Bancolombia Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 21, 2024

There are 11 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Bancro Colombia's 4th Quarter 2023 Earnings Conference Call. My name is Robert, and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Following the prepared remarks, there will be a question and answer session. Please note that this conference is being recorded.

Operator

Please note that this conference call will include forward looking statements, including statements related to our future performance, capital position, credit related expenses and credit losses. All forward looking statements whether made in this conference call, in future filings, in press releases or verbally address matters that involve risks and uncertainties. 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 current 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. Juan Carlos Mora, Chief Executive Officer Mr.

Operator

Julian Mora, Chief Corporate Officer Mr. Jose Humberto Acosta, Chief Financial Officer Mr. Rodrigo Brito, Chief Risk Officer Mrs. Catalina Tobin, Investor Relations and Capital Markets Director and Mrs. Laura Clefio, Chief Economist.

Operator

I'd now like to turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer. Mr. Juan Carlos, you may begin.

Speaker 1

Good morning, and welcome to Bancolombia's 4th quarter results conference call. Please go to Slide 2. As anticipated, 2023 has proven to be a year of significant challenges for the Colombian financial system. The prevailing high interest rates and inflation have had a discouraging effect on credit growth, resulting in reduced net interest income generation. Furthermore, these factors have adversely impacted loan quality and led to an overall increase in operating costs.

Speaker 1

In light of the prevailing macroeconomic environment, Bancolombia's net income for the quarter reached COP 1,400,000,000,000, indicating a 3% reduction compared to the preceding quarter. For the entire year, the net income amounted to ARS6.1 trillion, representing an approximate 10% annual decline. The primary drivers contributing to this decline are, firstly, a 1.5% quarterly and 6% annual contraction in the loan book portfolio due to the reduced credit demand and diminished risk tolerance, resulting in slower growth of interest income. Secondly, a net provision charge that increased by 7% quarterly and 97% annually, consistent with the current credit cycle. Thirdly, higher operating expenses, which despite stringent cost control measures remained under pressure due to increased taxes and labor cost.

Speaker 1

In addition, it is crucial to highlight the substantial 20.5% annual and 5.7% quarterly appreciation of the peso, leading to a decrease in the volume of loans and the interest income contribution of the dollar portfolio in the consolidated financial statements. As the loan portfolio experienced continued repricing at elevated interest rates, the cost of risk was recorded at 2.7% for the quarter and 2.8% for the entire year. This reflects the anticipated slowdown in the past due loan formation compared to the first half of the year, which was a result of the comprehensive measures taken. The efficiency ratio ended the quarter at 49% and 45% for the entire year, indicating that the growth in operating expenses surpassed the growth in income The aforementioned factors exerted downward pressure on the return on equity, resulting in a 15.2% ROE for the quarter and a 16.1% for the entire year. The total solvency ratio experienced a notable increase of 57 basis points during the quarter, ending in a year end figure of 13.4%.

Speaker 1

This positive development was primarily attributed to a significant expansion of 105 basis points in Core Equity Tier 1. Bancolombia's robust organic capital origination capabilities coupled with a reduction in the risk weighted assets were the driving forces behind this achievement. As a positive indicator and a testament of the bank's inherent capabilities, the generation of sound net interest margin has proven sufficient to absorb increased provisioning expenses and costs while maintaining meeting return on equity. E, aggregator of Central American Banks and Offshore Operations made a larger contribution to the overall group results despite the prevailing economic and political environment in each country. We maintain our conviction that the recent downward in flattening trends in Colombia will enable the Central Bank to pursue a sustained interest rate production strategy.

Speaker 1

This, in turn, is expected to stimulate credit demand and improve asset quality in the long term. We anticipate opportunities for credit growth primarily in housing, renewable energy and agribusiness sector as the government advances public spending. For a more in-depth analysis of the macro outlook, I will pass over the presentation to our Chief Economist, Laura Clavijo. Laura?

Speaker 2

Thank you, Juan Carlos. Now please go to Slide 3. The global economic backdrop of tight financial conditions, declining consumer demand and lower commodity prices combined with local challenges due to high inflation, low investment and with student consumer sentiment carved the path to a significant economic slowdown in Colombia. Overall, 2023 proved to be a very challenging year for the Colombian economy and resulted in GDP growth of just 0 point 6% year over year, the lowest level in over 3 decades, excluding the COVID years and well below market expectations and our own forecast of 1.2%. Despite the lackluster results, the final quarter of 2023 signaled a slight expansion of 0.3 percent rebounding from a 0.6% contraction during the Q3, mainly driven by 6% growth in agriculture and 5% expansion in public administration.

Speaker 2

Construction, manufacturing and retail sales continue to underperform. The biggest culprit to economic stagnation lies with public and private investment, which fell close to 25% during 2023. Total investment as a percentage of GDP has consistently declined since the pandemic from levels of 22% to just 17% last year. This scenario weighs heavily on our GDP outlook for 2024, which stands at 0.9% annual growth. On the more positive side, inflation has continued its downward trend closing the year at 9.3% and falling further towards the 8.3% mark in early 2024.

Speaker 2

Receiving food prices help explain much of the defense, but core inflation has come down consistently towards 7.9%. The drought season coming from El Nino has pressured energy prices to some extent that has proven to be much milder than initially expected. We maintain our 5.9% year end inflation forecast considering some upward pressure from potential diesel price hikes and the effect of stubborn prices in services such as housing. Given this macro scenario of falling inflation amidst the economic slowdown, the Central Bank began cutting interest rates in late 2023 early 2024, accumulating a 50 basis point reduction thus far. Currently, the intervention rate stands at 12.75 percent and we expect may come down towards the 9% level at year end.

