Bancolombia Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2024

There are 12 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Banco Colombia's Second Quarter 2024 Earnings Conference Call.

Operator

My name is Christine, and I will 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. 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.

Operator

All forward looking statements whether made in this conference call, in future filings, in press releases or verbally, address matters that involve risks and uncertainty. Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy and various other factors that we describe in our reports filed with the SEC. With us today is Mr. Juan Carlos Mora, Chief Executive Officer Mr. Julian Mora, Chief Corporate Officer Mr.

Operator

Mauricio Vatero Wolfe, Chief Financial Officer Mr. Rodrigo Prieto, Chief Risk Officer Mrs. Catalina Toban, Investor Relations and Capital Markets Director and Mrs. Laura Cavillo, Chief Economist. I will now turn the call over to Mr.

Operator

Juan Carlos Mora, Chief Executive Officer. Mr. Juan Carlos, you may begin.

Speaker 1

Good morning, and welcome to Bancolombia's 2nd quarter results conference call. Please turn to Slide 2. As the year progresses, we continue to see modest economic growth across all the regions where we operate. Despite the low demand for credit, our quarterly results demonstrated strong operational performance. We achieved a loan growth of approximately 3% and maintained a stable net interest margin at 7.1%.

Speaker 1

This was underpinned by our robust financial strategy that enable us to accelerate the reduction of interest expense, thereby fostering great origination and increasing our net interest income. Nevertheless, our net income saw a 13.5% decline from the previous quarter and our return on equity fell to 15.3%. This was primarily due to an increase in provision charges by 23%, which we will discuss in more detail along with our onetime impairment charge associated with the joint venture. On a year over year basis, net income remained relatively stable, thanks to a slower rate of credit deterioration that contributed to improved asset quality and a stronger balance sheet cover. Our capital ratios stand firm with a total solvency ratio of 12.6% and a core equity Tier 1 ratio of 10.9%.

Speaker 1

In other significant developments this quarter, I would like to draw attention to a few key points. Firstly, the appointment of Maurizio Bordeiro as the new Chief Financial of Cerro Bank Colombia, effective August 1, succeeding as Imbelsa Costa's return. Secondly, the initiation of our reduced rate mortgage loan program on July 20, designed to boost the housing and construction sector and thirdly, the successful execution of liability management and a new Tier 2 issuance in the international market aimed at optimizing our capital and funding structure we will explore in more detail later. I will now hand over the presentation to Laura Clavijo, our Chief Analyst, who will provide a deeper analysis on the macro environment. Laura?

Speaker 2

Thank you, Juan Carlos. Now please let us turn to Slide 3. The Colombian economy expanded at a better than expected pace of 0.7% during the Q1 of 2024 and has continued to show signs of an economic upswing during the following months in line with improving macro conditions. Leading monthly indicators such as the ISE and Bancolombia's NowCast suggest the economy may have expanded somewhere between 2% 3% during the Q2. Consequently, we have revised our growth forecast upward from 0.6% to 1.3% for 2024 and from 2.4% to 2.6% for the following year.

Speaker 2

Even though key economic drivers are still lagging such as investment levels, household demand and credit conditions, some sectors are thriving and leading the path towards a recovery. For example, the agriculture sector grew at an annual rate of 5.5% as the sector surpassed adverse weather conditions and has benefited from improving commodity prices and rising traditional exports. Moreover, the public sector, which contributes close to 15% of total GDP, has continued to thrive, expanding 5.3% during the Q1 of 2024 and has managed to bolster employment figures. Nonetheless, this support emerging from the public sector may be hindered moving forward as fiscal pressure has escalated. Even though the medium term fiscal outlook presented by the government sets a far more realistic setting, including lower expected tax collection, non feasible additional revenues, higher interest payments and expenditure cuts worth ARS20 1,000,000,000, increasing debt levels and the fiscal deficit forecasted at 5.6 percent of GDP in 2024 compared to last year's 4.3% reflect the fiscal policy challenges that lie ahead.

Speaker 2

Policy challenges are also being tackled on the monetary side, Even though inflation has continued its descent to the 7.2% level as of June, bringing down inflation to the Central Bank's range between 2% 4% is proving to be quite difficult considering the indexation effect on services and housing prices. Hence, the Central Bank's cautious approach to easing its policy interest rate, which still stands high at 11 point 25 percent at the end of the 1st semester. We anticipate the Central Bank may begin to accelerate to 75 basis point cuts before year end and loan rates will continue descending, boosting consumer demand. Finally, in other events, Congress closed its legislature during June with the approval of the pension reform and the advancement of the labor reform. Furthermore, the government has announced its intention to press through its reform agenda during the remaining 2 years in office, including a failed health reform, public services and an economic recovery package, which may include tax amendments.

Speaker 2

Now, please let me turn it back to Juan Carlos Mora, who will present Bancolombia's quarterly results.

Speaker 1

Thank you, Laura. Please proceed to Slide 4. Before we dive into the results of the quarter, I would like to highlight strategic advantages that Bancolombia has cultivated to remain competitive and capitalize on growth opportunities within the dynamic financial landscape. At the core of the 1st value trade ancillary for our comprehensive value proposition, which merges both financial and non financial basis models prior to a diverse range of sectors. This is delivered through a universal banking model that currently serves over 20,000,000 customers in Colombia.

