the end of the first quarter, $0.62 per ADR.

But at the -- just at the rate of exchange, it is $0.72 per ADR. That represents a 6% increase quarter to quarter, and 23% increase to the first quarter of 2008. So we have very dynamic performance of the net income.

Profitability of the Bank has remained stable. Return on equity was 19.9% in annualized terms during this quarter, versus 19.8% during the fourth quarter of last year, and 19.7% during the first quarter of last year.

The main drivers from the point of view of the revenue generation was that we were able to maintain -- to obtain a very solid income from interest, COP985 billion. That is an increase of 24% with respect to the third quarter last year, and almost stable if we compare it with the fourth quarter of last year.

We also had a record fee generation, with COP367 billion during the quarter. That is an increase of 20% if we compare it with the first quarter of last year, and an increase of 2% with the last quarter of 2008. And we have to keep in mind that the last quarter is usually a very dynamic quarter in fee generation.

Other operating income has declined, as we expected, due to changes in the valuation methodology that we have already discussed with you that is going to impact our results during the first half of this year, and also to non-recurring gains which were recorded in the last quarter of 2008, and that obviously are not present in this year.

Operating expenses have increased due to the growth of the Bank and other also -- and the impact of the modernization process that we are undertaking. Administrative and other expenses also declined with respect to the fourth quarter of 2008, represent an increase of 26% when we compare them with the first quarter of last year. Those expenses were determined by higher fees for software development, and other IT renewal and taxes, difference from income tax.

Personnel expenditure also went up. It declined with respect to the fourth quarter of 2008, but show an increase of 17% if we compare them to the first quarter of last year. But that increase was determined by wages increases, and also by the impact of devaluation in wages based in dollars, and by some increase in the headcount due to the growth of the institution.

Total operating expenditures consequently have come up to COP717 billion, that is a decrease of 2.5% with respect to the previous quarter, and an increase of 20% if we compare it with the first quarter last year.

Efficiency therefore has increased. Operating expenses, compared with net operating income, is at 49.8%, which is a slight decline from the 50.2% that we have in annualized terms in the previous quarter, and is stable if we compare them in the basis -- measured efficiency in the basis of expenditures to total assets remaining at 4.6%.

Credit cost has remained high due to the deterioration of asset quality. Provision charges during the quarter was COP340 billion. That is a decrease of 28% compared with the last quarter of last year, but an increase of 96% when we compare them with the first quarter of 2008.

In annualized terms, nevertheless, we have 3% total loans in provisions, while we have 4.4% of total loans in provision during the last quarter -- during the previous quarter, last quarter of 2008.

Past due loans, if we measure the asset quality by our past due loans that as you know are measured in every -- all the loans with more than 30 days past due, are in COP1,830 billion, with an increase of COP206 billion versus the last quarter of last year.

Past due loans right now are at 4%, which is an increase from the 3.6% that we recorded at the end of 2008. But we have been proactive, and allowances for loan losses have been made in accordance with the additional deterioration.

We have made COP2,351 billion in loan -- in allowances for loan losses during the quarter, which represent 5.1% of total loans and represent also -- total allowances represents 132% of the total past due loans in Bancolombia.

Asset quality, if we assess them by loan classification, has improved slightly. Loans classified as B have come up to be at COP1,931 billion, which is a decrease of 13% for what we have in the B category at the end of this year. And therefore, loans classified as A have increased to 91.6% from 91% that we have at the end of the year.

On loan growth, we had a rather stable position. Even though we show an increase in the figures that you have received in our press release, that increase is more than entirely explained by the devaluation of our dollar-denominated facilities. If we compare them in their own currencies, they have remained stable or declined slightly for the -- in the case of the dollar-denominated facilities.

But we maintained our loan activity, dynamic and active. We maintained the Bank lending. We are looking for opportunities of growth, and as a matter of fact, we have several [layers] of our assets which are growing, as is the case of mortgages that as we'd remember we have identified as a very good opportunity for growth.