Speaker 2

We maintain our view that 2024 will be a year of gradual recovery, especially during the second half of the year when interest rate cuts will begin to pick up speed. Now, please let me turn the presentation back to Juan Carlos, who will present Banc Colombia's quarterly performance.

Speaker 1

Thank you, Laura. Before discussing the quarter's results, I would like to provide an overview of the advancements made in several initiatives that are aligned with our 4 value driving pillars. These pillars significantly contribute to our market leadership, operational softness and the scalability of our business model. Please go to Slide 4. Under our first pillar, which embraces our client centric approach, we would like to share the developments we have made as a part of our capabilities as a service model.

Speaker 1

This model is based on the open banking regulations approved in Colombia, making it the 3rd country in Latin America to achieve this significant milestone following Brazil and Chile. The regulation establishes the foundation for financial and non financial entities to disclose, coordinate and utilize data. It complements the Central Bank's immediate payments system framework introduced in October and anticipated to be fully operational by 2025. While there are some potential risks to our strong position in the transaction space, we anticipate numerous opportunities and avenues for growth. Our multi channel platform is made a range of APIs available.

Speaker 1

The 2 primary sources of growth originate firstly from the immediate payment system framework, which will streamline all types of payments processing through a low value payments system managed by the Central Bank with real time clearing, thereby reducing operational cost and improving user experience. Secondly, it will enable us to further integrate our financial capabilities into new marketplaces, promoting financial inclusion and enhancing the value proposition for our clients. Notably, we pioneered the launch of a new feature on our app for account aggregation, allowing our clients to manage all their financial data in a centralized location and interact seamlessly through a single app. Furthermore, we are delighted with the positive development and performance of our banking as a platform, as a service models, as they have enabled us to innovate and explore novel business models. As of the end of 2023, we had processed close to 50,000,000 transactions, resulting in deposits and fees of Ps.

Speaker 1

7,700,000,000. Notably, these models have demonstrated remarkable growth with compelling compounded annual growth rates of 16% and 14% respectively, over the past 5 quarters. This indicates the substantial potential for Fortin expansion under our ecosystem approach. On Slide 5, under our 2nd value driving pillar that focuses on our digital capabilities and multi channel platform, I would like to elaborate on what we believe is the most compelling evidence of the robust competitive advantage we have built in this area. For over a decade, we have strategically invested in the development of a comprehensive, resilient, multichannel and interoperable platform.

Speaker 1

We recognize the critical role of each channel in our business strategy. As illustrated in the accompanying graph, the platform has emerged as a powerful instrument for acquiring new customers, particularly those who are unbanked or underbanked and seek affordable money transfers and cash withdrawal solutions. Consequently, we have achieved exponential growth in transactional volume, increased fee revenue and significantly enhanced our ability to attract and retain deposits. In response, there has been a substantial raise in highly diversified low value and low cost sticky deposits. These deposits have primarily come in through savings accounts and more recently through digital time deposits.

Speaker 1

Notably, digital time deposits have experienced a remarkable compounded annual growth rate of 125% over the past 5 years, aligning with our digital transformation. Certainly, this well structured strategy serves as a reliable foundation for maintaining a competitive funding cost, thereby enhancing NIM performance and overall profitability. On Slide 6, under our fair value driving pillar of structural capabilities that provide distinct market advantage, I would like to highlight the credit risk model we have developed for corporates, midsized companies and most SMEs. We consider this model as a key differentiator in assessing credit risk, which significantly contributes to superior performance of our commercial loan portfolio compared to that of major Colombian banks. This is evident in the latest report released by the Colombian financial superintendents, which measures performance based on the 90 day past due loan ratio.

Speaker 1

Our model employs an end to end credit cycle approach supported by a comprehensive suite of tools for an assessment, writing, follow-up and collection, Underpinned by extensive research and well articulated sectorial risk assessments, our model provides an in-depth understanding of each industry and its cycles. This enables us to effectively diversify our portfolio, identify early warning signals, anticipate potential challenges and support our customers with tailored solutions. The most notable and valuable feature is the advanced analytical model. It draws upon the clients' transactional and cash flows insights captured on our multichannel platform. This provides a unique risk perspective, freeing us from the sole reliance on financial statements.

Speaker 1

By leveraging our own parallel insights, we have meticulously crafted a robust risk assessment framework. This framework has been instrumental in evaluating over £600,000,000 SMEs and 15,000 corporate clients in Colombia. Currently, we manage approximately MXN 120,000,000,000,000 in commercial loans under this model. Notably, our portfolio has consistently outperformed industry peers. Lastly, on Slide 7, regarding our 4th value driving pillar, which is the culture of efficiency and productivity, we would like to present the evolution of our digitalization strategy.

Speaker 1

In addition to the benefits of attracting more clients and transactional flows discussed earlier, it has also provided substantial efficiency gains and flexibility, enabling us to allocate resources more effectively. Over the past decade, there has been a significant shift in the way monetary and non monetary transactions are processed. In the early 2010s, nearly 30% of these transactions were conducted through physical channels such as branches. However, by the end of 2023, this figure had plummeted to just 8.3% with branches accounting for a mere 0.3% of all transactions. This strategic shift has involved the closure or transformation of branches into sales points with the aim of routing transactions through less expensive channels.

Speaker 1

Consequently, we have successfully reduced our overall fixed cost by replacing physical channels, primarily branches, with digital channels and variable cost based channels such as banking agents. This strategic move has enabled us to expand our reach and enhance user experience while maintaining operational efficiency. Furthermore, we are pleased to report continued advancements in the scalability of our business model, which will enable us to capture additional gains in efficiency and productivity. Now I would like to invite Jose Humberto Costa to provide further elaboration on our Q4 2023 results. Jose Humberto?