Speaker 1

Our integrated, complementary and scalable approach not only facilitate cross selling opportunities and diversification, but also enables the bank to adapt to emerging market trends and encase our value proposition. A prime example of our capabilities is the recent introduction of Uenya, a digital asset company that offers a gateway from traditional financial systems to the emerging digital asset economy. These position us at the forefront of financial innovation, providing a platform for learning and integration. Building on this, our 2nd value driving pillar involves an interoperable multichannel platform designed to serve all customer's efficiency through an ecosystem model. This platform has proven to be a powerful tool for attracting new customers, especially those who are unbanked or underbanked by offering accessible money transfer services and convenient cash in and cash out option.

Speaker 1

As a result, we have significantly expanded our distribution reach and witnessed exponential growth in transaction volume, which has contributed to an increase in fee based income and the accumulation of low cost sticky deposit that posted profitability. For instance, Lecy has seen a remarkable source in non pretransaction volume with a 20% increase quarter over quarter and a 70% increase year over year. This growth is driven by a raise in the average monthly transaction activity per user, which has grown nearly 15% quarter over quarter and 33% year over year. The Colombia financial system advances to our greater interoperability and Colombia is well positioned in the market with the technological and operational capabilities to further project and integrate our financial services into new marketplace. This will promote financial inclusion, increase our proposition and improve the client In this, Colombia has been transitioning over the past decade into an interoperable market with real time payment solutions like Pascia, PSC and ACH messaging.

Speaker 1

Colombia reached the market with the successful implementation of QR code technology, which is now used over 1,000,000 merchants across more than 1100 municipalities, but more than 3,000,000 unit payers and currently accounts for approximately 90% of intera probable incoming payment. This combined with our strong foothold in the transactional domain and a solid customer base of over 20,000,000 customers at Bancolombia and north of 20,000,000 users at Petti presents us with a unique opportunity to further engage the interoperable features of our payment infrastructure at the distributions and sales opportunities. Now please turn to Slide 5. Transitioning to our fair value driving pillar, I would like to discuss our recent transaction in the international capital market, which served as a testament of 2 hour expertise in financial management. In early June, we capitalized on favorable market conditions to initiate a liability management transaction.

Speaker 1

Our goal was to enhance our Tier 2 capital to support continued growth and to mitigate short term refinancing risk. The outcome proved the strong interest in the bank from international investors, which enabled us to issue the largest Tier 2 bond in the Colombian market to date. We effectively leveraged both internal and external resources to reduce interest expenses and provide investors with options for cash or long term investments to satisfy the variety of needs. I will now pass the presentation to Mauricio Botero, who will provide a detailed analysis of our results for the Q2 of 2024. Mauricio?

Speaker 3

Thank you, Juan Carlos. Please go to Slide 6. The contribution of the Central American operation to the consolidated book continues increasing, providing credit risk and currency diversification to our operation. Loan growth on the regional banks was mainly driven by an increase in commercial loans and supported by an 8% peso depreciation during the period, resulting a higher aggregate share of the offshore books relative to Colombia. However, while looking at each operation, we see mixed dynamics.

Speaker 3

Valismore recorded higher provision expenses as per lower growth prospects in Panama, resulting in net income contraction quarterly, which implies an ROE of 5.5% in the period. On the other hand, Banco Agricola posted a 21.6% ROE on the back of growing interest revenue coupled with a reduction on provision charges. Similarly, BAM presented a strong quarterly performance as reflected on a sharp ROE rebound to 12.3%, driven by a growing NII and lower provision charges associated to releases on corporate clients and progress made in controlling retail deterioration. All in all, the net income contribution of Central America to the consolidated figures remained flat during the quarter, but decreased year over year, largely attributed to the lower average exchange rate in Colombia during the last 12 months. Please go to Slide 7.

Speaker 3

The loan portfolio grew 3% quarter over quarter and notably reassumed growth on an annual basis with a 2.7% expansion. Net of ForEx, however, growth on the quarter was low at 0.5%, yet higher on the year reaching 3%. Growth was mainly driven by commercial loans with a 3% quarter over quarter as we implemented special lines to stimulate demand on midsized companies and corporates, which in turn contributes to interest income generation with good asset quality. Moreover, mortgage loans registered a notable expansion of 4.8% over the quarter and 7.4% over the year, fueled by the renewal of the social housing subsidy program in Colombia. This coupled with the recently launch of our cut rate program for certain mortgage loans should induce loan growth going forward.

Speaker 3

On the flip side, consumer segment increased 1.9% quarter over quarter, which if adjusted by ForEx represents a 0.6% drop with the restrained origination standards on unsecured loans. Please go to Slide 8. Growth on deposits outpaced loans growth, posting a 5.3% growth over the quarter and almost 6% on an annual basis, largely explained by a prudent approach towards liquidity in our ALCO strategies. Time deposits grew the most with percentquarterlyand8.6 percent yearly, mainly explained by a pickup in time deposits with institutional clients and in digital short term time deposits with retail customers. Thus, deposits reached a 37% share of our funding mix.

Speaker 3

On the other hand, saving and checking accounts both grew over 4% in the quarter, maintaining a 39% and a 12% share respectively on the total funding mix, providing an anchor to the overall cost and stability to the funding structure. All in all, cost of deposits decreased 35 basis points during the quarter, driven by a 73 basis points on time deposits, outpacing the 50 basis points repo rate cut carried out during the same period. We deem this very relevant as it provides our ability to adjust the time deposits maturity profile to secure a fast repricing and mitigate NIM contraction going forward. Please go to Slide 9. Total interest income on loans and financial leases order contracted 0.4% on the quarter and 7.2% over the year, driven by the interest rates decline that affects income generation on new and existing loans as well as for the contraction of the consumer portfolio, which has higher yields.

