Grupo Cibest SA (CIB) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Bancolombia second-quarter 2010 earnings conference call. My name is Louise and I will be your coordinator for today. At this time, all participants are in 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 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 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 rate and interest rates, introduction and 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 our SEC.

With us today is Mr. Jorge Londono, President and CEO of Bancolombia; Mr. Sergio Restrepo, Executive Vice President of Corporate Development; Mr. Jaime Velasquez, Chief Financial Officer; and Mr. Juan Carlos Mora, Chief Risk Officer.

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

Thank you and very good morning to everybody. And I want also to thank each of you for your interest and attendance to the second-quarter results call. As usual, we would like to begin with a brief discussion regarding the macroeconomic environment. At this time, I will like to ask Sergio Restrepo to present to you our thoughts on this matter.

Thank you, Mr. Londono. According to the latest economic data, the Colombia's GDP grew at an annual rate of 4.4% in the first quarter of the year. This figure was higher than expected and depicts a much better than anticipated performance by the country's leading indicators of demand. The result obtained in the first quarter reflects the impact of contra-cyclical policies on public sector and dynamism of the domestic demand.

From the first quarter of the year, household consumption increased 3.5% year over year, public demand grew 6.1%, and investment expanded at a rate of 8%. Additionally, leading indicators continued their positive trend. As of May 2010, retail sales were up 13%, industrial production was up 7.5%, and exports increased 28% compared to the same period last year.

Alongside, energy demand was 3.9% as of June, and the consumer confidence index continued to show sustained improvement since the beginning of the year. Given these results, our economic research team has revised our projection of GDP growth for 2010 from 3% to 4.3%.

Now, as we mentioned in our conference call last quarter, the inflation level and the focus of consumer prices allowed Central Bank to cut its repo rate an additional 50 basis points on April the 30th leaving it at 3%. There have been no additional changes in the rate since then.

Given the favorable figures for inflation, 2.25% in May, we expect interest rate to remain stable and inflation to continue within the range -- within the target range of 2% to 4% established by Central Bank. Looking forward, we're positive on the prospects for the year as the domestic economy is showing positive signs of recovery.

I would like to turn the presentation back to Mr. Londono, who will discuss the Bank's results.

Thank you, Sergio. As usual, also we have a slide presentation in our investment relation website. And at this time, for those who are following it, I would like to call your attention on the slide number two.

For the second quarter, we generated earnings of COP291 billion, a reduction of 15% compared with the first quarter, but an increase of 15% when we compare it with the second quarter 2009. These results reflect a higher interest margin, a good performance of our non-interest income, and a good performance also of fee generation, and a moderate growth on operating expenditures.

It is also important to stress the better performance of our investment security, which recovered the losses of the first quarter of this year. And finally and very importantly, a consolidation in the growth trend of the loan and leasing portfolio of our institution.

In 2010, cumulative results are therefore 12% greater than those of the same periods of last year. On asset quality, we have an inflation in the slide number three. If we go into the analysis of this asset quality, we'll see that the provision charges and the loan deterioration of allowances for loan losses are in very good figure at the end of the quarter. During the second quarter, net provision charges totaled COP187 billion.

These represents a larger amount than the charges of the first quarter of this year, which totaled also in this quarter a total charge of COP225 billion. But it is worth mentioning the lower deterioration during the quarter; that is, the loans that start being considered past due loans during this quarter. This deterioration was COP35 billion; that is 88% less than the corresponding figures of the first quarter of this year. And this is the most important time of the improving health of our loan portfolio.

You can also take a look at the slide number four. The past due loans consider, as we do in Colombia, those over due more than 30 days, are at COP1.5 trillion at the end of the quarter. This amount represents 3.6% past due loans over total loans and is lower than what we have in the first quarter of this year, which was 4.2%, and also lower what we have in the second quarter of 2009, that we had 3.9%.