Speaker 3

Thank you, Juan Carlos. Please go to Slide 8 to discuss results of our Central American operation. Despite the lower share of the Central American loan book on a consolidated basis, explained to a large extent by the peso appreciation, Almost all banks increase its contribution to net income. However, when broken down by each bank, their performance in the quarter is mixed. Banistmo sustained its NIM despite a loan contraction and accrued lower provision charge, but delivered a lower return on equity quarter over quarter on the back of higher costs.

Speaker 3

Likewise, Banco Agricola also posted lower interest income due to a higher income expenses and below average provision charges as the loan portfolio performed better than expected, contributing to a higher return on equity versus the previous quarter that reached 24.1%. On the other hand, Banco Acomerica and Peele had low loan book growth after a large commercial loan prepayment and subdued growth in consumer that impact interest income. Provision charges increased on the back of all vintages, consumer loans and a corporate loan, dragging net income to a loss. It is also worth mentioning that despite higher loan deterioration, all 3 banks run with comfortable level of 90 day past due loans coverage, providing balance sheet protection. We remain positive on El Salvador's macro performance, but more cautious about Guatemala given the most recent political and social unrest and with Panama due to the more challenging fiscal outlook as per the lower tax collection.

Speaker 3

Please go to Slide 9. Consistent with the trends seen in the previous quarter, the consolidated loan book contracted 1.5% quarter over quarter and almost 6% year over year. Not surprisingly, this reduction reaffirms the impact of the persisting high interest rates at this has discouraged credit demand and has provided incentives for prepayments and short term dated loans that limits the loan book growth. Furthermore, at 20.5 percent year over year peso appreciation reduced the contribution of the loans denominated in U. S.

Speaker 3

Dollars. Net of FX, the loan portfolio will have increased 1.5% on a yearly basis. From a segment perspective, consumer portfolio keep driving the largest contraction with a 2.6% reduction quarter over quarter and 8.4% year over year as expected. Please go to Slide 10. Total deposits increased 1.5% quarter over quarter, explained most by a seasonal effect as the government related entities in Colombia tend to increase its deposits on year end.

Speaker 3

Year over year deposits dropped 1.2% consistent with the weaker credit demand. Nevertheless, there was an interesting change in the funding mix dynamics during the quarter as time deposits dropped 3%, whereas savings, current accounts and other deposits increased. Year over year, however, time deposits increased its share in the total funding mix to 35% up from 30% after the strong growth on the first half of this year. Consistently, on a yearly basis, the pace of growth of time deposits dropped to 13.3%, main grounds for lower interest expenses ahead. Consequently, the cost of funding fell slightly to 5.8%, an early signal of interest expenses reduction as our rate subsides, a situation for which we continue adjusting our liability structure to provide margin protection.

Speaker 3

As a matter of fact, as of year end, the share of fixed rate time deposits maturing in less than a year was 70%, up from 68% as of September. Please go to Slide 11. Total interest income and valuation of financial instruments increased 4% quarter over quarter supported by 1st, a 67% growth on interest and valuations on financial instruments as per higher valuation on a large securities portfolio held during the period coupled with a fall in rates and second by a 1% growth on interest income on loans and financial leases, mainly attributable to the loan portfolio repricing dynamic. On a yearly basis, total interest income and valuation of financial instruments increased 38%, albeit at lower pace than the previous year and driven mainly by a 42% growth on interest on loans and financial leases. On the other hand, interest expenses was flat quarter over quarter as interest on deposits remained unchanged and coupled with a slight reduction on interest on bonds and interbank's borrowing.

Speaker 3

On an annual basis, however, interest expenses grew 97%, driven mainly by 117% increase on interest expense on deposits as per the larger stake of time deposits and higher interest rates. Nevertheless, the pace of annual growth is subsidizing consistent with the annual drop off deposits. Despite the loan book contraction, NII grew 8 quarter over quarter and 11% year over year due to an increase in interest income, whilst interest expense remained flat and is mainly attributable to the Colombian operation as 67% of the loan portfolio is floating in contrast to a 34% of deposits. Thus, the NIM in Colombia was proceeding to subsidizing inflation and short term reference interest rate as shown on the bottom hand side graph. Consistently with the above, NIM expanded 47 basis points quarter over quarter to 7.28 percent driven by the remarkable 3.54 basis points expansion in the investment NIM as per the securities portfolio's strong performance this year's ago, coupled with the 11 basis points growth on the lending NIM.

Speaker 3

Expansion year over year on the back of a strong 8% annual yield in Colombia, reaffirming the competitive advantage in funding and its asset sensitive condition. Please go to Slide 12. Net fee income increased 7 quarter over quarter, mainly attributable to a higher volume of transactions associated to our year end seasonality. Payment and collections, banking service and bank assurance related fees grew the most on a percentage basis on a quarterly and a yearly basis. However, year over year, if you're close to 5%, admittedly below expectations as fee expenses growth outpaced the fee income growth coupled with the higher third party provider cost and processing charges.

Speaker 3

The income ratio for the full year reached almost 19%. Please go to Slide 13. As shown in the upper left hand side chart, the slowdown in the volume of past due loan formation continued during the quarter, consistent with the trend seen since the Q2 of 2023, although admittedly at a slower pace than expected. This, coupled with an uplift in charge offs quarter over quarter, drove our efforts and commitment to preserve a healthy balance sheet. Despite this positive albeit still mild, new past due loan evolution, asset quality metrics exhibit a quarterly and annual deterioration at the 90 day past due loan ratio reached 3.3%, implying 110 bps year over year increment explained by the loan portfolio contraction during the last 12 months rather than by an escalation in the pace of past due loans.

Speaker 3

On the other hand, given the higher charge offs in the quarter and the fact that some loans of which provisions had already been charged became due during the period. The 90 day past due loans coverage ratio fell to 184%, although still proving strong coverage to the balance sheet. Moreover, net provision expenses for credit losses for the quarter was COP 1,700,000,000,000, a 7% increase quarter over quarter and equivalent to a cost of risk of 2.7% for the period. When breaking down the provision charge for the quarter into its components, the results were missed. First, on the SME segment, there was a COP 22,000,000,000 decrease quarter over quarter driven by releases related to loans repayments.