Speaker 3

Consequently, total interest income, including loans and investments, fell 1.7% over the quarter and 1.4% over the year. However, our ability to outpace the repo rate cut on our time deposits and reduce overall interest expense resulted in a decrease in interest expense of 4.6% quarter over quarter and 9.3% year over year. As a matter of fact, interest expense reduction compensated for the declining yield on loans, So NII resumed its growth reaching MXN5.2 trillion in the quarter, equivalent to a 0.5% increase over the quarter and 5.1% over the year. As you can see, NIM remained flat during the quarter at 7.1%. Going forward, we will continue managing the sensitivity and maturity profile of our assets and liabilities to mitigate NIM contraction.

Speaker 3

For example, securing a fast repricing of total time deposits, out of which 68% will mature in the next 12 months. Please go to Slide 10. Income grew 11.2 percent quarter over quarter and 10.2% year over year, mainly explained by Bancassurance that resume its growth dynamics posting a notable 37.3% increase for the period and 12.4% year over year. Similarly, payments and collections increased close to 10% quarterly and annually. Additionally, credit and debit card fee income increased 1.5% quarter over quarter and 5.8% year over year, driven by a higher volume of cards and transactions.

Speaker 3

On the flip side, fee expenses grew 22% over the quarter and 19% over the year, outpacing fee income growth explained by the increase of both credit card processing charges and correspondent banking fees. Thus, net income increased 2.9% in the quarter and 3.2% on an annual basis, resulting on a fee income ratio of 20.1% as compared to the 18% registered in the previous quarter. Please go to Slide 11. As shown in the upper left chart, there was a significant reduction on 5 year loan formation compared to the previous quarters, mainly explained by the slower pace of consumer loans deterioration in Colombia, as we will further elaborate. This, coupled with an increase in charge offs over the quarter, denotes our efforts and commitment to preserve a healthy balance sheet.

Speaker 3

On top of that, net provisions for the quarter were COP 1,600,000,000,000, a 23% increase over the quarter, yet a 22% drop year over year, reflecting the better performance of new vintages under tighter origination standards and an enhanced collection process. The 3 main factors behind the provision charge performance in the quarter were: 1st, $213,000,000,000 charge in SMEs second, a $153,000,000,000 charge in companies from constructions and health sectors and third, a $34,000,000,000 charge on certain clients on the large exposures segment given an expected deterioration. On the flip side, there was a $237,000,000,000 dollars provision release associated to macro variables as the downward trend in interest rates positively impacts consumer loans. Regarding asset quality, the 30 days past due loans ratio decreased to 5.2% on the quarter, driven by the consumer loans with a slight increase in coverage reaching 112%, whereas the 90 days past due loan ratio is slightly increased to 3.4%, explained by past due loans rollover, thus reducing coverage to 169%, but still providing an ample caution. From an expected loss perspective, we highlight the stability accomplished in Stage 2 loans provided all measures taken to contain defaults.

Speaker 3

Moreover, the combined coverage for Stage 2 and Stage 3 loans remain steady at 40%. We remain confident that as interest rates continue its downward path, the pace of loan deterioration will tend to normalize, but we do expect higher delinquencies on SMEs associated to a weak performance of construction, manufacturing and retail sectors. Please go to Slide 12. The consumer portfolio in Colombia posted a ARS 210,000,000,000 reduction on new past due loans quarter over quarter, given the slower pace of defaults and higher recoveries, pushing down the deterioration during the quarter to 7.8%. We highlight the improvement in personal loans that account for almost 48% of the consumer loan portfolio in Colombia, as reflected in its 90 day past due balance and its Stage 2 and Stage 3 share, which have declined for 2 consecutive quarters.

Speaker 3

Thus, the overall consumer segment posted a lower 90 days past due loan ratio of 5.4% and its cost of risk dropped from 8.9% to 8.7%. Given the better performance of new vintages and the visibility provided by our trade models, we continue increasing gradually loan originations on a specific client niches under a more conservative approach, which coupled with better macro conditions going forward should contribute to restore asset quality while increasing the loan portfolio profitability. Please go to Slide number 13. Operating expenses grew 3.4% quarter over quarter and 3.7% year over year, notably lower than the inflation rate in Colombia during the period. This reflects the stringent cost control and efficiency program discussed on our past conference call coupled with a lower average exchange rate that reduced overall operating expenses denominated in U.

Speaker 3

S. Dollars. Besides, personnel expenses only grew 1% quarter over quarter and decreased 0.4% year over year. In both cases, below the annual wage increase in Colombia, which certainly reflects efficiency gains. On the other hand, administrative expenses grew 5.2% quarter over quarter and 6.8% on a yearly basis, mainly driven by local taxes and IT and licensing expenses directed to the business transformation and migration to the cloud.

Speaker 3

We remain highly committed to cost reduction and efficiency gains, while we continue evolving our business transformation underway. However, the result of expense growth outpacing operating income growth increased efficiency ratio to 48 0.8% during the quarter. Please go to Slide 14. Net income for the quarter was ARS 1,400,000,000,000, 13% below the previous quarter, mainly attributed to lower net interest income, higher provision charges and a one off impairment charge on a joint venture. On a yearly basis, however, the bottom line remained relatively flat as the lower net interest income generation was offset by a much lower cost of risk.

Speaker 3

All things considered, the ROE for the quarter was 15.3%, which if adjusted for goodwill, results in a return of tangible equity of 20.5% that shows the strong profitability of the operation isolated of goodwill related costs. Now please go to Slide 15. Shareholders' equity increased 7.5% quarter over quarter and 7.3% year over year, mainly driven by net income generation coupled with ForEx depreciation. Core Equity Tier 1 ratio ended at 10.98%, up 53 basis points quarterly, explained by organic capital generation after accounting for the annual dividend payout decreed in the Q1. Consistently, total capital adequacy ratio stood at 12.6%, equivalent to a growth of 23 basis points over the quarter and 6 basis points over the year.