Regarding our balance sheet strength on Colombia, but Colombia continues to have very significant level of allowances for loan losses representing 5.6% of our total loans. These allowances represent 154% of our total past due loans, a ratio which is increasing from the 138% that we presented at the end of the previous quarter.

We keep in mind that the Colombian regulation is very strict and for 30 days everything is considered past due loans. We should do our calculation in more international standards; that is, considering 90 days and 120 days for mortgages. If we do that, our total delinquency ratio will be 2.1% and our allowances will cover past due loans by more than 2.5 times.

In slide number five, we have some analysis of the net interest income and margins. The most important thing to stress regarding this matter of net interest income is the trend that we are maintaining. We are being able to maintain in reasonable levels the net interest margin.

Even though the net interest income is still 6% lower than the one in the second quarter of the previous year, it is 8% above what we have in the first quarter of this year and shows a very important improvement trend.

Low interest rates percentage in Colombia had been compensated in Bancolombia by a lower funding cost in order to keep the interest margin as high as possible. The lower funding cost is the result of our ability to leverage in our very important franchise and distribution network, which has allowed our efforts to re-price the liabilities to be successful during the previous quarters and also to allow us to be successful in a better deposit mix.

The weighted average cost of deposits was 2.6% for the quarter. That is below the 2.7% of the first quarter of this year and very well below the 4.9% of the second quarter of last year. The (inaudible) the securities portfolio recovered a great part of the losses experienced during the first quarter of this year.

This recovery was explained because the total level of sales of the Colombian Treasuries has -- have returned to what we may call a new normal. Deposits reached COP41 trillion, and that is 74% of our total liabilities at the end of the quarter, and increased 2% in the quarter.

In 2009, time deposits represented 50% of total deposits. In previous quarter and the second quarter of this year, they represented only 42%. This decline has been in line with the funding strategy implemented by the Bank in the past quarters and aims to take advantage of the increased liquidity and the low interest rates, while incentivizing deposits in savings and checking accounts and reducing the time -- and reducing the costs of the time deposit. As a result, the funding remixing paid in checking accounts changed from 50% in the second quarter of 2009 to 58% in the previous second quarter of the year.

We can see the evolution of our margins illustrated in slide number six. The annualized net interest margin was 6.4% in the second quarter rated on the annualized margin of 6.1% that we had at the first quarter of this year.

We see this margin as the short- and medium-term trend that we will not be -- expect to see a large variation to the future. As we mentioned before, the funding strategy is focused in keeping low funding costs in order to keep the margins. But we cannot project for the gains looking to the near future.

Fees and services have had a very good performance, as we illustrate in the slide number seven. During the second quarter, net fees and income from services totaled COP396 billion for the same above those of the second quarter of 2009 and 6% above the fees and income from services of the first quarter of this year.

Credit card and debit card fees increased 3% to the second quarter of 2009. These fees represent the largest portion of our total fee with 33% of them. On the other hand, fees related to payments decreased 4% compared to the first quarter, but increased 15% compared with the previous year.

Fees from fiduciary activities, asset management activities and brokerage increased during the quarter -- the second quarter of this year. Also, the first two decrease, as compared with the previous year, they already reflect a change in the trend, and they illustrate the recovery that we are perceiving in the economy.

It is worth mentioning the steady growth of banking services fees and other services, which includes investment banking fees. Both show a very dynamic quarter. So they were 17% greater than the fee generated in the second quarter of the previous year and 19% above those of the first quarter of this year.

Among the most important transactions developed by Banca de Inversion Bancolombia, we could mention some more in the Central America region. That was the project finance and structuring of the AEI in Guatemala and a syndication of above $200 million for the [Ideal] in Panama.

Operating expenses, as illustrated in slide number eight, as we mentioned at the beginning, the most important feature of them is that they show a moderate performance, which is very good in the currency consensus of increasing cost of infrastructure of the Bank.