Speaker 3

2nd, on the consumer segment, provision expenses was almost flat quarter over quarter as statute loan formation is being contained as we will further elaborate. 3rd, on the large exposure segment, there was a COP 168,000,000,000 charge explained by additional provisions on a handful of loans related to construction and retail sectors. And 4th, in the case of midsized companies and corporates, there was a COP 93,000,000,000 released provide several prepayment settlement with clients. Year over year, net provision charge increased 97%, attributable mainly to deterioration in the consumer segment in Colombia. As we will further elaborate and to a lesser extent on SMEs and a certain corporate loans consistent with the current economic and credit cycle.

Speaker 3

From an expected loss perspective, Stage 1 remained flat year over year as the deterioration is being contained, whereas Stage 2 decreased and Stage 3 increased as per non performing loans rollover. However, the combined coverage for Stage 2 and 3 loans increased 17 basis points to almost 40%. Going forward, we remain confident that the pace of past due loan formation will keep its slowdown trend due to all measures taken and as a lower rates release some pressures on debt to cash flows. However, we remain cautious and expect higher delinquencies in SMEs on the back of the weaker economic performance. Moving to the Slide number 14, our further discussion on credit quality in Colombia.

Speaker 3

In line with the past quarters, personal loans that hold a 52% share of consumer loans accounted for most of the deterioration during the period, increasing its 90 day pass through loan ratio to 7.4%, reaching a Costa Rica of 16.7% with a 20% of loans in Stage 2 and 3. On the flip side, credit cards, auto loans and payroll loans all performed better reducing their cost of risk and their share of loans in the Stage 23, signaling better asset quality conditions ahead. Moreover, when it comes to evolution of past due loan formation as shown on the upper right hand side graph, despite the low new past due loan level in the quarter, the ratio of deterioration increased due to a high level of charge offs. Now withstanding the above, partial loan formation in the second half of the year certainly grown below the average of the first half. And most importantly, new businesses in Colombia continue performing well and thus we foresee an improvement in our metrics going forward.

Speaker 3

As a matter of fact, after falling for 3 consecutive quarters, the volume of new consumer loans slightly increased during the 4th quarter leverage on the new origination standards and the portfolio better performance. As the sector wide metrics, we continue performing with the lowest 90 day pass through loan ratio for the Colombian financial system as on October of 2023, driven by our superior risk framework and capabilities that allow us to better assess credit behavior and mitigate deterioration. Please go to Slide number 15. The cost to income ratio for the period was 48.6 percent as operating expenses grew 6.6% quarter over quarter attributable to IT Investments and general expenses. On the other hand, personnel related expenses were flat quarter over quarter.

Speaker 3

On a yearly basis, operating expenses grew almost 19% driven by the high annual wage increase. Other taxes introduced to the tax reform of 2022 in IT related investments devoted mainly to the journey to the cloud and business transformation. However, it is worth mentioning that the pace of OpEx growth receded during the second half of the year given the reinforcement of cost control measures. Moreover, if we were to deduct taxes, actual valuations on certain employees' benefits and FX variations, the annual growth of operating expenses will have been 14% in tandem with inflation. The efficiency ratio for the full year was 45.3%, a slight increase compared to 2022 given the overall higher cost and taxes in BioNet.

Speaker 3

Please go to Slide 16. Net income for the quarter was COP 1,430,000,000,000 equivalent to a 3% drop quarter over quarter and ARS 6,100,000,000,000 for the full year, equivalent to a 10% drop year over year, driven by lower income generation as per the loan book contraction and the FX appreciation in tandem with higher credit and operating expenses. In turn, return on equity receded to 15.2% in the quarter and 16.1% in the full year, which adjusted for goodwill results in a return of tangible equity of 21% that shows the profitability of the duration accelerated of goodwill related costs. And finally, on Slide 17, I will present the evolution of capital generation. Shareholders' equity grew 1.5% quarter over quarter and contracted 2.6% year over year in tandem with assets, reflecting the bank's capital generation capacity that preserves Assam's balance sheet structure.

Speaker 3

Basel III total capital adequacy ratio reached 13.4%, increasing 57 basis points over the quarter and 6 basis points year over year on the back of a strong Tier 1 expansion with 105 basis points year over year increase attaining 11.4% for year end. This positive expansion is the result of net income generation, lower risk weighted assets and FX appreciation during this year. With this, I will hand over the presentation back to Juan Carlos for some final remarks. Juan?

Speaker 1

Thank you, Jose Humberto. Please proceed to Slide 18 for some remarks concerning our sustainability strategy. As of the conclusion of the year 2023, we have successfully exceeded the MXN 140,000,000,000,000 milestone in Notably, approximately MXN 38,000,000,000 Notably, approximately ARS 38,000,000,000 worth of new loans were granted during the preceding year. These loans have been instrumental in providing financial support for various initiatives, including small scale agribusiness ventures, green building projects and gender related endeavors, among others. With regard to environmental matters, we are pleased to inform you that we successfully completed our first set of disclosure information in accordance with SASB Standards for the commercial, mortgage, investment banking and asset management units last year.

Speaker 1

Additionally, for the 3rd consecutive year, we have released our TCFD report as mandated by local regulations, thereby enhancing the understanding of our commitments and accomplishments. In terms of economics, the Dow Jones Global Sustainability Index recently evaluated us one more, and we received a score of 78 out of 100 points. This accomplishment is a testament of the strength, influence and openness of our ESG framework. Finally, on the social front, 12 of the financial education programs we designed to provide financial well-being to our customers were certified by the superintendency under its standards, making us the leaders in this important area in Colombia. Lastly, on Slide 19, I will share our guidance for the end of 2024 based on the current data and our macroeconomic forecast.