Speaker 3

With this, I will hand over the presentation back to Juan Carlos for the final remarks. Juan Carlos?

Speaker 1

Thank you, Mauricio. Please proceed to Slide 16. As a part of our business with First priority, we have successfully originated COP21,000,000,000,000 during 2024, contributing to a cumulative total of COP162 1,000,000,000,000 since the year 2020. In our commitment to environmental matters, we have carried out climate related assessment with clients in the cement, wood, steel and manufacturing sector. This initiative is aimed at ensuring the requirement strategies are in alignment with our own.

Speaker 1

We are also proud to announce the release of the 4th edition of our Principles for Responsible Banking Report. This publication, which has received limited assurance from PwC, highlights our dedication for sustainability. Please go to Slide 18. Last, I will share our guidance for year end 20 24 based on the current data and our updated macroeconomic forecast. We expect a loan growth of 8%, broken down in a 4 0.3% growth from the peso denominated loans and 7.7% in the dollar denominated flow.

Speaker 1

NIM to close around 6.8%, cost of risk between 2.2% and 6.4%, efficiency ratio in the 50% area, ROE between 14% 15% and core equity Tier 1 between 11% and 11.5%. Now we will take any questions you may have. Thank you.

Operator

Thank you. We will now begin the question and answer Thank you. Our first question comes from the line of Ernesto Gabilondo with Bank of America. Please proceed with your question.

Speaker 4

Thank you. Hi, good morning, Juan Carlos. Welcome, Mauricio, and good morning to all your team. Thanks for the opportunity. My first question will be on your NIM expectations.

Speaker 4

So you're expecting an interest rate of around 8.75% in 2024% and 6% in the next year. So where should we see the means normalizing in the next coming years? Then my second question is on your effective tax rate. We noticed it came at 20% during the Q2. So how should we think about the effective tax rate for this and next year?

Speaker 4

And the last question is on Neki. We see you already have an important number of active clients. So just wondering if you can share a little bit of your recent strategies to monetize those clients. And how do you see Neki at breakeven? And also, well, if you can provide some key target ratios for net in the next years?

Speaker 4

Or when do you think you can start providing those indicators? Thank you.

Speaker 5

Thank you, Ernesto. Let me address your questions. 1st, I will have a comment on the tax effective tax rate. And on that, I will ask Mauricio to give you more color. And then and I'm going also to answer your question or your comments about Neki.

Speaker 5

So let's just start with the NIM. We know that in Colombia, we have had monetary policy that is at this moment like inflation and inflation has been kind of persistent to go down. So at the end, our NIM will depend on how the monetized policy will behave. And we are expecting or there are expectations around 2 additional reviews of the interest rate from the Colombian Central Bank. And due to the inflation news that were released yesterday, probably we will see probably the rate will go down around 125 basis points or 150 basis points.

Speaker 5

So with that, we expect our NIM to be around 6.8% by the end of this year and that will depend mainly on the speed of the transmission of the monetary policy and if the Central Bank is going to decrease the rate 25 or 50 basis points in each of its meetings this year. So for next year, we expect the inflation to keep going down. And still we don't see that the rate the inflation, I'm sorry, will be in the Banco de la Republica target. So the monetary policy will continue trying to control inflation. So with that, we expect that our NIM for 2025 will be around 6.5%.

Speaker 5

So that will decrease our net interest income, but also that will be related to the cost of risk if you see the results. Regarding your second question, the effective tax rate, I'm going to make a comment. And then we will go back after I answer your question about NEPI to the effective tax rate. So the our expectation is that effective tax rate for the year will be between 26% 28%.

Speaker 6

And

Speaker 5

that's in line with our past guidance. The quarter was around 25%, and Mauricio will explain that later. Regarding Neki, Neki now has more than 20,000,000 clients. Around 14% of them are active customers. And our path to monetization is it's going well.

Speaker 5

We are

Speaker 1

improving or we are in

Speaker 5

the past monetization is definitely through credit. And we are monthly by monthly improving our credit performance. So that will take a little bit a while. We think that our profitability will be by the end of 2025, beginning of 2026, but it will depend on how fast we can go on the credit side. We need to be careful and we will be measuring how the clients are performing.

Speaker 5

So far, as I mentioned, we are doing well. So those are our stations. The transactions are there. We have now a lot of information about our clients. They are transacting through Nike.

Speaker 5

So that's going to help us a lot knowing the clients and with that we'll be able to offer that credit lines. Mauricio, let's go back to the second question about the effective tax rate, please.

Speaker 3

Yes. Hi, Ernesto. To understand the tax rate we used for the 2nd quarter, it's important to understand that the aggregated tax rate among all the different segments, businesses and geographies in which we participate was 25%, as Juan Carlos mentioned. But there was a one off reversal of provision for taxes from the previous year. If you normalize that, you get the 25%.

Speaker 3

And that's why it was 20%. And the guidance should continue to be between 26% 28% for this year and the coming year.

Speaker 4

Excellent. Thank you so much. Just a follow-up in terms of your NIM expectation. So in the first half, I think NIMs were at around 7.1% And you're expecting that for the full year or in the second half, the NIM should be going to 6.8 percent. So that will be NIM pressure of 30 basis points for this year.

Speaker 4

And then for next year, you're saying it could be around 6 0.6%. So that will be only mean pressure of 20 basis points. So I just wanted to double check these numbers with you.

