Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Bancolombia S.A. (NYSE:CIB)

Q3 2007 Earnings Call

November 8, 2007, 8:00 AM ET

Executives

Jorge Londoño Saldarriaga - CEO

Sergio Restrepo Isaza - Executive VP Corporate Development

Analysts

Alonso Aramburo - Santander Central Hispano Investment Securities

Presentation

Operator

Good morning and welcome everyone to the Bancolombia's Conference Call. Today call is being recorded. With us today we have the President and Chief Executive Officer, Mr. Jorge Londoño and the Executive Vice President Mr. Sergio Restrepo and the Financial Vice President, Jaime Velásquez. At this time, I would like to turn the call over to Mr. Londoño. Please go ahead, sir.

Jorge Londoño Saldarriaga - Chief Executive Officer

Thank you. I wish to thank each and every one of you for your interest and attendance to this conference call, which we have prepared to share with you Bancolombia results. I would like to mention that a slide presentation is being made available in our Investor Relations website, which we will recommend you to follow during this call.

At this time, I would like to introduce Sergio Restrepo, Executive Vice President who is going to explain basically the latest parts of the Colombian and Salvadorian economy and financial markets. Please go ahead, sir.

Sergio Restrepo Isaza - Executive VP Corporate Development

Thank you. Good morning. Colombian economy continues its dynamic pace of growth having 6.9% increase in the GDP figures for second half of the year while investment and consumption play a key role on such performance. Retail sales for others increased 9.9% over the year more or like in the pace show last year when same [ph] had an increase of 14.6%. Industrial production figures increased 7.5% year-over-year on August coming from 12.8% last year on the same model.

Additionally, inflation figures have remained under control. Other region, an increase of 6.3% on April on a year-over-year basis, variation on consumer prices have come down to 5.2% increase in October. Buy back by those developments Colombia Central Bank has on these last quarters paused the increasing of its overnight rate for the first time in 15 months after having raised 325 basis points. Right now the number is 9.25%. Despite that pause, it can be said that interest rates continue rising responding to the new conditions established by the written changes on monetary policy.

Therefore, we expect the long growth dynamic to moderate in coming quarters as a direct consequence of higher interest rates. On the other hand, Colombia's financial market was not sanctioned in terms of high volatility presented all over the world. At the end of the third quarter, Colombian in pesos [ph] suffered a depreciation of 2.3%; the market benchmark, government bond was 25 basis points above in terms of yields and Colombian Stock Exchange index was 1.9% lower from their levels registered at the end of the second quarter. However, the bank's strategic logs exposure to Colombian bonds market prevented the financial results against representative loses caused by the mark-to-market evaluation.

Going to El Salvador, our economy has had a dynamic year as well. It is estimated by the government that the economy is going to grow close to 5% this year having a key driver's growth of investment and money remittances, which we are growing at a pace of 6.6% at May off this year. Free trade agreements signed in recent months by the country have started to impact positively the dynamic of international trade and commerce.

Additionally, the growth among all sectors of the economy has been accompanied by former job creation. The number of new [inaudible] relates to the social security have increased 7.6% on a year basis at June 2007. The consumers' price inflation is under control and CPI increase is expected to finish the year between 4% and 5%. All this positive microeconomic environment combined with the arrival of new international players have made El Salvador financial sector a very dynamic and competitive one.

Deposit of the system as of June 30, 2007 increased 14.8% year-over-year, while loans were up almost 12% on the same period. We expect this trend to continue as lower interest rates play a role in favor of the banking penetration in El Salvador. After this quick review, I will turn again to Mr. Londoño who is going to go over the bank results.

Jorge Londoño Saldarriaga - Chief Executive Officer

Thank you. I would like to begin this review of the figures by reminding you that this is the second time Bancolombia has reached consolidated results since the acquisition of Banagrícola that took place during the second quarter of this year. For the purpose of comparison, the quarter report contains pro forma figures for the second quarter of the present year and pro forma figures for the third quarter of 2006. Some assumptions were needed in order to complete this task.