Speaker 1

By the end of 2024, we anticipate a loan growth of approximately 3% in peso denominated loans and 5.1% in dollar denominated loans. We project a net interest margin of around 6.8% based on the expected lower average reference rates saved by the Central Bank. The cost of risk is anticipated to decline to 2.6%, driven by lower interest rates and inflation. The efficiency ratio is expected to be approximately 49%, influenced by reduced interest income and ongoing investments in business transformation. Consequently, we forecast a return on equity in the range of 14% and a common equity Tier 1 ratio of around 11%.

Speaker 4

In closing, I would like to inform you that we recently announced the proposed dividend, which will be discussed at the Annual Shareholders Meeting on March 15. The dividend paid out will be 62 percent, equivalent to COP3.4 trillion and will be paid in 4 corporate instalments of COP3,535 per share throughout the year. With that, we conclude our remarks on the Q4 2023 results. We are now ready to address any questions you may have.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Tito Labarta with Goldman Sachs. Please proceed with your question.

Speaker 5

Hi, good morning. Thank you for the call and taking my question. My question on the efficiency guidance that you gave, understand some pressure on margins from lower rates. But can what kind of expectations you have there for expense growth and fee income growth? And how long do you think you continue to invest sort of from a digital perspective?

Speaker 5

When could you see some benefits from that? And where should we think of the efficiency ratio sort of longer term as things normalize a bit? Thank you.

Speaker 4

Thank you, Tito. Our guidance regarding efficiency for 2024, it's 49% and let me explain why. We ended 2023 in around 45% figure on efficiency. What happened what we think will happen during 2024 is that we will have some decrease on margins. Volume, even though we expect some loan growth and we expect to be that loan growth of around 8%, but the combination of

Speaker 3

not big growth on volume

Speaker 4

and a slight pressure on margins will affect the income. And on the expenses side, we expect the total expenses to grow of around 9%. That if you do the math that implies or that the result is not 49% efficiency ratio that I'm mentioning. We have so it's from the income side and also we are moving to control expenses and to be close to inflation to grow expenses closer to inflation. Regarding fees, we expect fees to grow at around 10% based on our the services that we are providing, bank insurance, cards and the different services that we are providing.

Speaker 4

And that's for 2024. Regarding the years or the 2025 and 2026, we think that efficiency should move or should be around that figure of 50% moving probably between 48% 52%.

Speaker 5

Okay. Thanks, Juan Carlos. That's helpful. So do you think by 2025 and 'twenty six, the expense growth will be closer to inflation? Or when do you expect the expense growth to be closer to inflation?

Speaker 4

Yes. We will move closer to inflation, but I want to address one part of your first question. And it's when are we going to stop investing on digital? And I think Tito, with the dynamics of the sector, competition, new technologies, it's very, very difficult on the banking will be on cloud probably full in 2026 and that will help vary a lot on expenses and we can be more agile. But expenses on technology will be important in the coming years, Tito.

Speaker 5

Great. That's helpful, Juan Carlos. Sorry, if I can just one follow-up, I guess, from that perspective. How do

Speaker 6

you see

Speaker 5

the sort of the competition from FinTechs, other competitors becoming more digital? Do you see that a significant threat? Do you think you're well positioned for that? And I mean, do you see long term benefits from that from better efficiency?

Speaker 4

Yes. The competition is increasing. There are new players in the market and that's good because that force us to be also better. We keep growing on number of customers, on number of transactions, on our relevance on the Colombian market. So we compete with peers, banks like us, but also newcomers.

Speaker 4

As you know, new bank announced that they now have the authorization of the finance superintendency to be a bank or a commercial financial commercial entity as we call it in Colombia. So they will now will offer savings accounts and that they will be definitely a player. But we think we are very well positioned, the number of clients that we have, the scale and mainly our main advantage is our network of channels and how they are integrated and the coverage that we have around the country. It's worth to remember that still in Colombia and in many other Latin American countries, cash is important. So how cash in and cash out from the on the digital environment is very important, is as important as the digital environment that you have.

Speaker 4

And we have both, we have the channels and the digital environment. So competition, of course, all you have to take into account what they do and they are good definitely. But I think at the end, we will benefit all the market and as a players in this environment.

Speaker 5

Okay, that's great. Thank you, Juan Carlos.

Speaker 4

Thank you.

Operator

Our next question is from Yuri Fernandes with JPMorgan. Please proceed with your question. Hey, guys. Thank you.

Speaker 7

I have two quick ones. One is regarding your tax rate. I know it really depends on ex Colombia operations and also your security in the country. Usually, you have some tax exempt instruments, but 2025 has been a bit on the low end, I would say. So just a guidance on effective tax rate, how much you believe the tax rate should evolve in 2024, 'twenty five?

Speaker 7

If you see the 25% effective tax rate level as sustainable or if this should be higher? That's the first one. A second one regarding TUI, we saw an impairment this quarter. I think this was a headwind for your results about ARS 100,000,000,000. So just checking if you can And That would be my second one.

Speaker 7

And a third one, if I may, regarding Fitsa. If you have an estimate on the potential outflow impact from the removal from FEEDS that would be my final one. Thank you very much.

Speaker 4

Thank you, Yuri. Am going to address your first two questions and I'm going to ask Cosumberto to help me with your third one regarding the FTSE

Speaker 1

situation. Tax rate,

Speaker 4

I want to be clear regarding the tax rate. We have statutory tax rate in Colombia and also in the different countries. But when we combine the tax rates, the statutory and effective tax rates in the different geographies and in Colombia, and our situation, our fiscal situation in Colombia regarding taxes, That 25% effective tax rate that we had in 2023, we think that is sustainable around 26% effective tax rate for the coming 2, 3 or 3 years. So regarding your question and our guidance is our effective tax rate for the coming years should be around 26% with the current rules that we have Yuri. So it is because we have, as I mentioned, a corporate structure that allow us to be efficient regarding taxes in the coming 3 years.

