Grupo Cibest SA (CIB) 2010 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to Bancolombia's first quarter 2010 earnings conference call. My name is Marisol and I will be your coordinator for today. At this time all participants are in a listen-only mode. Following the prepared remarks, there will be a question and answer session. (Operator Instructions).

Please note that this conference call will include forward-looking statements, including statements related toward 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 involves risks 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 reports filed with the SEC.

With us today is Mr. Jorge Londono, President and CEO of Bancolombia, and Mr. Sergio Restrepo, Executive Vice President of Corporate Development.

I would now like to turn the presentation over to Mr. Jorge Londono. Please proceed sir.

Thank you and good morning. I wish to thank each and every one of you for your interest and attending to this first quarter 2010 results call. As usual, we will begin with a brief discussion regarding the macroeconomic environment in Colombia and in the region. I will ask Sergio Restrepo to give us a brief review.

Go ahead Sergio.

Thank you Mr. Londono and good morning to all our participants.

Our Economic Research team revised upwards the projections for 2010. They changed GDP growth from 2.2% to 3%. That decision was based on three elements; first, external factor; second, the positive growth in private investment; and third, the better than expected recovery of household consumption as a reflection of improved retail sales performance and increased consumer confidence in November and December last year.

Additionally, consumer and industrial confidence indicators have been improving consistently since the end of 2009. Disbursements for consumer credits grew 45%, mortgage loans 57% and credit cards 23%. And the urban unemployment rate fell to 12.3% in the same month, 1.2 percent points lower than that for March 2009.

On the other hand, there was a decline in inflation in the first quarter 2010; 1.98% for 12 months and 2.24% for April. These levels and a positive future outlook on the subject allowed Central Bank to cut its repo rate in the region of 50 basis points on April 30 leaving it at 3%, which should further stimulate economic activity.

For the rest of the year our Economic team expect interest rates to remain stable and inflation to continue within a target range of 2% to 4%, established by Central Bank. They also expect inflation to end 2010 at 3.4%.

With respect to El Salvador, I would just like to highlight the IMF is signing a [$790] million stand-by agreement that should anchor further fiscal [quarters] in the next few years.

After this quick review on the economic environment, let me turn the presentation back to Mr. Londono who will discuss the Bank results.

Thank you Sergio. I will start taking a look at our first quarter results summary. I will lead you, if you are following the website presentation, to slide number two.

For the first quarter we generated earnings of COP341 billion, which represents an increase of 10% compared with the same quarter of last year. These results reflect lower credit cost, solid non-interest income, stable operating expenses and strong earnings for our Investment Bank.

Unfortunately, the good performance in these areas was partially offset by mark-to-market losses in our debt securities investments, and also by low income from loans due to the lower interest rate environment.

The quarter results represent a 14.5% annualized return on shareholders equity, and are backed by a strong balance sheet, solid liquidity and a less leveraged capital structure.

Let's begin the discussion by taking a look at provision charges and asset deterioration and the balance sheet coverage. You can see some figures illustrating it in slide number three. During the first quarter provision charges, net of recoveries total COP142 billion, significantly lower than the levels reported in the first and fourth quarters of 2009. This could be explained by several factors.

First, asset deterioration declines, in the first quarter 2010 versus the first quarter 2009 new past due loans were 27% lower and loan charge-offs were 25% lower.

Second, we have during the previous year lower economic expectations in 2009 and 2008, and those were reflected on higher reserve for loan losses that produce higher provision charges during such periods. However, as we see from what Sergio told us, better economic data, including lending and better economic outlook in general started to have a positive effect on our provisioning model and resulted in a lower provision [volume] in the last quarter.

And third, the significant portion of our new past due loans occur on loans that were already part of risk credit categories and that had already been subject to higher reserves for loan losses. As a result, the increase in past due loans and the -- had a moderate impact on provision charges during the last quarter.

Regarding our balance sheet, we maintain a strong coverage against credit risk allowances for loans -- credit allowances for loan losses represented 5.8% of total loans and 138% of past due loans. If we measure that in a more international standard, which are not 30 days, but 90 days and 120 for mortgages we will have a total delinquency of 2.3% and a total coverage of 250%.

Let's now move to see the net interest income. We can see slide number four, where we have some figures about it. Our net interest income total COP770 billion in the first quarter, down 26% as compared to the fourth quarter and down 22% when we compare with the first quarter of 2009. These variations are explained by sharp decreases in interest rates.