Mortgages have grown 2% during the quarter, and we expect that they are going to remain dynamic in the coming months. I want to remember you that in Colombia, total mortgages to the GDP are still below 3% of GDP.

So that presents a very good opportunity which the government is taking for helping in the reactivation of the economy. As a matter of fact, the government is starting to offer a subsidy in the rate of interest that is definitely going to have a very good impact in the demand for new housing in the economy, and therefore is going to provide a good opportunity for growth.

We can see that asset quality and the loan growth figures in slide number six. We also have a very good dynamic in the underlying business, with a very important deposit deposit base activity that has increased our deposits in COP3.1 trillion (sic - see Press Release), that is 7.7% increase from the prior quarter, and an increase of 30% if we compare it with the first quarter of 2008.

Colombian peso-denominated deposits has increased 69 -- it has become 69% of our total depositing structure increasing 2.6% during the quarter. And dollar-denominated deposits increased 7% during the quarter.

That is driven by the good performance of our offshore banking franchises that continue to benefit from increasing client fund inflows. By the end of the first quarter, the ratio of net loans to deposits when including borrowings from development banks averaged 92%, decreasing from the 96% that we presented in the fourth quarter of last year, while the aggregate level of dollar interbank borrowing and overnight funds decreased 29% during the year.

Overall, regardless of the type of currency, Bancolombia maintained a very solid liquidity position. One of the cheapest funding cost and on a stable base of deposits, which have constituted our competitive advantage in the Colombian market and also in the Salvadorian market.

If we go to slide number eight, we can see that at the end of the quarter we have strengthening also our capital and our balance sheet. Tier 1 capital has increased COP573 billion as compared with the previous quarter due to high occupation of legal reserves and retained earnings, while Tier 2 capital increased COP519 billion driven by our successful issuance of an offering of subordinated notes in the local market.

As a result, capital ratio at the end of the quarter was 12.7%, an increase from the 11.2% that we had in the previous quarter.

Net interest margin, we illustrated in slide number nine. At the end of the quarter, it's slightly down from what we have at the end of 2008, coming from 7.5% to 7.1%.

We were expecting the decline. We discussed it with you during our last conference call, and we believe that some additional decline might still occur during the year as the Central Bank makes lowering moves in the rate of intervention.

So far the Central Bank has reduced the rate by four percentage points. We are already at 6%. That was the rate that the Central Bank had at the beginning of the increasing process in 2006.

However, most of the analysts believe that additional reductions has to come, and probably we are to expect for the rest of the year an additional 100 points in reductions.

We -- in the outlook of the economic performance, we make some illustration in slide number 10, and we would like to make a brief comment on these.

GDP growth for 2008 was 2.5% as it has been revealed during this quarter. The last quarter of 2008 growth was negative with 0.7% decline.

That was driven by a drop in investment and very important and significant drop in consumption. In addition, the latest economic indicators related to the activity of this year are confirming this slowdown trend.

As a result of this evidence, our team of economic research had to write down the GDP economic forecast, and now Bancolombia expects that the economy during this year is going to grow, but only 7%.

Likewise in El Salvador, also last year was of very slow growth, and we are expecting that this year, 2009, is going to be of zero growth. However, we still see very positive highlights for the possibilities of recovery of the Colombian economy and for the capacity of the Colombian economy to confront the effects of the current crisis.

First, we believe that the government has managed the economy well during the last years. Deficit is down, and therefore the government has room to maneuver to reactivate the economy and allow some increase of this deficit.

The central government has managed well the structure of the finance of the government and the country, reducing the portion of dollar-denominated debt, and also maintaining very well finance -- the economy.

Right now, all the financing needs of 2009 are being attended, and the government is already making operations to pre-finance 2010.

Not many emerging markets, not many emerging countries are the possibility of doing that. Also, we believe that Colombia is well prepared to manage the crisis because the Central Bank has performed very well.

The Colombian Central Bank was the first to start increasing the interest rates, and the first to start to cut interest rates, and therefore is providing good infrastructure for the growth of the economy and providing enough liquidity.