Now, in loan performance, it's a very important configuration of the analysis of the figure of the quarter. You can see slide number nine, Bancolombia gross loans increased 4.6% during the quarter reaching almost COP44 trillion. Of the total portfolio of loans, 23% are denominated in new results.

These loans grew by 7% compared to the first quarter of the year and grew by 3% when we compare them with the second quarter of 2009. However, the positive performance you have to keep in mind that when you look at the figures in our balance that are presented in pesos, they are affected by the 1% reevaluation of the pesos as we compare those to Colombian pesos.

The remaining 77% of our gross loans are denominated in Colombian pesos, the total COP33,574 billion Colombian pesos at the end of the quarter, and that is an increase of 4% compared with the first quarter of this year. When analyzing the total loans by category, it is quite clear that corporate loans played a key role in the growth of the total portfolio.

Corporate loans increased 9% with respect to the first quarter of this year. This increase is explained by the good demand in working capital by [businesses] and also retail and the small- and medium-sized loans increased 1% with respect to the first quarter.

It is also important to mention the good performance that we keep seeing in mortgage, which increased -- they reached a level of COP3.6 trillion at the end of the quarter. And if we look at the performance, look -- getting the figures of origination of mortgages, we perceive a growth of 3% quarter-to-quarter and 10% on the year-to-year figures. During the past few months and in the meetings that we have held with you during this year, we talk about loan growth increases in the range of 8% to 10% for this year (inaudible) of Bancolombia.

Today, we confirm that and we certainly believe that that is very possibly going to be in the upper range of that expectation. We very clearly see that commercial loans are going to be very dynamic during the second half of this year, due to future disbursement related to infrastructure projects and energy generation projects. And this is also related to higher level of economic activity.

In terms of consumer loans, we are also noticing an increasing appetite that is mainly derived from greater optimism of the population in respect with the economic performance. And mortgages certainly are still very low penetrated in Colombia and we foresee a good growth also in that line.

We have a very strong balance sheet. We see our liquidity position in slide number 10. Our ratio of net loans to deposits, including borrowings from domestic development banks, reached 95% at the end of the quarter. With regard to the shareholder equity, which ended the quarter at COP7.1 trillion, increasing 4% and increasing also 14% if we compare them with the end of the second quarter of 2009.

Colombia's capital adequacy ratio ended the quarter at 13.37%, which is a figure that is well above that is required by the Colombian regulatory standard of 9%. The return on equity and the return on assets are very important to analyze during this quarter.

We -- at the slide number 11, where we see the indicators of these ratios. Return on equity was 16.7% for the second quarter of the year and 18% in annualized terms for the first semester that ended on June. The other hand, return on assets for the second quarter was 1.9% improving in comparison with the second quarter of the previous year.

Finally, I would like to highlight Bancolombia's successful offering and placement in the international market of coordinated bond for COP620 million in the first week of the second semester. The total demand was five times the amount that we offered. It shows, once again, the total confidence that investors have in the Bank and they seem that they are optimistic in regards with the Company's and with the country's future performance.

With this season, Bancolombia increased its capital adequacy ratio to 15.5%, which will allow us to continue growing, maintain our solid results and effectively respond to the credit demand that, as we mentioned before, we are expecting in Colombia in the short and in the medium term.

To conclude then, our solid liquidity position, our moderate funding cost, the diversity and the strength of our franchises and our solid capital base put us in an excellent competitive position to take advantage of the growth opportunities that we are seeing in the market.

This moment, we will be happy to take your questions and comments that you may want to present to us. Thank you.

(Operator Instructions). And your first question comes from the line of Fabio Zagatti with Barclays Capital. Please proceed.

Hi, good morning, gentlemen. Thanks for taking these questions. My first question is on the net interest income evolution. Now that loan growth has resumed at Bancolombia, when should we expect to see any revenues accelerating?

And my second question is on the loan loss provisions, I wonder if you could give us some color on the strategy behind this line. I guess that we have seen some volatility over the last previous quarters with the loan loss provisions going down and asset quality deteriorates, and up, when it improves as we saw in the second quarter.