Interest from investment securities, which incorporate the interest accrual of debt securities and mark-to-market valuation adjustment, totaled COP46 billion in the last quarter, and that is considerably lower than in the comparable quarters. This performance is explained by lower interest rates in our books and some mark-to-market losses during the period.

It is also important to remember that, during the fourth quarter of last year, non-recurring income was registered in our investment portfolio.

Interest on loans and financial leases total [COP1.12] trillion. That is a decrease of 9% and 30% respectively when compared with the fourth quarter and the first quarter of last year. These decreases in interest income are explained by the rapid and large interest rate reductions occur in Colombia within the last year and also, to a lesser extent, by lower loan volumes in the first quarter of this year versus the first quarter of 2009.

As we have previously mentioned the low interest rates are very rapidly transferred to our variable rate loan portfolio, which is the largest part of our loan book. Also, the lower interest income was partially offset by lower interest expense. The low responding cost was not enough to prevent a margin compression in the quarter. We will look at this market compression in more detail and it is presented in slide number five.

Annualized net interest margin declined during the quarter to 5.8%, significantly lower than the 6.7% recurring net interest margin the fourth quarter of last year. This variation is primarily explained by the lower income from investment which, as we just saw, decreased 85% over the quarter and also, to a lesser extent, by lower margins on loans and financial services.

Margins breakdown show that annualized net interest margin for investment reach even negative territory, almost 1% negative in the first quarter, which is considerably lower than -- from the 2.5% margin obtained in the first quarter of 2009.

On the other hand, annualized net interest margin for loans and [overnight] funds reached 7.1%, which is very similar to the 7.3% that we obtained in the first quarter of last year. Also, it's above and -- the 7% that we had in the third quarter of 2009.

At this point I would like to emphasize that our significant (inaudible) repricing, together with a more favorable deposit mix, has helped us defend our margins. All in all, interest expenses decreased 17% as compared with the previous quarter, the fourth quarter of 2009, and were half the interest expenses that we presented during the first quarter of last year.

Average weighted annualized deposit cost reached 2.7% in the first quarter of this year, down from 3.4% and 5.4% in the fourth quarter '09 and in the first quarter of '09 respectively.

Looking ahead, with the surprising interest rate cut in Colombia and the increasing competition for loan volumes will pressure us -- our asset deals. However, our competitive funded costs and the normalization of income from investment should offset short-term pressures.

Non-interest income had a good performance; let's move to slide number six and we will see some figures about it. During the first quarter net fees and income from services totaled COP374 billion, which was an increase of 2% when compared with the first quarter of last year. Our Credit and Debit Card business continued to be a significant fee generator. And specifically, we continued our efforts to increase debit card usage among our customers.

As of March our clients' aggregate payments to point of sales were increasing 18% as compared with the same period of last year. While we ended the period with 1 million traditional credit cards and 1.3 million of our private label card with the joint venture with Almacenes EXITO and 5.3 million debit cards means from collection and payment services it remains solid increased 10% and 29% compared with the fourth quarter and with the first quarter of last year respectively.

In contrast, fees from fiduciary activities decreased as compared with the fourth quarter '09, but increased a little bit when compared -- 3% when compared with the first quarter of 2009. The quarterly decrease is explained mainly by seasonal factors, typical of the first quarter for the year.

Regarding our other operating income, we have revenues of COP190 billion, up 44%, up 50% compared with the respective first -- fourth and first quarter of 2009.

Other operating income's performance was boosted by solid combined revenue of net foreign exchange gains and derivative financial instruments, and also by solid earnings from our Investment Banking unit related to gains and detail of equity securities from its private equity portfolio. As a result of these divestitures, we recorded gains from sales on investment securities of COP34 billion in the first quarter of this year.

Moving to slide number seven, we will see operating expenses' performance. Operating costs totaled COP731 billion in the first quarter of this year, stable from our previous quarters and increasing 2% as compared with the operating expenses of the first quarter of 2009.

During the first quarter 2010, there was an increase in personnel expenses of 6%, as compared with the last quarter of last year. Such increase is primarily driven by annual wage adjustments, which take place during the first quarter of each year.

During the quarter, we continued our plan of a number of cost containment initiatives. These initiatives, together with lower [building] renovation expenses and lower currency translation of expenses in the US dollar expenses had a positive impact in lower administrative and other expenses.

All in all, costs totaled COP345 billion, which is a 6% reduction with respect to the last quarter of last year.

Now let's take a look at the growth of our loans and actually what we see in this chapter is that we have recovered the dynamics of our loan portfolio, not yet very strong, but certainly is very significant change of direction of the evolution of the total loans.