As a sample of this liquidity, it is important to mention to you that during the four months of this year -- first four months of the year, the total amount of private programs made to the market by this bond issuance in the market is three times as large as February 2008.

So we conclude that the -- both economies in Salvador and Colombia will present to us evolution that allows us to manage the Bank well, and maintain the profitability of the institution.

We emphasize that we have remained focused in capital and balance sheet strength, and that we are confident that our levels of capital and reserves, combined with our significant earnings and revenue power, and very well-positioned franchises, will maintain our liquidity position and our profitability.

At this time, we will be happy to hear your comments and take your questions. Thank you.

(Operator Instructions) And your first question comes from the line of Lucas Ramirez with Merrill Lynch.

Hi, thank you. Good morning, gentlemen. My question is on the Bank's asset quality. It seems like the pace of a non-performing loan formation seems to be accelerating at the Bank in line with the deterioration in the economy.

So I was wondering if this is a recurring theme that you see for 2009, a reacceleration of nonperforming asset growth, or do you see stabilization in the upcoming quarters?

And a second related question is, is there any particular sector or sectors of the economy where you are seeing a material pickup in the formation of past due loans?

Okay, thank you very much, Lucas. Yes, we are experiencing an asset deterioration, but if we look at the magnitude of it, it has remained very much in line with what we are expecting.

We have not experienced in the economy anything different from what we were expecting at the end of last year, and therefore we still maintain the position that we will be more than able to digest the deterioration of assets.

The deterioration of assets is in line with the slow activity in the economy and the downward pace of the economy, and it is affecting almost the entire portfolio in a very balanced manner.

If we see, as you mentioned, we are at 4% past due loans. That is above what we would like to maintain and certainly above what we have maintained in previous years, but it's not as high as something that will confront the possibility of maintaining our modern operations.

This year, we foresee that the cost of credit is going to maintain at high levels that we have had at the end of last year and during this quarter, but not speed up on the situation.

Great, thank you very much.

Thank you, Lucas.

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

Yes, Good morning gentlemen. Basically two questions; one, with the actual decrease of the interest rates by the Central Bank during the last couple of months, I see your average weighted cost in the first quarter was 5.41%. Where do you actually see this cost actually going at the end of 2009? That would be my first question.

And my second question, I would like to actually elaborate a little bit more on the question of Lucas. If you actually look at your past due loans for the first quarter which are 4%, we're working with a 30-day period. If you would look to that on the international standards of 90 days, where would that actual past due loans be? Thank you.

Okay, thank you very much, Andreas. What we have seen from the Central Bank are loans that are being quite [bold]. To tell you the truth, we were not expecting the Central Bank to move downwards as quickly as they have moved during these four months of the year.

The team of economic analysis of the bank has started to adjust the expectations of the end of the year. They have not quite come to the figures yet, but they are moving at something like 5% for the end of the year; so an additional 100 points of decline.

Now, in your second question; if we were to measure our past due loans by 90 days rather than 30 days, they would come up to 2.1%, which is a very low figure.

It's about half of what we are showing at 4%. We have made comparisons of our past due loans. If we measure them with the regulations in other neighboring countries, in other Latin American countries, and in the international basis, not only moving the entire package to 90 days, but just maintaining some at 30, even some at 180 as is the case for the mortgages in most of the countries, and they come up to about half of what we show.

Okay, I'd like to have a follow-up there. On the actual first question, I was actually talking about the cost of deposits, the average weighted cost. I see that in your presentation on slide seven, you're seeing an average in the first quarter of 5.41%.

And maybe I was misunderstood. At the end of the year, you're seeking only 100 basis points, so you're talking around 4.41%?

Okay, no. Thank you very much. I'm sorry that I misunderstood you. What we -- let me elaborate a little bit about our liquidity position and the benefits that we derive from the current situation.

Actually, we are making to -- we are starting to gain a good profit out of the good structure of the Bank, and our franchise of distribution. The increase in our checking accounts and the increase on our savings accounts have given us the possibility of reducing the rates of our CDs tremendously; even I would say slightly below what is the average rate in the market for those in accordance with what it should be.