And maybe, what is the optimum level for the coverage ratio? If I remember correctly, in the previous call, you indicated it was around 130%. And also do you stick with the guidance for loan loss provisions as percentage of total loans of 2% in 2010? Thanks.

Okay. Thank you very much, Fabio. Certainly, in the first questions, the net interest margin evolution is one that from which we are very happy because it has been a very challenging period. As we have analyzed in previous calls, interest rates in Colombia dropped from about 10%, 10.5% a year ago to 3.5% this year.

So it's very interesting to see how we have been able to defend the market. We -- with the current increase in demand, we are not expecting like recoveries of the margins to 7.5% and 8% that we have in the previous years. We believe that we can maintain the margins at the current levels for only slightly above those, and that will be fine for us to maintain the profitability of the Bank.

The second question, about the quality of our loan portfolio, it is very interesting. And it's very interesting indeed in this quarter because, as we mentioned, we have perceived a very clear lower volume of the deteriorating loans, very significantly, almost 90% below the figure of the previous quarter during this quarter.

So the -- what happened in this quarter is that we are consolidating the strength of improving the quality of the debt. And we can now say that even if we refrained from doing so in the previous quarter, we think that we can now say that now we have a better horizon in that matter of asset quality.

And it makes very important your last question about what is the coverage. In fact, it is a little bit surprising that during this quarter, the amount of total -- the coverage increases when we are saying that we are optimistic about the quality, what happens is that at the end of the second quarter, we must include a total review of our loan book that we make credit by credit and re-qualify, make all the ratings of all our loan credit again in a new manner.

And this was quite a hard exercise. Since that review is done with the figures and the balances from 2009 that were very bad for our commercial clients. 2009 presented bad figures, and that determine deterioration is in our internal ratings for those credits. And that was the element that increased a little bit the coverage that you see. But you are right. We maintain the expectation that 150% is not our target for this year and we will now like to see more in 130% for the, let's say the end of the year.

Okay, thanks.

And also Fabio, you asked about the total cost of credit for coverage, which is 2%. Yes, we confirm that. If you look at this quarter with all these things that you already described has happened, it was roughly about 2% and we believe that we will be able to keep it at around 2% for the year.

Okay, thanks. Thanks a lot for the explanation.

Thank you.

Your next question comes from the line of Tito Labarta with Deutsche Bank. Please proceed.

Hi, good morning. Just a couple of questions. First to follow-up on the previous question regarding the coverage ratio. I just want to get a sense in terms of asset quality, what you expect going forward. You had a nice improvement in the quarter. Is this a trend that you think that will continue for the rest of the year, and how much could it improve, or is it -- do you think asset quality will remain stable?

And then second question, you mentioned in terms of profitability, just want to get a sense. I mean, are we still kind of running below historical levels? What's kind of your target in terms of are we safe for this year and next year? Thanks.

Okay. On the first question regarding the level of past due loans, certainly we believe that the trends of improvement is going to continue and we believe that 3.5% will be reasonable for the rest of the year.

Now, the second question was the return on equity. Well, the return on equity is a heavy challenge because of all what we have said and mainly because of the challenge of the net interest margin. But we consider that we could be between 18% and 20%, given that the growth that we are obtaining makes us optimistic about the possibility of managing the Bank with a high return on equity level.

All right. Thank you. And just to get a little more color on that, that 18% to 20%, is that for this year? And what about like on a longer term basis, do you think that's sustainable? Do you think there is maybe some upside to that?

I wouldn't say -- it all depends on what happens to interests. Our projection of the interest levels is rather stable. And if that is the case, and we continue to see a dynamic performance of the Colombian economy from the growth point of view, we will keep around the same 18% to 20%.

Okay, thank you.

Okay.

Your next question comes from the line of Andres Jimenez with Bank of Colombia. Please proceed.