Speaker 5

Mauricio, can you please state Ernesto's question?

Speaker 3

Ernesto, you need to understand the sensitivity that we have in the net interest margin to the movement in the repo rate. So for every 100 basis points decrease in the repo rate, we would have an impact of 10 basis points in the net interest margin. So it will all depend on the velocity of the decrease in interest rates from the Central Bank. It would make sense to look at the second half at 6.8%. And according to the velocity, you may see that interest margin moving from 6.8% to the 6.5% area during 2025.

Speaker 3

But it won't be from the beginning of the year. It would depend on the velocity of the Central Bank to decrease interest rates.

Speaker 4

Okay, perfect. Thank you very much, Mauricio.

Speaker 5

Thank you, Rest.

Operator

Our next question comes from the line of Tito Livrado with Goldman Sachs. Please proceed with your question.

Speaker 6

Hi, good morning, everyone. Thank you for the call and taking my question. My question is on your provisioning. We saw provisions increased in the quarter, although asset quality looked better, the tone on the call in general sounds a bit more optimistic and you did lower the guidance a little bit on the cost of risk. So just to think about, want to understand the increase in the quarter a little bit more specifically given the somewhat better trends overall that you're seeing and thinking maybe a little bit more longer term, you're still well above your historical cost of risk.

Speaker 6

Do you think you can get back to those levels, right? You expect a better GDP growth next year. How do you think that cost of risk can continue to evolve into 2025? Thank you.

Speaker 5

Thank you, Tito. If you compare 2nd quarter with the Q1, you see some additional cost of risk. But the overall and that's because the Q1 of the year was abnormal low. What we see is a trend of better asset quality and the behavior in the second quarter was better than in the Q1. Now that's why we our guidance is for cost of risk for the end of the year, it's between 2.2 and 2.4 and previous guidance was 2.5.

Speaker 5

So what we are seeing is a better behavior on the consumer loans, some deterioration on SMEs, but all in all, we expect an improvement on cost of risk for the next of the year. And regarding your question about 2025, we expect a better performance in terms of GDP required. And on top of that, we all suspect a better cost of risk and a more normalized, as you mentioned. In the past, our normalized cost of risk was around 1.8 2025 to be between 2,000,000 and 2.2,000,000, which is towards a normalized cost of risk, T2.

Speaker 6

Okay. That's very clear. Thanks, Juan Carlos.

Speaker 7

Thank you.

Operator

Our next question comes from the line of Yuri Fernandes with JPMorgan. Please proceed with your question.

Speaker 7

Hey, guys. Good morning and congrats on the quarter. I have a question regarding your guidance and your ROE. You're increasing this a little bit, but when you look

Speaker 5

to the metrics and when we look to the first half,

Speaker 7

like you had almost 18 ROE in the first quarter, the ROE was higher and there were

Speaker 5

maybe some one time events

Speaker 7

on impairments. My question is, can we see higher ROE? Or is this, I don't know, tax rate normalization, a headwind or margin pressure? I'm just trying to understand if you're not being too ROE here and what can maybe make the ROE to be within your guidance, if it's taxes, if it's higher expenses, if it's the margin normalization, just trying to get some color on this? Thank you.

Speaker 5

Thank you, Yuri. The first semester was a good semester and actually was better of we were expecting. Regarding the 2nd semester and what we expect by year end And if we will be able to deliver a higher ROE that basically will depend on and this is quite obvious on 2 main variables. The speed of interest rate changes or if, as I mentioned, if the Central Bank will reduce 25 or 50 basis points and the effect on our NIM. So that 6.8% NIM suppose a more aggressive reduction on interest rates.

Speaker 5

So there could be an upside possibility. And the other main variable is cost of risk, and we are seeing the cost of risk improving. So to your question, our past guidance of ROE was around 14%. Now we are saying 14%, 15%. Percent.

Speaker 5

It is an upside possibility regarding NIM, it will depend on how at the end the interest rates will behave and the Colombian economy will perform. We had in the couple of past months a good surprise, positive surprise regarding economic activity in Colombia. If that continues, I think we could deliver a little bit a higher ROE yield.

Speaker 7

Super clear Mauricio, if I may a second one more strategic structural like one of the good things about Bancolombia is the funding, right, like the funding cost and the franchise. And now in Colombia, we have the newcomers and like we discussed a lot of new bank here and they are offering 13% yields on the Cuentes del Aujos. Is there a problem for funding cost in Colombia at some point? I know probably your answer will be they are too small, but like thinking 2, 3, 5 years from now, how do you see players offering above benchmark rates on liabilities impacting the dynamics like on competition for the industry because maybe it's not a direct impact for Bancolombia, but some peers of you will start offering higher yields attract deposits and like in the end, the entire industry funding cost moves up. So not a question for the quarter, but more how you see players offering yields above benchmark rates and how this can be

Speaker 3

a threat for your funding cost? Thank you.

Speaker 5

Yes, Yuri. Definitely, competition tougher now. There are new players that are more active now. As you mentioned, they are offering rates in the savings accounts that are high. One of our advantages is that we have a lower funding cost and a presence in all parts of the country.

Speaker 5

So regarding if that is going to affect our position in the future, definitely we will need to adjust our strategy and our strengths. But still as it's cash in and cash out and our presence in with through physical channels, it's also important. So overall, we will need to adjust our strategy. We don't think that is going to affect materially our cost of funds, but we need to keep an eye on the development of those competitors and how they behave. So far, the players that are offering a higher or high interest rates for savings accounts are the newcomers and the Fintechs mainly, not the traditional players.