Being the most representative that the acquisition was simulated as it took place on June 30, 2006 applied the same multiples. Additionally, an issuance of subordinated bonds and preferred shares were stimulated keeping a similar participation of the bank funded. Those assumptions should be taken into account when analyzing the figures that we present in this report. Having said that let us review the highlights of the financial performance of Bancolombia for the third quarter of this year.

We had a solid quarter. Net income amounted to Ps 316.7 billion for the period, which represents an increase of 31.3% when compared to last quarter figure. Net income for the first nine months of this year has reached Ps 764.5 billion, which is 44% increase when compared with the pro forma figure of the same period of last year. Our loan portfolio had continued its dynamic growth of the quarter reaching Ps 34.2 trillion and increasing almost 10% in the period that we are reviewing.

As mentioned on recent quarters, we have been keeping a close eye on asset quality measures, which fortunately continue on comfortable levels. As of September 30, the ratio of past due loans to total loans was 2.77% and the ratio of allowances to past due loans was about 131%.

Net provisions for the first nine months of this year increased significantly when compared with the pro forma figure for the same period of last year, which is going to be... we are going to analyze this further for the dawn [ph] on this report. Our profitability and efficiency measures improved on the quarter our secrecy [ph] of the solid results. Annualized returns on average shareholder equity for September was 24.5% and efficiency measure of the ratio between operating expenses and operating income for the same period is at 55.4%.

Let's take a look at more detail through the results. The balance of Bancolombia shows the most important figure in slide number 8 of the presentation, I mentioned earlier. Bancolombia's total assets amounted Ps 48.7 trillion, increasing 15.2% when compared with the figures of last year. The increase is mainly explained for the loan and financial leases growth that I mentioned at the initial highlight, and represents now 70%... a little bit more than 70% of the total assets of the situation.

Investment securities and specifically debt securities have not been changed. As we mentioned earlier, we maintain a low exposure to debt securities, which represented 10.6% of our total assets. I find this time appropriate to share with you in a rate manner the composition of our debt securities portfolio emphasizing that we do not have exposure to U.S. top brand mortgage assets. The most representative portion of our debt securities portfolio by superficial [ph] are sovereign bonds with our participation of 55% of the total portfolio, where bonds issued by Colombia's government account for about 40% of details.

On the other hand CIPs, which is the way that we call Colombia's mortgage-backed securities represent 18% of the portfolio. These securities are derived from Bancolombia's security size and exercise [ph] from which we maintain a portion allowing us the benefit from the income tax exemption related to these kinds of investments. In short, these securities are backed by mortgages originated and managed mainly by Bancolombia, therefore, meeting the bank's credit risk standard.

On the other, Colombia's fundamental of the housing on mortgage sector are in quite good shape. The total level of mortgage per GDP is close to 4% when 10 days ago, it was near 12%. The loan to value in Colombia is close to 50%. If we go to slide 9, we show the portfolio breakdown. We can see that that corporate loans, the category with the biggest participation represents now 50% of the total loan portfolio reaching almost Ps 18 trillion followed by retail on a small and medium sized enterprise loans, which amounted to Ps 10 trillion or 29% of our loan portfolio.

Financial leases represent 10% reaching Ps 4.3 trillion finally but not less important mortgages as we obtained reached Ps 3 trillion representing now 9% of the total of our loan book. Slide number 10 has parts to understand the dynamic of loan portfolio percent. Corporate loans were the most dynamic segment over the quarter growing at a pace of almost 20% and they are showing a growth in the year of almost 17%. Retail and small and medium-sized enterprises were up 8.2% of the quarter and are up 32.5% over the year. Financial leases also are very dynamic with an increase of 8.5% in the quarter and an increase of almost 20% when compared with the pro forma figures of last year. The increase in mortgage loans including past securitizations was 7% for the quarter and almost 24% for the year. We also are securitized in Ps 280 million of mortgages in this quarter.