That's Interbolsa. Yes, good morning gentlemen. Three questions more on the strategy side. My first question is recently Banco de Bogota purchased a bank in Central America. Could you provide us with a little bit more of color of your strategy in Central America? Are you going to continue with the type of loans that you mentioned during the call. That would be my first question?

My second question, recently we're going to have an IPO of the fourth bank here, [W'Bienda]. We see that their number, especially on the loan, and especially on the consumption side is actually increasing, the ballpark around 16%, away from the levels of Bancolombia. How can we actually see that Bancolombia is going to react to these strategies? That would be my second question.

And my third question is recently there was a news, unfortunately of your departure, Mr. Londono, which you've done an excellent task inside the bank. And I would like to actually know how is this transition and who would be the possible people that would actually assume in your shoes and going forward. Thank you very much.

Okay, Andres, I thought that you had moved to Bancolombia, which I didn't know, but I see that you remain --

They haven't given me a job yet. I wish I was actually there.

Okay. Now, about the acquisition of Banco -- of Grupo Aval, I think that it was a great acquisition. It's a fine institution and Aval is a very good competitor and good colleague. We are happy to see more Colombian businesses in the region. We are happy to see more Colombians in Central America. That is something that is part of the support of our strategy to expansion there.

And as you know, we keep a high appetite for Central America. We look at everything that we have the opportunity to [fire on]. We are looking at the possibilities of growing our businesses, which has been very successful under the current strategy that we can support in the participation in El Salvador.

And also it was announced recently our current process of obtaining general license in Panama, that we are still expecting to be able to materialize during this year, and that will allow us to go into the local business of Panama in a more direct manner.

Yes, we have seen the movement of W'Bienda. W'Bienda it has also fine local institution, which has done a great job in moving from a mortgage bank that it was about half a decade ago to a universal bank that they are now. This IPO, always certain, is going to give them a better strength.

But we, if you look at what happened in Bancolombia, during the crisis, we were very conservative in consumer loans. Right now, we, as I mentioned during the call, we see a growth of demand, the optimists of the population is determining a very dynamic market for retail loans, and we certainly are taking advantage of that.

As of the departure, most of the questions that you have to ask is certainly in the hands of the Board of Directors. This is a natural process in all organizations, and we were forced to release the news in a very early stage because the media founded out about some comments that were done in an informal manner by myself. But this is a type of thing that always are very well managed by this organization, and by Bancolombia in particular.

We have a good government to see how to take care of that. And as usual, in all the high positions of the bank, we have a very professional man of ever waiting possible candidates and the possible people that is going to take the responsibility. So it's not my decision, but I know that there is plenty of candidates and very good ones as a part.

Okay, thank you very much.

Thank you.

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

Hi, good morning, everybody. I want to ask two questions regarding the importance of interest rate in your results. I am with the opinion that probably there won't be more interest rate cuts during this year. And I want to know your opinion about which could be a no interest margin evolution, we see some interest rate hike during the last quarter of the year or in the first quarter of 2011.

My other question is regarding asset quality because I am seeing that you are going to expand your consumer loan portfolio. But it will represent a higher delinquency or you expect the quality to remain flat?

Okay, Jose. The interest rate, and I agree with you, and I had mentioned before, we believe that there is not going to be further reductions and therefore there are going to be further challenges. But also as we mentioned, we are not going to see additional improvements of our funding costs. So what we see is that the net interest margins is going to remain probably a little bit upward, but a very small figure. They are supported by the great activity in retail loans.

Asset quality also is under challenge if we increase our retail portfolio. But that is not going to be an increase -- a significant increase in the percentage and the importance of the total portfolio because as we mentioned what we are experiencing, these have very dynamic corporate demands.

We are seeing for the rest of the year very important disbursements of credits that we have already in our hands approved and studied. And that are going to be required for the expansion of the infrastructure and the electrical programs of the country. So, yes, we are going to see some dynamics in retail, but we also are experiencing at the moment a very dynamic market for the corporate portfolio.