Speaker 5

We will see if we need to adjust a little bit our strategy. And at the end, if the cost of funds increases, that will also we will need to see if we are able to transfer that to the economy through the interest rate we charge to our customers. So that is something that we need to take an eye on and see how it develops. And as you said, that will probably come in 2025 by the end of 2025 or 2020 6, we will see the effect of that strategy from some competitors.

Speaker 7

No, super clear. Thank you very much guys and congrats again. Thank you. Thank you, Yuri.

Operator

Our next question comes from the line of Brian Flores with Citi. Please proceed with your question.

Speaker 5

Hi, I think congratulations on the quarter. I wanted to ask on 2 things. 1 is maybe seizing the opportunity. A follow-up on Yuri's question. You have a very strong franchise in terms of credit cards, right?

Speaker 5

You have 30% market share in terms of value of transactions. And as really was mentioning, you have a new entrance that is accelerating in this segment that, as you mentioned in the call, appears to be in a very risky segment in this point in time, right? So how is your strategy in terms of preparing to incent this market share? Or would you be willing to open space in terms of market share given the current market conditions? I think maybe just this question is more focused on the asset side more than on the funding side that you covered with Yuri's answer.

Speaker 5

And then my second question is in your presentation in the Q1, you opened the duration of your assets and liabilities, and we saw that you have around 5.90 days duration in liabilities, which was already reducing around 5.30 days in assets. Can you elaborate a bit on where is it now and where is this gap, the mismatch between those as of the second quarter? It would be very, very helpful. Thank you. Thank you, Brian.

Speaker 5

I will take your first question and I will ask Mauricio to address your second question. It's definitely the competitive landscape is changing in Colombia. As I mentioned, there are new players trying to enter and buy some market, which is understandable. What I see is that if you do the math, 13% interest rates on savings accounts with maximum rate around 29%, don't we don't have much room there to take risk. So what could happen is that players are going trying to buy market, but it's not a sustainable strategy.

Speaker 5

In terms of how can that last. So we have, as you mentioned, a strong franchise. We have a diversified client base. We have a very strong and very wide distribution network in terms of branches and in terms of banking agents. So we are going to leverage that.

Speaker 5

And the other point that is important and different to other markets besides the maximum interest rate that we could charge is that there is a transaction fee in Colombia, which promotes the use of cash. So that also is something that we need to take into account. As I mentioned, we need to prepare for different conditions and we think that we have all the tools to defend our market share and we'll need to adjust our strategies regarding those new competitors and new players that are entering into the market. Now, Iso, could you address Brian's second question, please?

Speaker 3

Yes. Hi, Brian. Our strategy has been very focused on the deposit mix, how to keep a low cost of funding based on the deposit mix. So as you can see, both the interest income from loans and interest expenses from deposits, both of them decreased, but the interest expense from deposits decreased a little faster, defending the NII. So in terms of duration, what we're having is repricing strategy for time deposits as 2 thirds of the time deposits have a maturity of 1 year or less.

Speaker 3

So that allows us to reprice our time deposits and keeping savings and checking accounts with healthy growth figures. So all in all, we keep on having a low cost of funding, which allows us to have a resilient net interest margin.

Speaker 5

Perfect. Just a quick follow-up. So in terms of the magnitude of this sensitivity, I know maybe the days are now not being disclosed. But should we think it's a bit

Speaker 1

more again

Speaker 5

on the passive side of the balance sheet? Or is it more much now, more neutral? Just to get a big picture idea. Thank you. Mauricio, could you take that please?

Speaker 3

Brian, I'm sorry, could you repeat your question please?

Speaker 5

Sure, Marisa. No worries. So basically, in the second in the 4th quarter, we saw the gap, right, already contracting. I think in the Q1, it was around 56 days negative basically on the duration of liabilities, right? This asset duration gap between assets and liabilities was minus 66 days.

Speaker 5

Should we think that as of the Q2, is this at similar levels, is it closer to 0? Just a big picture idea would be helpful.

Speaker 3

Okay. Thank you. You can have a projection of a similar duration in terms of assets and liabilities. We are working very actively with the ALCO committee, trying to hedge the different rates. But overall, the structure between assets and liability should continue to be very similar to the one we had in the previous quarters.

Speaker 5

Super clear. Thank you. Thank you, Brian.

Operator

Our next question comes from the line of Andres So to with Santander. Please proceed with your question.

Speaker 8

Good morning, Mauricio, Juan Carlos, thank you for the presentation. I have a question regarding the numbers that you are commenting on the 2025 outlook. You have mentioned margins at around 6.5%. So that will imply 30 basis points compression versus the one that you are expecting for 2024. And you are guiding for a cost of risk that is 20 basis points below the range that you are providing for 2024.

Speaker 8

With that, we will assume some ROE compression next year. I would like to confirm if that's your view or you are expecting some efficiency improvement to offset that ROE compression? And if you can give us what is your preliminary outlook for ROE next year?

Speaker 5

Thank you, Andres. As you mentioned, our guidance for 2025 regarding 6.5% and that's because interest rates will go down. Also as I mentioned in the previous answer, that variable, meaning net interest margin and the cost of risk will be key. So what we expect is a lower cost of risk between 2% and 2.4% 2.2%, I'm sorry. With that, we our expectations regarding NIM are in the 14% area.

Speaker 5

We will expect some efficiencies in terms of expenses or operating expenses. We expect to have less pressure from inflation during 2025. So with all of that, our expectations of NIM is around 14%, between 13.5% 14% for 2025, Andres.