As of March 2010, 23% of our loans were denominated in US dollars. Therefore, a sharp movement in the peso/dollar exchange rate experienced during the last year produced immediate effects in our dollar denominated loans translation into pesos, which makes our consolidated loan volume analysis a little bit difficult. In order to isolate this effect, let's take a look at the loan book, the type of currency and their respective performance.

During the first quarter, we experienced a mild recovery of our lending activity in our operation in Colombia. Colombian peso denominated loans reached COP32.25 trillion by the end of the quarter, up 2% during this quarter. On the other hand, US dollar denominated loans amounted to $5 billion and they were stable during the quarter.

Let me bring to your attention the peso denominated loans valuation during the last quarter, where a mild recovery in lending activity took place. This, together with improving signs in economic activity and consumer confidence, allow us to be more optimistic about the future performance of loan volumes in Colombia, where we have our main operation.

After contracting for two consecutive quarters, affected by higher repayments from corporate firms, commercial loans grew 1.7% during the last quarter. Likewise, consumer lending in Colombia reversed its downward trend and showed some increasing activity in the first quarter. Consumer loans increased 2% in the quarter, while mortgage origination continues to outperform other segments.

Outstanding mortgage balance in the country grew by COP200 billion, while COP105 billion was set [aside] during the same period. When taking into account securitization of mortgages, the total origination of mortgages grew by 4% during the quarter.

The better activity in mortgage lending is explained by higher demand, resulting from lower long-term interest rates in Colombia and also by the Colombian Government interest rate subsidy, created in April last year.

Today, we are announcing our decision to lower our interest rates to fixed rate 10-year mortgages and we will be charging a monthly rate of 1%, which is equivalent to about 12.7% annual rate. This cut of rate of mortgage interest rate, to the same level that we had in 2006, when we launched our 10-year and 15-year fixed rate mortgages.

I would like to highlight that during the last full year, we have been successful in increasing our footprint in the Colombian mortgage market. As of today, we have a market share that exceeds 30%. And that compares very favorably with the market share that we had below 20% at the end of the year 2005.

In terms of what we expect in 2010, a better economic outlook, increasing confidence level, signs of improvement in the Colombian lending market and a foreseeable low interest environment have led us to change our loan growth forecast for the year. We were expecting our loan book to grow from 5% to 8% range and now we're seeing more likely to believe that the growth will be between 7% and 10%.

Specifically, we are seeing some activity in commercial lending, related to infrastructure projects and the financing of new energy generation plans that will likely take place in the second part of the year. And Colombia is in a very good position to take benefit from the development in Colombia, as well in the Central America region.

As an illustration of this, we recently had a successfully made syndication of the major private facility ever for the region in the construction of a thermoelectric plant in Guatemala. On the other hand, we have noted an increasing credit demand for consumers, while we still foresee great opportunities in mortgage lending, a segment that is quite unprecedented in Colombia.

Finally, let's look at the slide number nine, where we summarize some of the indicators of our capital liquidity position.

Regardless of the type of currency, we maintained a solid liquidity position, one of the cheapest funding costs in the market and a stable base of deposits, all of which constitute the main pillars of our competitive advantage.

The ratio of our net loans to deposits and borrowing from development banks reached 92% at the end of the first quarter, while restrictive policies [on GAAP line] regarding our investment portfolio applied in the last year have strengthened our liquidity position.

With respect to our capital base, our shareholders' equity totaled COP6.8 trillion at the end of the quarter, decreasing from the previous quarter, also 12% above of the level of the first quarter of last year. This quarterly valuation is primarily explained by the distribution of profits in the amount of COP500 billion approximately, which was approved by our Annual General Shareholder Meeting in March. Also, it was partially offset by the Bank's operating results and capital generation throughout the period of this first quarter.

Bancolombia's consolidated capital ratio increased to 13.62% at the end of the quarter and 13.23% at the end of the year 2009, and was considerably higher than the 12.73% presented at the end of the first quarter of last year.

Bancolombia's current capital ratio is 460 basis points above the minimum required in Colombia and the basic capital ratio is 10.84%.

So my closing remark is that we are very happy to present our very healthy balance sheet and our very good income performance during a quarter that is already showing a turnaround in the conditions of the economy that we believe are going to be maintained during this year.

At this time, I will be very happy to take your questions and to hear your comments, go head.

(Operator Instructions). Tito Labarta from Deutsche Bank.