So the asset quality, as we mentioned, it's going to improve a little bit further, a service out of the cycle of the economy, and we are seeing 3.5% positive loans for the end of the quarter, which is very well within the model that we operate.

Okay. One more question regarding consumer loans. I have seen that other banks in the country, the Occidenta, Banco Bogota, [ColomBank] all of them want to increase their share -- their market share in consumer. And almost their main bet is payroll loans. So which is your strategy to grow in consumer because you have a market share lower than the average market share of the Bank. So which could be the strategy in that segment?

We certainly have been increasing the last quarter and are seeing that we will keep doing that our market share on retails. Particularly, we are growing faster, it's unusual in retail -- in payroll loans. And certainly, the tradition of the Bank has been not to be the leader in that particular segment.

We are improving our position, but that is not something that could be changed from one day to the next in the sense that we are going to see moderate changes in the relative importance of retail loans during the rest of the year for the better, in other words, for the improvement of that chapter, but nothing that is going to change the profile of Bancolombia.

Okay. Thank you.

You're welcome.

Your next question comes from the line of Saul Martinez. Please proceed.

Hi, this is Saul Martinez. How are you, gentlemen? A couple of questions. You -- first you kind of addressed some of your competitors already from the previous questions, okay. But if you can just give us more of a broad overview of what you're seeing in the competitive scenario? I'd imagine especially with the economy recovering, growth in consumer lending, W'Bienda doing their IPO, you may be seeing more competitive pressures. Are you worried at all about lending stretch, for example, starting to come in?

And secondly, on expenses. You had a very good evolution of expenses in the quarter. At the same time, you've been -- as you mentioned, been investing in upgrading your IT platform. What's the outlook there in terms of expense evolution? Can you maintain the good performance you had in the second quarter? Should we expect to see a pickup in expense growth in the second half?

Okay. Thank you very much, Saul. And Colombian environment is very competitive. It is not a new element to me. We expect it to continue like that. The fact, when you look at the scenario is that Bancolombia is very well positioned to maintain that competition and to get a good outcome out of it.

We have -- this is not a new phenomenon for us. We have been competing very hardly with our colleagues for the entire previous year. So right now, we are very aggressive, we are eager, we are in the position of taking the opportunities for growth. And as we mentioned, we are very well positioned with 15.5 total capital and with retail franchise and distribution franchise that keeps showing its very important strength.

On expenses, I agree with you, we -- you called it a positive performance. Yes, it is positive on the light of the new investments and the new developments that the Bank is taking responsibility to do.

We are very excited about the benefit for the Bank in the medium term that these modernization of our IT platform is going to bring to the institution. But certainly, that is not going to allow us to produce very impressive reductions in our expenses. But we will maintain -- we hope to maintain a moderate increase, an increase under control in our administrative and payroll expenses.

Okay, great. Thank you very much, Jorge.

Thank you, Saul.

(Operator Instructions). And your next question comes from the line of Boris Molina with Santander. Please proceed.

Yes. I have a question. You recently announced a settlement of the legal disputes with the Gilinski Family. I just wanted to confirm that the settlement does not involve ulterior determinations or potential liabilities regarding all these losses that have been troubling the Bank for some time.

Okay, Boris, thank you. Well, yes, it was a positive announcement that we did during the quarter of the settlement of serious disputes. And the answer is, no, nothing is pending in the figures for the future. Everything that was to take care about the settlement is already included in the current second quarter consolidated results that you have in your hands and there is nothing pending looking forward.

Thank you. Thank you very much.

Thank you, Boris.

At this time we have no further questions. I would like to turn the call back over to Mr. Jorge Londono for any closing remarks. Sir.

Okay, thank you very much. Thank you for attending to this conference call in which we show our positive horizon for the Colombian economy and our good ability of Bancolombia to take the opportunities that it poses to us. Thank you very much again for your attendance.

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