Speaker 8

That's very clear, Juan Carlos. And assuming in your cost of risk expectations, specifically for this year, your guidance implies that for the second half of the year, you are going to be at around 2.2%, 2.6%. When I look at your number in the second quarter, excluding the provision releases that you guys conducted, cost of risk is significantly higher than that level at almost 2.9%. So how confident are you on these ROE sorry, cost of risk improvement in the second half of the year? And if you can comment, we have discussed a bit about the performance in Colombia, but we see that continued deterioration in Panama.

Speaker 8

Do you expect this performance to continue? And what have been the drivers for the Panama deterioration?

Speaker 5

Yes, Andres. If you see the behavior of the second quarter in terms of provisions, in terms of how the loan book to form in general, we see an improvement. It's more regarding a specific situation for the quarter. If you not analyze the cost of risk for the quarter is 2.5%. With that and the behavior that we are seeing in the different books, we could expect a lower cost of risk.

Speaker 5

So as of your question, yes, we are expecting an improvement in the second semester. That's because we are seeing a better performance on the Colombian economy that we were expecting at the beginning of the year even after the Q1. Regarding your second part or the second part of your question, Panama, yes, we see a higher cost of risk in Panama. But And that's mainly on the consumer side. We don't expect an additional deterioration, but it's going to impact the results of the year overall.

Speaker 5

So we don't expect an additional level of deterioration, but it's going to continue at similar levels. And because of that, ROE for Vanitzmo will be below 10% for the year. But we expect that situation for Panama improves during 2025. Remember that Panama was especially affected by the pandemic and some measures coming from supervisors regarding payments. And still we are seeing some effects on that, particularly on the consumer side and some mortgages, but we expect that to improve in 2025.

Speaker 8

Thank you, Juan Carlos. And maybe as a follow-up to that, you have presented in this release the tangible ROE, which is significantly higher than your reported ROE and a lot of that is affected by the goodwill from the Panama acquisition. Have you guys considered to write off of that goodwill that you still have on your balance sheet?

Speaker 5

We always are exploring different alternatives and options. So far, we are not we don't have a decision, but it's always that we always have in mind and look for opportunity. But as of today, we don't have any decision regarding that goodwill, Andres.

Speaker 8

Thank you, Juan Carlos, and congratulations on the results.

Speaker 5

Thank you, Andres.

Operator

Our next question comes from the line of Nicolas Riva with Bank of America. Please proceed with your question.

Speaker 9

Thanks very much, Juan Carlos and Mauricio for the chance to ask questions. As I have said before, I think it's very useful that both credit analysts and equity analysts can ask in this call. So with that, I have two questions on your Tier 2 capital. The first one looking at the change quarter on quarter, so it declined by $226,000,000 You did the buyback on the 27, you bought back $283,000,000 I believe they compute 80% of Tier 2 capital. So that would explain the buyback of the 27 would explain the $226,000,000 decline in your Tier 2.

Speaker 9

However, it looks like you didn't include the $800,000,000 raise that you did by issuing the 2,034. So I want to confirm that the $800,000,000 new Tier 2 capital has not been included in your capital ratio at the end of June. And in that case, that will increase, I believe, your capital ratios by 110 basis points, which means that pro form a your total capital would be 13.7 rather than 12.6 if you can confirm that? That's my first question. And then my second question, you have the call option on the 29 in December.

Speaker 9

I know that decision has not been made yet, but if you can maybe just talk about your thoughts regarding that call option. I would assume that calling the 29s without any capital replacement is not a feasible possibility because in that case, you would lose, I believe, 80 basis points of capital, which is all the capital you raised by issuing the 2,034s net of buying back some of the 27s. But again, if you can discuss your thoughts regarding capital ratios now, including the issuance of the 2034s And any early thoughts regarding the call option on the 29th in December? Thanks.

Speaker 5

Thank you, Nicolas, for your questions. I'm going to ask Mauricio to take them.

Speaker 3

Hi, Nicolas. Let me take the first question. You are right. We didn't account in the solvency ratio for the Q2. We didn't account for the 800 €1,000,000 bond issuance.

Speaker 3

And that's because by the close of the second quarter, we hadn't received the approval of the Superintendency of Colombia to get capital credit for that issuance. But we already did. We did receive it on July. And the pro form a figure is exactly what you just mentioned. It would have added 117 basis points.

Speaker 3

So if you normalize that, our solvency ratio would have been 13.7% and not the 12.6% that you see. And we're going to be able to see the updated figures for the 3rd quarter. So for the second question, you need to take into account that the 27s are decreasing their capital credit. So by the end of this year, the capital credit would amount to 56%. So according to that, we're going to have an open window to make our mind in terms of the coal option.

Speaker 3

But one different thing from the previous situation in which we didn't call the bond is that markets are open. We just did an issuance. Markets are open. We're able to replace capital if we want to. But the other thing to take into account is that our long term guidance for Tier 2 is between 1.5% 2% in Tier 2.

Speaker 3

And as of today, as we just mentioned, Tier 2 after accounting for the recent issuance moved from 1.6 percent to 2.7%. So that can give you a big picture of where we are standing in terms of the co option coming in the next few months.

Speaker 9

Thanks for that Mauricio. Maybe just one follow-up. So your total capital, we said 12.6 percent at the end of June. It's going to increase to 13.7% by including the $800,000,000 on the 2,034s, but then you're going to have the 20% phase out of the 27s by the end of the year. Do you have a target because so the minimum capital requirement total is 11.5%, right?

Speaker 9

So that means that pro form a with the 2,034s, it would be around 200 basis points above the minimum requirement. Do you have a target for the total capital or for the buffer over the minimum requirement?