Speaker 4

Your second question, Tuya. Tuya is a financial commercial institution. They take deposits or mainly the way they fund is through time deposits. And during 2023, there were periods in which the liquidity in the Colombian market was difficult, was tight. And in that situation, small institutions had to go to a market and they had to pay high interest rates for their funds, not just Tula, many others.

Speaker 4

And on the other side, the income was affected because the maximum rate that institutions could charge in Colombia went down because of the spend tendency changed the way the formula to calculate it. They come what are the maximum closer to 45%. That's the cap rate that we had in 2022 at some point and came down to 35%, even 33%. So that squeezed the margins. If you have the liquidity issue and then you have to pay more for our funds and the income was going down because of what happened with the maximum grade.

Speaker 4

So the margin was lower. And on top of that, there were more risks. So at the end what happened is a smaller margin to cover higher risk that explains that happened to other institutions that other entities, financial entities that are focused on cards, mainly on credit cards. So it's not something that happened just to Tugia. It was a general issue in the market.

Speaker 4

We are taking the measures to reverse that situation, moving to different products, taking less risk. Our risk appetite now is lower. So we expect that that situation, even though we could have some still some pressures in 2024, 2020 5 will be different and Tuya will be profitable again, Yuri. And I'm going to pass your third question to Jose Humberto.

Speaker 8

Yuri, good morning. Yes, the consequences of being removed from the index, it would have 3 different moments. Yesterday, Monday Tuesday, as you probably checked, the price of the ordinary shares dropped at around 5%. We believe that the next coming 2 weeks, there will be an stabilization of the price of the share. But then on March 15, the date in which the new calculation will take effect, we are going to see another drop in the price of the ordinary shares.

Speaker 8

The second element that I have to highlight is the level of floating of the ordinary shares is very low at around 10% of the ordinary shares. So the numbers will change in this floating. The third element is, remember that the ATR plus the preferred shares, those are the shares with the high level of liquidity, and we don't foresee any particular concern regarding those shares. Summarizing the sell off based on some calculations that we received from some analysts, that will be a potential sell off of around $70,000,000 $70,000,000 in the next coming days.

Speaker 7

That's super clear, Jose Alberto, super clear. And regarding Tullia, I totally get it. My point is that if not for Tullia, your results, they would be even better this quarter. So I get it's a tough situation in Colombia, but trying to see the glass half full, maybe the underlying results of the bank per se were better. But thank you for the clarification everyone.

Speaker 7

Thank you and good luck in 2024.

Speaker 4

Thank you very much Yuri for your comments.

Operator

Our next question comes from Andres So to with Santander Bank Mexico. Please proceed with your question.

Speaker 9

Good morning, Joel, and thank you for the presentation and the opportunity to ask questions. My first question is related to your outlook for NIM, but not in 2024, but rather once interest rates normalize in Colombia, what is the level for normalized interest rates? That will be the first question. And based on that, what is your expectation for NIM? My question basically is, in the past, Bank Colombia used to operate at the NIM of 5.5%, something like that.

Speaker 9

So you are still 130 basis points above that level in 2024. I'm curious about the ROE guidance of 14% and what will be the outlook once interest rates fully normalize?

Speaker 4

[SPEAKER JOSE RAFAEL FERNANDEZ:] Thank you, Andres. NIM, as you mentioned, improved because of what happened with the interest rates in the markets where we operate, but also because we change the mix in our balance sheet between commercial and consumer loans. So there are 2 effects. The normalization of the interest rates will have pressure on the NIM of course. What we expect and you mentioned 2024, what we expect for 2024 is that the NIM to be around 6 0.8 and that normalization process should keep happening and we expect that margin to be around 6.3, 6.5 moving in the coming years.

Speaker 4

And that's explained mainly for the mix that we have in our balance sheet. We have more SMEs and medium enterprises and we could charge higher interest rates to those entities, but also we have a bigger mix of consumer loans. So that's why we expect that our NIM should be not it's not going to what was our NIM around 6.8 5.9, sorry, that we had in the past. And with that, I will I could have affirmed that our ROE in the midterm should be around 14%. I don't know if Jose Umberto wants to complement me with something in this answer.

Speaker 8

Yes, Juan Carlos. Thank you. On the funding side, Andres, we have a structural change, which is you see that CASA represents 50% of the funding and the correlation with the interest rate is it's lower than the correlation that we are having with the time deposits. So for the next cycle, as Juan mentioned, that the interest rate will come down. We have, if I may say, natural protection because of the CASA funding.

Speaker 8

And remember that most of our time deposits are short term, more than 60%. So that is why our guidance or our forecasting for NIM is to remain at the level that Juan mentioned, which is around 6 point

Speaker 9

5. Carlos, this is Humberto. And based on this, can you please provide in terms of points versus the policy rate? [SPEAKER JOSE HUMBERTO ACOSTA

Speaker 8

MARTIN:] Yes. We have been managing our sensitivity because our floating is at around on the asset side and the loan side is 60%, 70% of the portfolio. But on the other side, the floating on the liability side is at around 40% plus savings accounts, which accounts also as a floating as well. So the number is 30 basis points for every 100 in change of interest rate of the Central Bank.

Speaker 9

Thank you, Jose Alberto. My second question is related to cost of risk. I was checking my notes from the previous call. In the previous call, you mentioned your expectation for 2024 was for the cost of risk to be in between 2.3 to 2.5, so around 2.4, let's say. And now you are saying 2.6.