In other words, as the liquidity has been incremented by the policies of the Central Bank, Bancolombia is making the benefit of its strong franchise, obtaining a cheaper [deposit] base.

And I will say that that will impact directly that 5.4% which is our average cost, and that will increase the percentage of our lower cost or no-cost funding, as compared with the CDs and higher-cost instruments.

But I wouldn't like to go into projections of it, because as I mentioned, the volatility of the policy has been high. We were not expecting the Central Bank to come as quickly as they have come downwards.

And it depends very much on how are we looking forward at our participation of checking accounts and saving deposits. If you look at that figure that you have referred to in page in the upper right-hand side of slide number seven, you can play around with those figures.

If the liquidity keeps coming up, we will probably do very well, in saving deposits and in checking accounts, and therefore lowering significantly our rate of funding. But the fact is that right now we are showing a very good performance in that line.

Okay, thank you very much. Have a good day.

Okay.

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

Good morning everybody. I just have a question on your expenses. I think for the third quarter in a row, we have seen expenses growing almost 20% year-on-year.

You did mention that part of this is related to salary increases, also modernization of the bank. Can you tell us or give us some idea of when should we expect the new expenses to start growing at lower rate? When should this modernization process that you are doing, when shall that be completed? Thank you.

The modernization process is going to take us a couple of years, but obviously the rate of growth of the expenses are going to level up I would say, during this second semester.

We are already constructed -- we have constructed a team of advisors and a team of people that is developing our IT, and we have already acquired most of the software. So I would say that we will expect for growing -- expect the growth of those expenses and maintain them high for about two more years.

Okay, and if I can follow up then on just a separate question, on your loan growth. Can you break down for us what was your loan growth between El Salvador and Colombia, and what do you expect this growth rate to be in each country for this year?

Okay, the first quarter is always a weak quarter in terms of growth, and if we look at El Salvador and Colombia, both of them have performed rather similar.

We have to keep in mind that in Colombia we have a securitization of COP200 billion during the [first] quarter of this year in mortgage procedure.

So that gives you a slight growth of the peso-denominated loans in Colombia, and also you have very minimum growth of the loan portfolio in El Salvador.

We believe that during the year, what we are expecting is about 8% growth. Probably last quarter we were saying that we were expecting something between 8% and 10%, but since the growth of -- the economic expectations have been coming down slightly, we also believe that there is some decline in expectation of the growth of the loan portfolio.

Okay. And then just a breakdown of this 8% growth for '09; how much from Colombia, how much from El Salvador?

Actually in the two economies, quite different. We don't see a significant difference in the performance that we are expecting in this year. Colombian economy and the Salvadorian economy are facing this crisis from very different angles, but the fact is that the impact of their growth is going to be very similar.

As you probably hear, we are expecting 0.7% growth in Colombia and 0% -- no growth in El Salvador. So that gives us the same possibility of growth in both countries. We have the -- our lending open. We are looking for business; we have enough liquidity to lend; we are looking at areas in which we believe there is growth. We are benefiting from the fact that international institutions are not as active in the region as they were in previous years.

So there is room for us to grow in replacing the activities of those banks. And we also see some economic activities that are -- developing world in particular, both governments are interested in promoting infrastructure development and construction, and that will give us full opportunities for growth, and also give the economy good externalities for other activities to develop.

Okay, thank you very much.

Oh, thank you, Mario.

And your next question comes from the line of Jose Restrepo with Interbolsa. Mr. Restrepo, your line is open.

Hi, good morning everybody. I want to ask you three questions mainly. The first is that we have seen this political process in El Salvador and Panama; so do you have any opinion about that -- it will impact your business development in these countries?

My second question will be all these efforts like electronic saving accounts [spoken in foreign language], and all these efforts to -- from the government to give access to the low-income people to the financial sector, how do you see it, how do you see it developing in Colombia?

And my last question will be do you have anything about expansion or new acquisition in the region due to this crisis that the prices of some companies are going very low?