Speaker 3

Our target has always been around 11.5% in Tier 1. But you need to take into account that, that's our target for year end as we have a seasonality in terms of Tier 1 after declaring the dividend payment that we always do during the Q1, capital decreases as we as it did in the Q1 of this year. And after that, we organically accumulate capital with the retained earnings, as you can see, in a very positive manner for the Q2. So you're going to see Tier 1 increasing above 11.5% by year end. And if that's the case, we're going to be okay.

Speaker 3

Especially according with the loan growth we're seeing. So we believe we're very confident in terms of capital, both Tier 1 and Tier 2.

Speaker 9

Okay. So roughly so 11.5% roughly target for CET1 plus 150 basis points to 100 basis points Tier 1. So your target for total capital would be 13 to 13.5 kind of over the cycle roughly, which is roughly like 150 basis points of our minimum requirements. Okay. Thanks very much, Mauricio.

Speaker 3

Thank you.

Speaker 5

Thank you, Nicolas.

Operator

Our next question comes from the line of Jitin Singh with HSBC. Please proceed with your question.

Speaker 10

Hi. Thank you for taking my question. So my call got dropped, so apologies if you have already answered my question. So the first one was on impairment costs with JV in 2Q. So can you elaborate why the bank decided to record impairment losses on JV?

Speaker 10

And what is your outlook on the remaining equity investments in your portfolio? And second, I just wanted to get your sense on liquidity. How has been the banks or the financial systems liquidity positions evolved since the issues faced last year? Can you just give me the numbers like what is your NSFR ratio currently versus last year? Thank you.

Speaker 5

Thank you, Ginta. If I understand your question, right, and you correct me, it's about the joint venture impairment. Is that correct? And then the second one about liquidity, I am correct?

Speaker 10

Yes, yes. That's right.

Speaker 5

Okay. Thank you very much. Okay. Regarding your first question, we have an impairment of around $75,000,000 regarding our investment in Puya. As you may know, Puja is a company that we have with Exito, a retailer, it's a joint venture.

Speaker 5

And that business, particularly in Colombia, has been affected because of the behavior of interest rates. So we have an impairment, as I mentioned, close to $75,000,000 during the quarter regarding that investment, Total joint venture. That's for one off for this quarter. And we don't expect in terms of valuation additional effects of that business. So that's regarding the impairment.

Speaker 5

I will pass your second question to Mauricio.

Speaker 3

In terms of liquidity, I would say that we are very comfortable. Our ratio is around continues to be around 115 in both U. S. Dollars and Colombian pesos. We're very comfortable in terms of liquidity and our funding strategies are a reflect of that.

Operator

Our next question comes from the line of Julien Azig with Davidsienda. Please proceed with your question.

Speaker 11

Hi, everyone, and thank you for having my question. My question is regarding as well as cost of risk. I would like to understand why you have this expectation. I know you already mentioned some explanations of the reduction of cost of risk. But I would like to understand why this reduction if we have seen an upward trend of the SMEs deterioration during the quarter.

Speaker 11

So I would like to understand why you reduced the cost of risk estimation and what is the expectation of declaration of SMEs

Speaker 3

for the 2nd part of the year, I think,

Speaker 5

yes? Thank you, Julian, for your question. Cost of risk, what we have seen, it's a better performance on the retail fast open business. Consumer loans are behaving better. Since we starting to change our policies at the last year at the end of the Q3.

Speaker 5

So we see the effects now that vintages are behaving better. Regarding and we mentioned that we are seeing some deterioration on SMEs, but let me remind you that SMEs are around 11% of our total loan book. So that part of the business is limited and the effect on the total cost of risk is not that important. So overall, we see a better performance on the retail business. We have we see some deterioration in SMEs, but it's relatively small part of our portfolio.

Speaker 5

And we are also seeing a good performance in terms of some corporates. And the economy is performing better in the last quarter and there are some expectations that that continue. So with all of that, that's why we expect that our cost of risk should be around 2.4%, 2.3%, 2.4%,

Speaker 11

Okay. And just a follow-up. In your report that you released yesterday, you mentioned that the Construction and Home Trust segment had a deterioration in the corporate segment. Like you are seeing something special in those sectors? Or it's just like the common behavior of those sectors during this part of the year?

Speaker 5

Yes. We mentioned that we are seeing some deterioration on construction and health sectors as also additional deterioration on the retail business and manufacturing. But that's they are behaving aligned with our expectations. So particularly on the construction segment, we have been working with that clients now for almost 9 months helping them. So we think that we can manage that deterioration.

Speaker 5

And we also have included some provisions already for those segments. In terms of the health sector, our position is limited there. So we don't see

Speaker 1

a big impact of the health sector.

Speaker 5

And on the retail businesses, we see some deterioration, but as the second semester, it performs better for that sector. We will see some deterioration, but nothing that affects materially our projections in terms of cost of risk.

Operator

Does that complete your question?

Speaker 3

Yes. Thank

Speaker 5

you, Julio.

Operator

Thank you. We have no further questions at this time. I would now like to turn the floor back over to Mr. Juan Carlos Mora for closing comments.

Speaker 5

Thank you everybody for participating in our second quarter results conference call. As we mentioned, we had a good first semester. We will have some challenges ahead for the Q2, but we expect that our behavior or the behavior of the economy and Bancolombia's behavior will be in line with our expectations and we could deliver what we were discussing during this call. So again, thank you. Thank you very much for participating in this conference call, and we hope to see you in our Q3 conference call results.

Speaker 5

Have a good day everybody.

Operator

This concludes today's conference. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Bancolombia Q2 2024
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