Yes, hi good morning everyone, just a couple of questions particularly related to asset quality. I just wanted to get a sense, because we did see some slight deterioration in the quarter, just your expectations for the rest of the year, particularly given since we saw a sharp decline in provision charges. With this, I guess you're expecting asset quality to improve. I just want to get a sense of how much of an improvement you would expect.

And then in terms of the provision charges, what kind of a recurring level of provisions do you see going forward? Do you think there could be more decline in terms of your coverage ratio or are you comfortable with the coverages right now? Thank you.

Thank you very much Tito. Yes, certainly as we mentioned, we see better projections of the economy. And just to mention probably the figure that will give you a better indication of what our expectations are is that we were -- in the last conference call, we told you that we were expecting about 2.2% cost of credit. Right now, we have more likely to look at 2%.

I very much want to stress the fact that during the last year we made about 2.7% total provisions costs, so this is a significant reduction. And we want to go carefully on it, to see whether this movement towards this improvement stabilizes or even improves even higher, we still have to see. But certainly, there is a trend of improvement that is taking place at the moment.

Okay --

And the coverage rate, sorry Tito, we believe that we could be comfortable maintaining about a similar coverage of what we have. In other words, around 130% will be normal.

Okay, great, thanks that's helpful. So just to clarify, you expect 2% provision charges for the year. So that would mean you would expect it to be higher than what we saw in the first quarter, when it was around 1.4%. And just was there any reason why it was so much lower in the first quarter? Thanks.

Actually, you're right, it's a little bit higher than we experienced in the first quarter. And the reason for this is that this was the quarter of the change of direction and then the reduction can be slightly accentuated by this change of direction.

Okay great and then just any expectations in terms of the NPL ratio, like how much it could improve for the year?

I will say that we are at around 4% expectation for the end of the year.

Okay, great, thank you.

Thank you.

Saul Martinez from JPMorgan.

Hi, Jorge, and Sergio; good morning. I also have a couple of questions.

First of all, you did indicate that you feel economic growth conditions are improving, and you updated your loan growth outlook. But I'm also curious to get your views on how your margin outlook and your net interest income outlook has changed with the 50 basis point reduction in the repo rate. Obviously, you started off the year with something of a decline year-on-year, but I'm curious what your expectations are for net interest income, growth, or declines for the year versus '09 and your margin.

And just secondly, more of a detail point. Can you quantify how much of a mark-to-market loss you had in the first quarter from your -- from the revaluation of your bonds?

Okay, yes. On the first question, Saul thank you, certainly the additional reduction on the central bank rate poses an additional challenge. But what we believe is that we will be able to manage that reduction without additional punishment to our margins.

You have to keep in mind that last year, we saw a reduction of about 10 percentage points in the interest rate. Right now, what we have experienced during the last week was a reduction of a 0.5 percentage point in the intervention, which is a high reduction, but we have to keep in mind the comparison. And we believe that that reduction will have a better condition for the valuation of how our investment portfolio, and we still have a small margin, certainly, but some margins in stabilizing our funding costs.

So we are optimistic that we might increase the margins -- the interest rate margins in the coming quarters of the year. Certainly, the margin in the first quarter was significantly affected by the investment portfolio.

On that question, that is the second question that you make, we, our estimate is that it cost us about COP40 million in mark-to-market related losses during the first quarter of this year. If you compare the total interest from investments and with respect to the volume of our portfolio, that is the figure that comes out as particularly related with the mark-to-market losses, which was something strange that happened in this first quarter; that there was a sudden increase in the first quarter, because the market was a little bit nervous. But right now, with the reduction of interest by the Central Bank, certainly, that is not going to be the case in the coming quarters.

Okay, that's helpful. When I think -- when we look at interest on investment securities then, obviously, the fourth quarter had some one-off gains. This quarter apparently had some -- what I would consider to be extraordinary losses. In the past, you've had about COP125 billion to COP150 billion per quarter.

In a normalized environment, where rates don't change, should we be thinking that that COP125 billion/COP150 billion is something that is a reasonable run rate for your securities portfolio?

Yes. Certainly COP100 billion to COP120 billion, it's a very safe expectation of what our investment portfolio could produce.

Okay. And on interest on loans, it came down. So do you believe with the rates coming down and the repricing effect, is that -- do you think that -- how much of an increase -- do you think you can start to grow that with volume growth in the coming quarters? Because it sounds like some of the growth is coming from -- that you're forecasting is coming from infrastructure and commercial lending that might have lower interest rates attached to them. But, should we start to expect some volume growth and some positive evolution in terms of the interest on loans that you're generating in the second, third and fourth quarter?