Speaker 9

So I would like to understand what happened what changed over

Speaker 1

the past few months for you

Speaker 9

to have a more cautious view on cost of risk?

Speaker 4

Yes, Andres. We change or we increase a little bit our view on cost of risk because we had the results of the GDP growth of 2023 that was disappointed. It was 0.6%. The market was expected something around 1.2%. There were even some analysts expecting 1.5.

Speaker 4

The most pessimist analysts were expecting 1. And the figure ended being 0.6%. So that made us more cautious regarding 2024. But even though we feel that in terms of how are we handling, how are we originating consumer loans, how are we doing or working with our on the commercial side of the portfolio. Still we think that we will have an improvement on the cost of risk, but we are more cautious and we will be updating this figure as the year moves on.

Speaker 4

And I think we will have a clear view around mid year of how things are evolving. I think Q1 will be key to determine or to see the evolution of the Colombian economy. We expect the government to start implementing some contra cyclical measures regarding housing infrastructure. So that we think will have a positive effect, Even though our view for the year, as you know, is that the GDP growth for 2024 should be around 0.9%, which is low for Colombia better than 2023, but that's why Andres, we are cautious regarding the cost of risk. Jose Humberto want to complement something here.

Speaker 8

Thank you, Juan Carlos. The other element is the change in our view of inflation and interest rates 3 months ago, 6 months ago, we believe that the interest rate and inflation will drop beginning February March, but you see that we are an outlier in terms of inflation and interest rates. So that's the other reason why we believe the first half of the year we have also an increase in the cost of risk.

Speaker 9

That's very clear. You guys mentioned at the beginning of the presentation that one of the areas where you need to do monitoring is the SME segment, right? So far, most of the deterioration in your loan book has come from the consumer. Now you are looking into the SME. Looking at your corporate book, is there any sector in the economy that you think may be suffering with this environment in 2024 with high interest rates and still high inflation?

Speaker 4

Andres, we are monitoring very closely SMEs as you mentioned, but we haven't seen so far a deterioration outside our forecast. Sectors in particular, construction, particularly housing construction is something that we are monitoring and working with our clients in restructuring some of their loans. So particularly construction, housing construction and another sector that even though our position is very, very low or is low, it's the health sector. Health sector concern us and we think that there will be there could be some deterioration on health on the health sector or the participants on the health sector, Andres.

Speaker 9

Understood. Thank you very much Juan Carlos and Juan Carlos.

Speaker 1

No. Thank you.

Operator

Our next question is from Carlos Gomez with HSBC. Please proceed with your question.

Speaker 10

Thank you for taking my question. It is about your foreign subsidies. What we see is that you have reported a very high number in El Salvador, but we understand it has to do with reversals of provisions. Can you tell us what you expect your normal profitability to be in each of the markets in which you're operating and in Panama? And second, going back to expenses, I mean, you mentioned earlier that without taxes, the growth will be 40%, but inflation, I believe, 9%.

Speaker 10

So that is still significantly above inflation. Could you expand that a bit further? Thank you.

Speaker 4

Carlos, we had some difficulties with the line. I'm just going I just want to be sure that we understood your question. Your first question is regarding the profitability of our operations in Central America. Is that correct?

Speaker 10

That's correct. And apologies for the lag.

Speaker 4

And the second one is regarding expenses. And the explanation we gave around the expense the operating expenses growing 9% and that compares with that 40% tax rate was you commented?

Speaker 10

No, no, no. You mentioned that without extraordinary items, your growth was about 14% last year, but again inflation was lower than that. So we wonder if you will continue to have high expense growth.

Speaker 4

Understood. Thank you, Carlos.

Speaker 8

Carlos, yes. Regarding Salvador, historically, Salvador has it is one of our operation with the lowest cost of risk. In this case, what happened is we changed and updated models with new data, and that's the reason why the level of provisioning is coming down. And this is one of our most profitable operation with more than 20% return on equity and a very stable cost of risk. If you double check the last 3 years, we have been on the area of 1%.

Speaker 8

Regarding operating expenses, what happened this year, the 9% that we are forecasting, remember that beginning of the year, we have been with the high inflation that came from 2023. So most of the prices are adjusted because of CPI. And the other element is the minimum wage in Colombia was 12%. So both elements imply that we began with a high level of expense, about 9% is a number doable for the year. And we believe that at the end of the year, as Juan mentioned the beginning, we are going to reach an efficiency level below 50%.

Speaker 8

That would be at around 49%. But the main reason why it's 9% is because of the CPI of 2023, and basically, this is the main reason.

Speaker 10

On the foreign subsidiaries, I wondered what your normal ROE would be for each of them? And in the case of El Salvador, I mean, it was over 20% because of this reversal. Do you expect more than 20%?

Speaker 8

Carlos, we are expecting to maintain that level assuming this cost of risk that I mentioned before, assuming that we will be able to sustain the NIM of around 6.5% to 7%. And the operation there, the efficiency also is below 50%. So we are forecasting for Salvador that level at around 20% area at least for the next 2 years. They have a very positive structure of funding as well as Bancolombia based on casa deposits. In the case of Banizmo, we are expecting to maintain a level of around 10% in the next coming, at least for 2024 and increase to 12% next year.

Speaker 8

In the case of Guatemala, Banco Agroamerican TIL in Guatemala, you see that the numbers this year are very low because of high level of provisions, but we expect to sustain our return on equity in between 10% to 12%, 24% 25%.

Operator

Our next question comes from Alonso Arambruto with BTG. Please proceed with your question.

Speaker 10

Yes. Hi, good morning. Thank you for the call. I wanted to ask about Neki. Can you give us an update on when the spin off is going to happen?

Speaker 10

And just some color about the path to profitability and the monetization drivers of Neki. How do you see the platform evolving over the next few quarters? Thank you.