Okay, thank you very much, Jose. And yes, we have experienced a recent political process in El Salvador that has changed -- has switched the line -- the political line of the presidency.

Actually, we are very clear about that since we manage businesses in Latin America; we take into consideration from the beginning that political volatility is one of the characteristics of the region. So we very much believe that we don't have a business model which is -- which is taking in consideration a particular political orientation of the economies where we work.

Actually, we believe that the differences -- and it's very clearly depicted now in South America, in Latin America in general, the difference are between good governments and bad governments. We have very good performing economies which are left-wing oriented in the management, in the government. Also we have very good performing economies with right-wing oriented governments, as we have the [contrary] in each one of those cases.

So we consider that all the businesses in the region should be separated from what could be the consequences of the political orientation of the governments, and whereas we -- you know, making benefit of the good or bad economic management.

And we believe that the performance of El Salvador, and with the expectations that [are with the] the new government are very good in the economic community, and internationally it has been well-received the new government.

And also in Panama, in a very different decision, I think that is going to be also positive. Bankarization, which is your second question, has been also an important area of growth for Bancolombia in Colombia.

If we look at what happens to GDP, GDP has doubled during this decade, and therefore banks have great volume of population that has reached the possibility of being bankarized profitably.

The efforts of Bancolombia has been on that line. We are very proud of having been the bank that has been maintaining a leadership in the establishment and operation of non-banking correspondence because we have spent many years developing the technology and developing the marketing model that will require for exploiting that model profitably, and we have been able to do that.

We have non-banking correspondence and complementary models of this division as something that we call the mobile points of services, which is like a smaller brother of the non-banking correspondence.

And through those means, we have been able to reach areas of the big cities and population in the outskirts of the country that have good economic activity to be exploited.

Colombia distinguishes itself by being a country that has its population and its economic activity distributed in a large geographical area. And in that, it is more similar to Mexico and Brazil than what it is to the rest of Latin America.

On the -- your third question of acquisition, obviously we maintain our policy and our strategy of growth, strong commitment to growth, and that growth passes through acquisitions. But obviously, as we have always expressed, our first commitment is not growth but value creation.

Today, prices are low, but the possibilities of making acquisitions which are profitable are not so easy. So we keep evaluating all the opportunities that appear under the current circumstances in which still it is difficult to access to the international capital markets, I mean, the current situation of economic activity.

And if we -- if something appears that definitely is right, and currently that we are not going to affect the balanced structure of the Bank and the profitability of the institution, looking forward, we will certainly look at it with interest. But it's not so easy at the moment.

Okay, thank you very much.

You're very welcome, Jose.

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

Yes, hi, good morning. My question is on the margin. You touched on the deposit cost coming down on the back of the Central Bank reducing rates. I'm assuming also as the yields will be coming down, you had mentioned in previous quarters that your mean would be on average similar this year to last year. I was wondering if you still maintain that view, given the more aggressive reduction of rates from the Central Bank.

Yes, I -- we maintain the same view actually, Alonso. In margins, do you remember that during last year we were able to increase the margin even above our own expectations, and that we started to say at the middle of the year that we were looking forward, seeing some decline of that margin?

And that is always -- that is what always happens in the scenario of reducing rates of interest. We believe that what we are achieving in more efficiency in funding our operations will somehow soften the effect of that declining in the interest rate, and will help us to manage that declining of margins, making it not so strong. So we maintain the view that we have had in that matter, Alonso.

Great, thank you very much.

You're welcome.

(Operator Instructions) And there are no questions at this time.

Okay, thank you very much, Pamela.

I want to thank everybody again for the interest in this conference call in which we made a point in showing the results of this first quarter that we find satisfactory in the sense that we have maintained the profitability of the Bank, and we have strengthening in our capital base, and we have a strengthening in our balance sheet.

And also, we have benefit from a very good performance of our underlying business expansion in the deposit taking and in the fee-generating process.

Thank you very much. And if you have further questions; you have the telephone numbers of our IR people in the press release that you received yesterday. Thank you very much.

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