Slide number 11 show us the proportion represented by loans classified C, D and E, the lowest categories of our loan books in terms of quality. It is important to note that they only represent 2.64% of the total loan portfolio while the allowance for loan and accrued interest losses represent 3.63% of our total book. On the same subject, next slide, show how the coverage level of the loan book measure the ratio allowances to past due loans increased reaching 131% coming from 129% on the past third quarter. As you can see, we have not had big changes on the indicators and show some asset quality. Nevertheless, we continue to monitor very closely the fulfillment of our credit policies.

Slide number 13 helps us to analyze some of the representative changes that took place on the right side of the balance sheet. I am going to comment only on the valuation of the equity and the subsequent improvement on the capital radius because hereby [ph] in larger sense, the capital increase undertaken on July when we issued around $60 million preferred shares for about $480 million.

Let us now pass to the income statement, review for the last quarter figures. I recommend you to follow me to slide 14. Our solid performance is explained in good extent by our interest income. Interest on loans grew 12% in quarter and 33.5% when we compare to the third quarter of past year. The interest derived from financial leases had a similar performance on the quarter and very similar also with the year. This growth can be explained by this loan portfolio growth combined with higher interest rates, which we capture rapidly due to the fact that the majority of our loan book is index to short-term interest rates.

On the other hand, interest expenses increased 13.5% over the quarter and say 5% over the year as deposit interest rates catch up with the tightening cycle and competition for funding that adds pressure on this line of costs, also in line with the measures taken by the central bank. However, net interest margins remains above the levels seen during the year 2006, which we will refer again later in the presentation.

On the other hand, net interest with an income from services have not as high as dynamic as the one that we have had in August [indiscernible]. This is explained in part by the sale of ALMACENAR, the warehouse services business whose fees used to account for this line of income and represented of our 6.5% of the total fees last year. Additionally, brokerage fees have not performed as expected this year as a consequence of the less dynamic Colombian capital market. Despite these, I would like to note that the net fees and financial services for the quarter increased 4.5% when compared to the second quarter figure showing an interest in annualized rate of increase not seen in recent quarters.

Operating expenses was 4.5% almost when compared with the second quarter figures, and that is only up 3.7% when compared to the third quarter of last year for a pro forma basis. Personnel related expenses decreased 1.3% over the quarter and are increasing 9.7% over the year. Administrative and other expenses show a decrease of 5.2% of the quarter and an increase of 2.5% when compared with the same period of last year. We are aware of the needs of improving further our efficiency ratios and we continue to work on actions that help us to achieve this goal as we have described in previous conference calls.

Slide number 16 shows the performance of provision charges we have made during the year. The necessary adjustments to fulfill the requirement established by Colombian superintendent [ph] financed on this matter, which has been becoming more rigorous in terms of provision charges in recent years. These charges include the use of our reference model for commercial loans that modifies the established way of calculated provisions for this category, and was implemented for the third time in the third quarter of this year.

In order to meet these parameters of the reference models, new provision charges have to be made of already outstanding performing loans contributing to higher provision charges on the quarter. Additionally, some changes were presented on the quarter concerning the applicable allowance percentage formula for consumer loans, which increased these percentages for loan classified E and B. Those have performing loans and loans that are [indiscernible]. Also the regulators that need to advance to adjust our allowances was one GFE. We decided to apply the call adjustments in the third quarter of this year, therefore contributing also to higher provisions.

On the other hand the adjustment of Banagrícola allowances to the Colombia's regulatory frame has continued during this third quarter of the present year meaning also the insurance and non-recurring provision for the quarter even though these are only charge for consolidation purpose. In short, leaving aside the current provision charges related to the normal development of the credit business, the level of provision charges on the quarter is explained in our good extent for the implementation of legal requirements of the subject, and the provision generated by Banagrícola adjustment to Colombia legal standards. Being all this risks magnified by the loan growth as its direct effect on provision charge on the period.

This is one additional precision we made here and there is another precision we've made here and it's the implementations of the reference model for commercial loans to reduce our tax benefit given the part that general provision charges related to these categories will loosen the old methods of calculation or replaced within the legal provisions or provisions attached to each specific loan. The tax benefit is presented because individual provisions are tax deductible while general provisions are not. That is the reason behind the decline in percentage on income tax expenses in this quarter.