Yes, Saul. We believe that growth is the name of the game during this year and we are very carefully, but very strongly, seeking it. We have the perception that we are going to have growth in the commercial as well as in the consumer markets. And therefore, we believe that the structure of our loan book is not going to deteriorate from the point of view of marginal interest, and even could increase, because probably the growth of the consumer market was very significantly affected in the last year, and we were very strict in reducing the growth of that sector. And now, this year, we are looking at it in more favorable terms.

Okay. Great, that's very helpful. Thank you very much.

Thank you, Saul.

Chris Hill from Goldman Sachs.

Hi, good morning. Thank you for the presentation. I just have a quick question here regarding the decline in auto loans from the fourth quarter to the first quarter; want to know if there's any background to that? And then also, if there's any way we should be thinking about that going forward?

Okay, that -- I'm very happy that you asked that, because we should have probably explained that from the beginning.

During the first quarter we had the incorporation of our auto loan unit, which is called Sufi, into the Bank. In other words, it was an independent company that was obviously incorporated when we did our consolidated results. But right now, it doesn't have to be consolidated; it's part of the Bank. And in the process of integrating it, we made a change, an error in the classification. That is what reduced the auto loans, because they were considered like working capital loans in Sufi, and then we didn't change the line.

If you see there it's an increase -- a tremendous increase in working capital loans of 33% and a reduction in automobile loans. So nothing happened. Automobile loans remain in part a very dynamic line of lending. We are seeing automobile demand increasing very nicely, and that is a market that we like very much, and that is a very strong line. We are leaders in the market in auto loans.

Okay, that's great. Thank you very much.

Victor Galliano, HSBC.

Hi, yes; morning. Most of my questions have been answered, but just if I could focus a little bit on expenses. And looking here in terms of your admin, there's obviously a very positive progression there in terms of admin and other expenses. Do you expect to maintain that going forward?

And just looking at the quarterly numbers that you have here both in admin and in personnel expenses, can we assume that this is a normal run rate for expenses going forward? Or is there anything that really impacted on these numbers as a one-off, but either on the negative or on the positive side? Thank you.

Thank you. No. I think that the quarter is a good example of what is taking place in our expenses. Obviously, when you look at it in the mid-term, you have to keep into mind that we have expressed in the previous presentations that we are on the process of renovation of our IT infrastructure, and that could have, as the time goes and we incorporate and we start to operate some of those units, could have some increase in expenses.

But what we are expressing in this presentation is that we have maintained a good performance of, let's say, recurring administrative expenses, and that is our policy that we have been applying for the last few years and that now is certainly taking place.

Okay, thank you.

You're welcome.

Jose Restrepo from Interbolsa.

Hi; good morning, everybody. I have two questions. My first question is that you in March granted a loan to build in Sogamoso for about COP1.54 trillion, so I think we didn't see that in your loan book this quarter.

And my second question will be, if we exclude this gain of this in the sale of investment, which will be the net income for the quarter?

Okay, I'll start to answer the second part, Jose. Thank you. We estimate that if we analyze what is the mark-to-market loss in the quarter, will be COP40 billion. So probably if it hadn't been, because of that, we would have COP40 billion more in our income. But again, as we show, we are very pleased that we have very good income for the quarter; a 10% increase is very good. So with the COP40 billion, which will be about 34% before taxes, it is a very good improvement in the net income.

The first part of your question, I would like you to repeat it, because I didn't quite follow. What is the Sogamoso business? What is that?

The Sogamoso -- I read in the news that you granted a loan to Isagen to build in Sogamoso. It's a loan that amount like COP1.5 trillion. I think March 13 was the date of that. So I was asking, we can't see that in your loans right now, or it will be -- that will be disbursed in the future?

Yes, that is -- it's a facility that has been approved. Now I know what you are talking about. It's a facility that has been approved and that will be disbursed during the realization of the project. This is still even a little bit early to tell how long it will take to disburse, but certainly, it's the backlog, and the backlog is also good, but it increases. It doesn't produce income immediately, but shows the potentiality of growth for the near future.

Okay, thank you.

Welcome.

(Operator Instructions).

Okay. Apparently we don't have any more questions. I want again to thank everybody for their presence and to remind you that we will be very happy if you have additional questions or require additional information, the telephones of the people of our Investor Relations are in the first page of our press release of this morning.

Thank you very much.

Thank you for your participation in today's conference. This concludes today's presentation. You may now disconnect and have a great day.