Speaker 4

Thank you, Alonso. We ended 2023 with more than 18,000,000 customers users in our platform, of which around 13% are active users. So definitely, we have the network effect happening Neki and transactions are going on there. We expect that the growth will continue and probably we will reach around 21,000,000 customers, which if we put in perspective Colombia has around 50,000,000 inhabitants. So it's a very significant number.

Speaker 4

And that allow us to with that network effect and platform effect also move forward on our profitability strategy that will be based on offering those customers different services, including insurance, some investment opportunities, but mainly, mainly credit loans. We have to be careful and we need to be aware of the where are we on the economic cycle. We think that this is not a year in which we can push very hard on offering credit in a platform like Nike. This is to say that we have the elements, we have the clients, we have the products, we will continue evolving on the products, but our path to profitability will depend on where are we on the economic cycle and how much we can push credit. With this, with our current situation and our expectations on how the economy is going to behave in the coming 2 years, we expect that we could be profitable in 2026.

Speaker 4

That's regarding how we see the evolution of our path to profitability. Regarding the spin off, we are ready to spin off MECI. Now what is happening in the coming weeks is that the superintendency should evaluate our readiness. They will give us some recommendations and after we implement them, we will spin off Niki. That will come and depends on their recommendations that we will receive from the supervisor, we will be ready to spin off Neki in the coming months, maybe 2 months, but it depends on, as I said, on what they see and how they are the results of the assessment in which we are ready.

Speaker 4

And a matter of fact, we'll start that assessment the superintendent will start that assessment next week.

Speaker 9

Great. Thank you very much.

Speaker 4

Thank you.

Operator

Our next question comes from Julien Ossik with Davenda Cardenas. Please proceed with your question.

Speaker 6

Hi, everyone, and thank you for having my question. My first question is regarding the ordinary shares. I know you already mentioned something about that, but I didn't get it. But my question is related to the plans that the company has related liquidity of the share due to the recently elimination of the share from the FTSE index. And in my calculation, I saw that Bancolombia Ordinary Share is not meeting the liquidity requirements that the MSSA LatAm is required for some shares to maintain in the index?

Speaker 6

And my second question something related to something you already mentioned about the spin off of NEP. Are you expecting some inflows in terms of cash to Bancolombia? And if there is some inflows, what will be the uses of that cash? And just to catch up in terms of cost of risk, I heard that you are expecting some deterioration with the housing and construction sectors like I don't know if you have like a down scenario in terms of cost of rigs, if you saw really weak deterioration in those sectors? Thank you.

Speaker 4

Thank you, Julian. Let me have some comments on your first question. I will answer your second question regarding the spin off of Neki and a comment on the cost of risk. And I am going to start with your second question then your third. I will do the comment on the FTSE index and MSCI, and then I will ask Jose Humberto to compliment me.

Speaker 4

Regarding the spin off, this is not going to generate any cash for Bancolombia. What we are doing is on a spin off in which we move assets and liability to a different entity, which is NCE in this case. So NCE will be a fully owned entity, Banco Colombia is fully owned entity and we just spin off assets and liabilities and neki will operate as a separate entity, legal entity, but 100% owned by Bancolombia. So what happened on a consolidated basis is that NEX is going to consolidate on the numbers that we present for Grupo and Colombia. Regarding the cost of risk, 2024 is a year that it has complexities and how you read it.

Speaker 4

But we are with the 2.6, we are more on the conservative side. It could be some upside potentially if we manage as we are how are we managing so far the risk that we are or our risk appetite. So to be concrete, the 2.6% is our expectation. It's more on the conservative side and it depends on how the year evolve, as I mentioned. But it could have some potential of upside if the year evolves better than expected.

Speaker 4

And moving to your first question, I want to highlight that what happened is more because of the size and the liquidity of the Colombian market. It's not something that is particularly regarding or related to Bancolomba. At the end, Bancolomba is the most liquid share in the Colombian market, but it's a very, very small market. And that's why when the different index companies like FTSE evaluates liquidity, the market is very low. But Bancolombia is the most liquid and a very liquid market.

Speaker 4

Jos, I want to make that comment. And Jose, could you complement me on that?

Speaker 8

Yes. Thank you, Juan Carlos. Julian, on practical terms, the change of FTSE means a sell off of $70,000,000 in the next coming weeks on ordinary shares. Probably, the consequence will be the price will come down. And again, as Far mentioned, we have the preferred at the 8 years with the high level of liquidity.

Speaker 8

The second element is, there is a very important element here right now for the old players than we are listed in the local stock market, which is to have a market maker. This is relevant in our case, we're hiring a market maker 2 months ago. And the consequences was very clear in both, in ordinary and preferred. In terms of the ordinary, the spread reduces more than 50% and in preferred more than 45%. And this is very important because at the end of the day, it's a way of democratization of the shares on individuals.

Speaker 8

So we are using platforms as a 3, for example, trying to offer them the opportunity to have possibility to buy. So the market maker today is relevant because of that, because helps the individuals to have an opportunity to buy our shares, no matter if it is ordinary or preferred.

Operator

We have reached the end of the question and answer session. I would now like to turn the call back over to Mr. Juan Carlos Moro for closing comments.

Speaker 4

Thank you all for your interest on this conference call results. Next this Q1 of 2024, I think it will be key to understand what will how we'll evolve the year. So when we report the results of the Q1, we will see how things are going. And I also want to mention again that we will have our shareholders meeting, general shareholders meeting March 15, which is where we will present our or the Board of Directors proposal proposed dividend. So we are very thankful for your interest and we expect you to have you in our conference call for the Q1 of 2024.

Speaker 4

Thank you very much and have a good day.

Operator

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.

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Earnings Conference Call
Bancolombia Q4 2023
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