Slide 17 shows the performance of the net interest margin for the quarter, which came up to 6.9%, a slight decrease from 7.2% of the one that we calculated in the pro forma figure for the second quarter of this year. Despite these results, we expect net interest margin to compress in our moderate space as competition for funding will keep adding pressure on the cost of deposits in our biggest market of Colombia.

Solid quarter results allowed us to improve most of the main ratios at shown [ph] on slide number 18. Our ratio of operating expenses to net operating income for the first 9 months is 55.3%. It is still above our medium term objective. On the hand our efficiency measure operated expenses over other total assets reached 4.89% when calculated for the same period.

At this time, I will like to thank you for your attention and announce that we will be happy to take questions and comments from you. Thank you.

Question And Answer

Operator

[Operator Instructions]. The first question comes from the line of Juan Rebello. Go ahead Juan, your line is open.

Unidentified Analyst

Okay. Hello?

Jorge Londoño Saldarriaga - Chief Executive Officer

Yes, go ahead.

Unidentified Analyst

Are you listening or not?

Jorge Londoño Saldarriaga - Chief Executive Officer

We can.

Unidentified Analyst

Okay. My question is in reference to the new modification interviews to date for interception cost. What do you think about the client satisfaction results of these changes and their revenues... the importance of these changes in the revenues for the bank for the next year and the short term?

Jorge Londoño Saldarriaga - Chief Executive Officer

No, I'll tell you what is pertained to the market recently is a new structure of the segmentation of some of our savings accounts, which are taking care of different profiles of customers. In other words, we are reducing the number of free transaction for some of the clients. We believe that that is not going to impair the growth of our number of clients that as you know are already about 5.5 million clients and the biggest growth of that is coming from the increasing number of payroll accounts that the bank is having.

Unidentified Analyst

Okay. Thank you very much.

Jorge Londoño Saldarriaga - Chief Executive Officer

You're welcome.

Operator

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

Alonso Aramburo - Santander Central Hispano Investment Securities

Yes, thank you. Good morning. I was wondering if you could... just going back to the provisions, if you could tell us what level of operations came from Banagrícola from the consolidation of Banagrícola this quarter. And what should we expect going forward as the level of provisions on a more normalized basis for the next quarters?

Jorge Londoño Saldarriaga - Chief Executive Officer

Okay. Thank you very much, Alonso. Yes. Obliviously, this is a calculation that is very broad and we have to keep into consideration that there is not a precise number, but anyway we have measured the total impact of the provision and that means that the past comments [ph] amounts to almost 20% of what we did in the last quarter for the part of the bank allowance for about 40% of the total provisions.

Alonso Aramburo - Santander Central Hispano Investment Securities

And going forward should we expect... I guess we are not going to see the same level of provisions given that you have one-offs this quarter. What is roughly the level that we should expect for the next few quarters or the next quarter?

Jorge Londoño Saldarriaga - Chief Executive Officer

Okay. Banagrícola also required some provision but the most part of it are already done. In other words, Banagrícola is already almost in compliance with these provisions we made this quarter, I think compliance with Columbian regulation. There is still a small portion of it to come in the next quarter. Obliviously, the growth of the loan portfolio is very high and as the new regulation is implied that we have to make provisions immediately when we make the displacement of the loans, the level of provisions is going to increase in accordance with the growth of our loan portfolio for the future.

Alonso Aramburo - Santander Central Hispano Investment Securities

Okay. And on your taxes, given that you have lower taxes this quarter because of the customer [ph], should we expect that going forward as well?

Jorge Londoño Saldarriaga - Chief Executive Officer

No, unfortunately not because the benefits was derived from the application of general provisions to a specific provisions, so we are expecting that from now the level of taxation is going to be close to 30%, which is being the normal level of the bank.

Alonso Aramburo - Santander Central Hispano Investment Securities

Okay, great. I guess one last question, can you give us... what was the breakdown of loan growth between Columbia and El Salvador?

Jorge Londoño Saldarriaga - Chief Executive Officer

I think... I don't have that figure precise in my mind, but I will be very happy to send it to you over e-mail.

Alonso Aramburo - Santander Central Hispano Investment Securities

Great. Thank you very much.

Jorge Londoño Saldarriaga - Chief Executive Officer

Thank you.

Operator

[Operator Instructions]. Your next question comes from the line of Marcelia Rodaldo [ph].

Unidentified Analyst

Thank you. Good morning. I have two questions. The first one is about a couple of figures, expected figures which is the expected return on average equity you expect to have for next year once the interest rate of development by the central bank perform? And the other one is related about the medium term objective of operating expenses to net operating income, which is the figure you expect to reach in this sense?

Jorge Londoño Saldarriaga - Chief Executive Officer

Okay, thank you. As you know, we don't present projections, but we are happy with the figures that we have presented in the year and this certainly allows you to make your own guesses and your own projections and operate your own model. We believe that these figures that we have presented in return on equity of 24 plus percent is sustainable and we are happy with the outcome obtaining profitability of the bank. In the order hand also in the efficiency, we are coming down in the figure and as we mentioned in the presentation, we are not satisfied with that. We know that we still have a lot of work to do in that respect and we are assuming tasks of enforcing discipline in expenses inside the bank, and also improving our operation framework, our technology and going forward in our Six Sigma program and from those activities we hope to achieve a better performance going forward in the future.

Unidentified Analyst

Okay. Thank you. My other question is about Corresponsales No Bancariosis. How is this business going in Colombia and if you have started to implement the same figure, the same business in El Salvador?

Jorge Londoño Saldarriaga - Chief Executive Officer

We are very happy with the performance of this new figure of our branch or transaction operation that allows us to reach more towns and areas of big cities, and we are very happy to realize that we are in a very high level of transactions for this non banking correspondence that they are calling Colombia. That was the main effect as we are driving from that is that we are delivering very low cost transactions, which allow us to increase our bankarization, in other words that allows us to get to the bank, groups, sub-customers that otherwise won't be profitable and won't be sustainable. We will have to get into the analysis of the convenience of this type of distribution in El Salvador. It is an entirely different scenario. It's a different country and Banagrícola is going to have an extraordinary growth retail distribution framework, so we will have to see where this type of system is applicable there or not.

Unidentified Analyst

Thank you very much.

Jorge Londoño Saldarriaga - Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Peter Labrado [ph].

Unidentified Analyst

Hi, good morning. Just a quick questions. I noticed that the FX gains increased significantly in the quarter from previous quarters. Just wanted to get a sense of what drove that you have a sense of potential impact going forward? Thank you.

Jorge Londoño Saldarriaga - Chief Executive Officer

Sorry, Peter, could you repeat that because we didn't even get that. Sorry, Peter.

Unidentified Analyst

Yeah, sure. Just the FX gains were significantly higher this quarter and then previous quarters. I wanted to get a sense of what drove that and if you have any anticipation of how it will continue going forward? Thank you.

Jorge Londoño Saldarriaga - Chief Executive Officer

Okay, yes. We have very good FX gains in this period but that is very volatile, as you have seen the volatility on this line is mainly a result of the volatility of the market. We do better when there is some movement as the progression of this quarter, but everybody wished to have higher ability and that probably reduces our margins in that market.

Unidentified Analyst

Thank you.

Jorge Londoño Saldarriaga - Chief Executive Officer

You're welcome.

Operator

And I am showing no further question as this time.

Jorge Londoño Saldarriaga - Chief Executive Officer

Okay. We want to thank you very much for your attendance to this conference call and as usual, we like to tell that we will be more than happy to present to you more explanations or any further questions that you might have on the name of the persons that are ready to talk to you are in the bottom of the press release that you received yesterday; Sergio Restrepo, Jaime Velásquez and Juan Esteban Toro. Again, thank you very much.

Operator

And this concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

Source: Bancolombia S.A. Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts