Bancolombia - Q1 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Bancolombia's first quarter 2024 earnings conference call. My name is Daryl, 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. During the question-and-answer session, if you have a question, please press star then one on your touchtone phone. 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. 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, these 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 described in our reports filed with the SEC. With us today are Mr. Juan Carlos Mora, Chief Executive Officer, Mr. Julián Mora, Chief Corporate Officer, Mr. José Humberto Acosta, Chief Financial Officer, Mr. Rodrigo Prieto, Chief Risk Officer, Mrs. Catalina Tobón, Investor Relations and Capital Markets Director, and Mrs. Laura Clavijo, Chief Economist. I will now turn the conference call over to Mr. Juan Carlos Mora, Chief Executive Officer. Mr. Juan Carlos, you may begin.

Juan Carlos Mora (CEO)

Good morning, and welcome to Bancolombia's first quarter results conference call. Please turn to slide 2. During the first quarter of the year, Colombia encountered economic challenges marked by elevated interest rates and reduced consumer confidence. Despite subsequent declines in inflation and interest rates, consumer demand and investments remain restrained. Nevertheless, by utilizing our commercial expertise and conducting comprehensive risk assessments, we accomplished a notable 2.5% quarterly loan growth. However, this growth is offset by a 2.6% annual contraction resulting from the substantial appreciation of the peso by 17.3% during the quarter. Efforts to reduce credit deterioration resulted in a notable 24% decrease in provision expenses compared to the previous quarter. Consequently, the cost of risk for the reporting period was recorded at 2%.

Additionally, an 8% quarter-over-quarter reduction in operating expenses contributed to achieve a net income of COP 1.7 trillion, representing an approximate 15% increase compared to the preceding quarter. However, it's worth noting that this figure still reflects a 3% decline year-over-year. Furthermore, the efficiency ratio decreased to 46%. ROE rebounded to 17%, and our capital position remains robust, with a total solvency ratio of 12.3% and a Core Equity Tier 1 ratio of 10.4%. The Central American banks and offshore operations sustained their positive performance, contributing to the overall group's results and diversification strategy. On the other hand, we believe that the declining trend on inflation in Colombia will solidify in the coming months, facilitating a gradual reduction in interest rates. This should stimulate a recovery in credit demand and alleviate the pressure on asset quality.

We expect that there will be opportunities for credit growth in agribusiness, mining, and public administration sectors because of the government's advancement on public policy programs. This growth is expected to partially offset the slowdown that is being experienced in the construction, manufacturing, and retail sectors. However, it is important to note that there are still concerns regarding the progress of regulatory changes in the health sector, as well as the performance of the energy sector, which is currently facing challenges due to the El Niño phenomenon. It is important to acknowledge that our involvement in the healthcare industry is relatively small, with our services reaching over 11,400 clients, which constitutes only 1.6% of Bancolombia's independent loan portfolio. On the business development front, we are pleased to share the recent launch of Wenia, a Bancolombia investment in a digital asset company.

Wenia is registered in Bermuda and has been granted a Class F license by the Bermuda Monetary Authority. By utilizing innovative technology, Wenia serves as a bridge between traditional financial system and the expanding digital economy. Initially, Colombian residents will be able to engage in the buying, selling, converting, receiving, and sending of digital assets such as Bitcoin, Ether, and USDC in a swift and secure manner.... This initiative aims to empower individuals with an interest in the digital assets realm to confidently diversify their investment portfolios. This innovative solution is framed within rigorous compliance with regulatory standards and internal control policies, including Know Your Customer, Know Your Transaction, and Travel Rule, ensuring comprehensive stewardship and confidence among all parties involved. After these highlights of our first quarter results, I am pleased to introduce our Chief Economist, Laura Clavijo, who will provide further insights into the macroeconomic landscape. Laura?

Laura Clavijo (Chief Economist)

Thank you, Juan Carlos. Please go to slide 3. Economic activity in Colombia is going through a phase of substantial weakness that will continue for much of 2024, due to stagnated consumer demand and a significant fall in fixed investment. Consequently, our updated forecast incorporate a slight downward revision for some key macro variables. For 2024, we anticipate economic growth of just 0.6%, in line with the previous year's overall economic results. Inflation is expected to close at 5.7%, leaving more margin for Central Bank interest rate cuts for an end of year repo rate of 8.75%. Indeed, first quarter results suggest that even though the economy as a whole is still sluggish, as in the case of construction, retail, and manufacturing, some sectors have managed to outperform amidst this uncertainty.

The agriculture sector, for instance, managed to grow 1.9% year-over-year during January, and 2.5% in February, according to the leading economic indicator, ISE. As farmers anticipated the drought season in the wake of an unpredictable El Niño, some crops, such as coffee and cacao, thrived in the earlier months of the year. Also, the services sector, which includes public administration and entertainment, showed favorable activity, expanding close to 5% during the first quarter. Furthermore, the economy has continued to benefit from receding inflation, which has managed to maintain a consistent downward trend, closing at an annual rate of 7.36% during March.

This trend has been mainly led by declining food prices, registering just under 2% year-over-year, and goods prices around 3%, especially imported goods that have eased, thanks to the appreciation of the exchange rate. Given the scenario, the Central Bank accelerated the pace of interest rate cuts to 50 basis points during March and April. Thus far, policy interest rates have declined 150 basis points from its 2023 peak, enabling the repo rate to descend to its current level of 11.75%. Going forward, we expect the Central Bank to continue a cautionary approach to monetary easing, given the upside risks that still prevail in bringing inflation back towards the target range of 3%. Indexation effects are tangible, and potential hikes in gas and diesel prices are still on the table.

Finally, in recent months, much attention has been drawn to the fiscal outlook. Underwhelming economic activity has significantly impacted tax collection, and other sources of revenue have suffered setbacks, such as those expected from lawsuit windfall gains and mining sector royalties. Declining sources of revenue contrast sharply to high levels of planned expenditure that the government has set out to meet social policy goals. As a result, the government expects to expand its fiscal deficit to 5.3% of GDP in 2024, from 4.3% in 2023, which implies testing the limits of compliance to the fiscal rule. In sum, the Colombian economy faces growth challenges, but macro financial conditions are slowly improving and should help alleviate household budgets and lead to an uptick in demand during the second half of the year.

Now, please let me turn the presentation back to Juan Carlos, who will present Bancolombia's quarterly performance.

Juan Carlos Mora (CEO)

Thank you, Laura. Before we move into the detailed quarterly results, I would like to present an overview of some initiatives aligned with our core value-driving pillars. Through these pillars, we develop innovative solutions and develop exceptional capabilities that not only reinforce our market leadership, but also lay the groundwork for sustained growth and profitability. Please proceed to slide four. As a part of our first and second strategic pillars that cover our integrated and client-centric solutions approach and our digital capabilities under a multi-channel platform, I would like to share the recent launch of our enhanced value proposition to address SMEs merchant cash management and collection needs under a simple and innovative acquiring app operated by Wompi, a payment platform subsidiary fully owned by Bancolombia. We consider Wompi a strategic channel due to its substantial market share potential in payment flows.

Small and medium-sized enterprises are approximately 90% of Colombia's total productive sector, and lack of formal and cost-effective cash management and acquiring services to facilitate their in-store and online sales. These services are inherently recurring and scalable, generating fee-based revenues that aids in diluting fixed costs and IT investments. With the introduction of novel capabilities such as Tap to Phone and tailored solutions, Wompi seeks to complement rather than compete with the traditional acquiring and cash management services offered by the bank. Moreover, from a channel ecosystem perspective, it leverages Nequi's substantial customer base as these customers represent the end users of acquiring services provided by Wompi to merchants. In fact, Wompi experienced an impressive growth of approximately 30% year-over-year in terms of clients, 33% in terms of revenues, and 7% in terms of the number of transactions.

We anticipate this positive, positive trend to be further enhanced by the new value proposition, thereby contributing to the consolidated group performance. Furthermore, we envision Wompi as a vehicle to capitalize on the open banking opportunities through an API connectivity, leveraging the bank's progress in this domain. On slide five, under our third value-driving pillar of structural capabilities that create distinctive market advantages, I would like to examine the key factors behind the net interest margin performance in Colombia. These factors largely explain the bank's superior results compared to its peers over the past almost two years, and will provide tools to defend the margin in the current descending interest rate cycle. Firstly, we offer a comprehensive portfolio of assets and liabilities with a range of diverse and complementary products that provide greater flexibility to manage rate and index gaps.

Secondly, the diverse sources of counterparties of time deposits, including retail, commercial, and institutional clients, facilitate the diversification of tenors and indexes, thereby enabling the construction of an efficient pricing curve. Thirdly, the substantial volume of low-cost and stable deposits, which exceed the low sensitivity interest rate fluctuations, serve as a reliable anchor, ensuring the maintenance of highly competitive funding costs across varying interest rate cycles. Lastly, we have developed a highly knowledgeable and experienced team that effectively utilizes comprehensive transactional data and market insights to strategically adjust the tenure and rate gaps of assets and liability. This enable us to effectively manage duration risk and optimize the net interest margin throughout diverse interest rate cycles.

For instance, as illustrated in the initial two upper pie charts, in 2021, when the interest rate hike cycle had recently started, we strategically adjusted our assets and liability structure to enhance our asset-sensitive position. This involved increasing the proportion of floating-rate loans relative to floating-rate deposits, with the objective of expanding our net interest margin, which subsequently materialized. However, in the current environment characterized by an interest rate cut cycle, we have been implementing adjustments to our liability structure to mitigate our asset-sensitive position. This involves a three-element strategy. Firstly, reducing the proportion of non-rate sensitive liabilities. Secondly, accelerating the repricing of time deposits by increasing the share of time deposits with maturity occurring within the next 12 months. And thirdly, increasing the proportion of floating-rate time deposits to capitalize on the interest rate reductions.

The duration of assets and liabilities has changed significantly, as reflected in the lower right-hand side chart. In 2021, assets were repriced much faster than liabilities. However, currently, the duration of liabilities has decreased to accelerate the repricing of time deposits, while the duration of assets has increased to maintain higher yielding loans for a longer period. As we progress throughout the current monetary expansionary cycle, we will continue to adjust the gaps between our assets and liabilities to mitigate our margin sensitivity to rate cuts. However, we will remain vigilant and consider the potential impact of the next cycle. Finally, on slide 6, under our four value driving pillar, which is the culture of efficiency and productivity, I will review the expense control strategy we implemented at the beginning of the year. This strategy seeks to identify opportunities for efficiency enhancement and reduce recurring expenditures.

The plan has a short, medium, and long-term approach and covers an in-depth assessment in six key areas: technology, fixed assets, fee expenses, operational risk, resource realignment, and regulatory expense management. Each area has a dedicated team led by senior management and a centralized governance oversight and control mechanism ensures alignment with our objectives. By way of illustration, we are presently evaluating the potential avenues to optimize cloud-based services, minimizing expenditure on credit and debit card fees, terminate real estate leases, capitalize on resource realignment facilities by IT tools, and implement comprehensive fraud mitigation measures. We will provide a periodic update on the progress made in each of these areas, as we believe that the above-mentioned strategy will surely yield the desired outcomes, thereby ensuring enhancement operational efficiency. Now, I would like to invite José Humberto Acosta to provide further information on our first quarter 2024 results. José?

José Humberto Acosta (CFO)

Thank you, Juan Carlos. Please go to slide 7 to discuss results of our Central American operation. During the first quarter, the share of our banks in Central America grew quarter-over-quarter with respect to Colombia, driven mainly by a couple of large corporate loans. However, when analyzed on an annual basis, such growth is offset by a 17% peso appreciation. Banco Agrícola had another strong quarter on the back of payrolls and commercial loans growth that increased its NII, whereas Banistmo and Banco Agromercantil's growth was mainly focused on commercial loans as consumer remains subdued, so their NIIs contracted. Regarding asset quality, our banks are tending towards a slower pace of deterioration, but posted mixed results in terms of cost of risk, as Banistmo had a provision release related to a parameter update.

Whereas Banco Agrícola returned to a normalized cost of risk after one-off accrual last quarter. On the other hand, Banco Agromercantil recorded a lower provision expense quarter-over-quarter, partly explained by seasonal effect and a lower growth on consumer loans. Banco Agrícola recorded a return on equity of almost 18%, Banistmo of 9.5%, whereas Banco Agromercantil returned to 10% area. Despite the overall positive results of all banks, the net income contribution decreased year-over-year compared to that of Colombia, also due to the peso appreciation. We remain cautious regarding the economic and political outlook of all three geographies, particularly with respect to Panama, due to the more challenging fiscal performance and expectations around the new government recently elected. Please go to slide 8.

Driven by an almost 4% quarter-over-quarter growth on commercial loans, the consolidated loan book resumed its growth path with a 2.5% quarter-over-quarter increase. Despite still recording a 2.6% year-over-year contraction, explained by the 17% peso appreciation, that reduced the contribution of the loans denominated US dollars. Absent of the FX impact, the loan book would have grown 3.8% on a yearly basis. The growth on commercial loan is in part attributable to the good performance of the subsidiaries in Central America, that originated a couple of large corporate loans. Coupled with a deliberate strategy to seize market share growth on this segment in Colombia, as lower interest expense incentivized demand.

Also, it is worth to mention positive performance of the mortgage segment that accomplished a 1.9% growth on the quarter, signaling a slight recovery after several months of subdued demand, and driven by social housing, housing as per reestablishment of the government subsidy program at the beginning of the year. On the flip side, consumer segment continues contracted in a combination of reduced appetite and low demand, given still high rates for this unsecured type loan. Consistently with the above, the share of consumer loans yielded to commercial loans during the quarter, down to a 20.8% share of the total portfolio, versus 22.1% a year ago. Please go to slide number 9.

Despite the commented growth of the loan book, total deposits decreased 1.2% quarter-over-quarter, as we used excess liquidity and repos to fund the loan growth and to prepay medium-term bank loans, which fell almost 10% quarter-over-quarter. Year-over-year, deposits recorded a 2.5% drop, whereas loans with banks and debt instruments contracted by more than 25% and 24%, respectively, consistent with a weaker credit demand. In terms of products, time deposits grew the most, with 1.5% quarter-over-quarter growth, exclusively on digital time deposits, whereas savings fell 2.2% and current account 3.2%, as clients shifted again towards higher-yielding instruments after the preferred year-end liquid position. Year-over-year, time deposits grew 2.8%, whereas savings fell 4% and current account, 10%.

From the funding mix perspective, savings maintained its stake, whereas current accounts and loans with banks yielded to time deposits that increased to 36%. Provided the Central Bank rate cut and the lower pressure to secure funding, the cost of funding dropped to 5.3% in the quarter. However, it is important to highlight that with regards to time deposits, we were able to cut the weighted average rate by 219 basis points, exceeding the accumulated Central Bank rate cut of 100 basis points as of March. A proof of our ability to adjust our time deposits maturing profile to secure a fast repricing, as discussed earlier. Please go to slide 10.

Total interest income on loans and financial leases contracted 4.1% quarter-over-quarter, driven by the lower rates applicable on credit originations and on the repricing of the loan book, coupled with the reduction in the consumer loans share that yield higher than commercial loan. Moreover, there was a 5.7% quarter-over-quarter decrease in interest and valuations on financial instruments, driven by lower income valuation on the TES portfolio. Thus, total interest income and valuation on financial instruments fell 4% quarter-over-quarter and 3% year-over-year, consistent with the interest rate cut and portfolio performance.

Furthermore, interest expense fell 7.2% quarter-over-quarter and 2.1% year-over-year, given the contraction on deposits, the prepayment of medium-term loans, the reduction in debt instruments, and the ability to cut rates on time deposits to a larger extent when compared to the Central Bank's policy. However, despite the effort on interest expense reduction, NII fell 1.5% quarter-over-quarter and 3.7% year-over-year, mainly attributable to the drop on interest and valuation on financial instruments. Thus, NIM fell 14 basis points quarter-over-quarter to 7.1% on the back of the 77 basis points lower NIM on investments, whereas the lending NIM only contracted 4 basis points because of our margin protection strategies in play discussed earlier.

Going forward, our NIM will benefit especially from the repricing dynamic of the 67% of total time deposits that will become due in the next 12 months. Please go to slide 11. Net fee income decreased 2.4% quarter-over-quarter due to seasonal effect, as transactions increased on a year-end. As a result, fee income ratio fell to 18%. Year-over-year, net fee income was flat, as fee expenses growth outpaced fee income growth due to the higher third-party provider cost and processing charges. When breaking down by products, credit and debit cards, payments and collections, and banking service fee income fell quarter-over-quarter as per lower volume of transactions in the first quarter, whilst posting growth rates year-over-year.

On the flip side, fee income related to bancassurance fell 27% quarter-over-quarter and 2.2% year-over-year, driven by a smaller share of fee income, as the claims ratio has increased, coupled with a lower volume of policies issued, given the contraction in personal loans. Regarding other sources of operating income, the fleet leasing operation reduced 2.3% quarter-over-quarter as per lower demand, but still post interesting 10% growth year-over-year. Please go to slide 12, and an overview of the asset quality. Net provision expense for the quarter was COP 1.3 trillion, an almost 24% drop quarter-over-quarter and 36% year-over-year. Consequently, the quarterly cost of risk fell from 2.7% to 2%, whereas the annual figure dropped to 2.6% cost of risk.

The explanation of this sharp drop in net provisions is threefold. First, there was a COP 213 billion reduction on consumer loans, given the slower pace of deterioration in Colombia, as we will further elaborate. Second, and a COP 198 billion pesos released, mainly attributable to the update of macroeconomic inputs, which incorporate the downward part of the interest rate, which is the main variable associated to consumer loans performance, as well as a release related to a parameter updated in Banistmo. And third, a COP 34.6 billion pesos release on a large exposure segment, given prepayments of several past due loans. On the other hand, a COP 55 billion pesos provision expense was accrued on SMEs due to an increase in past due loans, as expected.

Thus, despite the better performance of consumer loans in Colombia, new past due loans increased quarter-over-quarter, as shown on the upper left-hand side graph, related to commercial loans in Colombia and Banistmo, personal loans in Banco Agromercantil, and mortgages in Banistmo. Moreover, charge-offs for the quarter were COP 1.5 billion, below the charge-off amount on the last two quarters, as the stock of past due loans on consumer loans is lower, and these typically are written off faster than commercial loans. In terms of asset quality, past due loans exhibited a quarterly and annually deterioration in terms of 30-day past due loans, as per the increase in new past due loans.

On the flip side, the 90-day past due loans ratio remained flat quarter-over-quarter, albeit increasing on a yearly basis, as the pace of rollover has subsided, provided higher collections and refinancing agreements. On the other hand, provided the decrease in net provision charges on the quarter, both the 30- and 90-day past due loans coverage ratio fell to 111% and 176% respectively, although still proving a strong coverage to the balance sheet. Now, from an expected loss perspective, Stage 1 slightly increased, provided the growth on loans during the quarter, whereas Stage 2 and Stage 3 remained flat quarter-over-quarter, as the net result of less consumer loans reaching 90-day past due, and the transition of some commercial loans from the Stage 3 into Stage 2, given its better performance.

The combined coverage of Stage 2 and three loans increased three basis points to a level of 40%. Going forward, we envision a decrease in loan deterioration on the back of interest rate cuts that alleviate pressure on debtors' cash flows. However, we do expect higher delinquencies on SMEs as construction, manufacturing, and retail continue to perform poorly. Moving to slide number 13, I will further discuss on credit quality in Colombia. As we anticipated, there has been an evident reduction in loan deterioration in the consumer segment in Colombia, provided all the measures taken to increase collections and adjust credit appetite. As shown on the upper left chart, there was indeed a negative past due loans delta quarter over quarter, as new vintages are performing better.

When broken down by product, personal loans, which hold a 9.4% share of total loans on Bancolombia's standalone book, and 20% of loans in stage 2 and 3, reduced the most in terms of new past due loans. On the flip side, auto loans, credit cards, and payroll loans registered a higher past due loans due to a seasonal effect, as individuals typically have access to extra cash in year-end, allowing them to catch up with their installment. But most importantly, customer risk fell across all products except for credit cards, given the model's recent interest rate update, which forecast a descending path that alleviates debt or cash flows, coupled with the better performance of the new vintages.

In the case of credit cards, the increase of customer risk was attributed to the fact that the quarter-end date fell in Holy Week, and some collections were recorded days after. Based on the adjustments introduced to the consumer risk model that have resulted in better performing new vintages in Colombia, we continue progressively increasing the volume of new originations, confident that as our rates go down, asset quality metrics will improve. In terms of overall asset quality, we continue performing within the average of 90-day past due loans amongst the largest peers. Please go to slide number 14. Operating expenses contracted 8.1% quarter-over-quarter, due to a seasonal effect related to a year-end additional expenses in IT, advertisement, and cash transportation, and consequently, there was a lower VAT provision.

Thus, administrative expenses dropped 13%, and the personal expenses that aggregate salaries, benefits, and the compensation plan remained flat, despite the 12.3% average salary increase for employees in Colombia, which was somehow compensated with lower increase in Central American Bank. Now, from an annual perspective, and in line with the slower pace of growth exhibited since the second half of 2023, year-over-year total expenses grew 3.5%, significantly below inflation, driven by far by a stringent cost control, and second, by the 17% peso appreciation during the period. Administrative expenses grew 5.4%, mainly because of non-income taxes and IT-related services devoted mainly to the journey to the cloud and business transformation, whereas personal expenses grew below 1% despite the annual wage increase in Colombia, what reaffirms the efficiency gains.

Consistently, cost to income ratio for the period fell to 46.2%. Please go to slide 15. Net income for the quarter was COP 1.7 trillion, equivalent to a 15% increase quarter-over-quarter, driven by the 24% drop in net provisions and 8% reduction on operating expenses that more than offset the contraction on the net interest income. On a yearly basis, however, the net income fell 3% year-over-year on the back of loan book contraction, lower income generation, high credit and operating expense. Return on equity for the quarter increased to 17.4%, which, if adjusted for goodwill, results in a return on tangible equity of 21.8%. That shows a strong profitability of the operation isolated of goodwill related. Now, please go to slide 16 to discuss the evolution of capital generation.

Shareholders’ equity fell 4.2% quarter-over-quarter, provided the COP 3.4 trillion dividend payout approved in our general assembly in March.... Year over year, it contracted 1.2%, driven to some extent by the peso appreciation during the period. On the other hand, Core Equity Tier 1 ratio ended at a level of 10.4%, implying a 100 basis points reduction, whereas on a yearly basis, it increased 7 basis points on the back of organic capital generation. Consistently, total capital adequacy ratio was 12.3%, equivalent to a 110 basis points quarter-over-quarter reduction, and 30 basis points increase year-over-year. During the remainder of the year, income generation will offset the dividend payout to reach the CET1 target of 11% area for the year end.

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

Juan Carlos Mora (CEO)

Thank you, José Humberto. Please proceed to slide 17 to review the evolution of our sustainability strategy. In Q1, we increased disbursements under a Business with Purpose strategy by COP 10.2 trillion, bringing the total to COP 151 trillion since 2020. These loans support small-scale agribusiness ventures, green buildings and mobility projects, decarbonization plans, and gender-related initiatives. Over the past year, as a part of the Climate Finance Leadership Initiative, we have been actively engaging in meetings with representatives from both the private and public sectors. These discussions have focused on our collective contributions to climate action and clean energy transition strategies. The culmination of this work will be formally presented at the upcoming COP16 conference. We are also pleased to announce that we have been voted as the company with the highest ESG responsibility for the fifth consecutive year.

This recognition is based on the findings of a survey conducted among 80,000 respondents, encompassing ethical conduct, transparency, corporate governance practice, and environmental commitment. Finally, in the area of social impact, we are pleased to introduce La Casa de la Plata, an innovative online platform designed to foster financial well-being among our valued customers. This comprehensive platform provides a wealth of financial education resources and interactive tools, empowering individuals to make informed and responsible financial decisions. Last, on slide 18, I will share our guidance for the end of 2024, based on the current data and our updated macroeconomic forecast, as shown on the left-hand side, for which I want to highlight the variation in terms of the exchange, exchange rate as it imposes changes to dollar-denominated accounts when expressed in pesos.

We expect a total loan growth of 8%, broken down in 4.1% growth on peso-denominated loans and 8.5% in dollar-denominated loans. We keep our 6.8% guidance with regards to the net interest margin, adjust our cost of risk from 2.4% to 2.6% as vintages continues performing better, adjust efficiency ratio to 15% area, and maintain our ROE forecast around 14% and core equity tier one ratio of 11% area. With this, we conclude the review of our first quarter results. We will be happy to address now any questions you may have. Thank you.

Operator (participant)

Thank you. We will now begin a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. If you wish to be removed from the queue, please press star, then two. If you are using a speakerphone, you may need to pick up your handset before pressing the numbers. Once again, if you have a question, please press star, then one on your touchtone phone. One moment, please, while we poll for your questions. Our first questions come from the line of Ernesto Gabilondo with Bank of America. Please proceed with your questions.

Ernesto Gabilondo (Analyst)

Thank you. Hi, good morning, Juan Carlos and José Humberto, and good morning, everyone. Thanks for the opportunity to ask- to take questions, and well, I have 3 from my side. My first one will be on NIMs. So in your presentation, you were saying that you did some adjustments to your balance sheet. So what would be your current sensitivity in Colombian pesos and in basis points for every change of 100 basis points in interest rates? And how much NIM pressure can we expect for this year? And what will be the levels that you will see for NIMs on a normalized levels? My second question is on market-related revenues. We saw there was some pressure in this line during the quarter.

So, just wanted to see how are you expecting this line to behave in the next quarters? And my last question is on Nequi. We started to see stronger fee income generation, and we continued to see a larger number of active clients. So, can you please share if you have, like, some specific targets for Nequi in terms of number of clients, revenues, or profitability within Bancolombia? Thank you.

Juan Carlos Mora (CEO)

Thank you, Ernesto. I am going to start addressing your third question, and I'm going to ask José Humberto to give you some color on the first two questions. And then, also, I am going to ask Laura to give me, to give us, her view on how the interest rates are going to behave according to our view, so we can have the framework to address your question about the Nequi. So let me start with your Nequi question. Nequi continues to develop its business plan. It continues growing in terms of number of clients and number of active customers.

We currently have close to 19 million customers, of which around 13.5%, 15 million customers are active, meaning that they interact with Nequi at least once a month doing a monetary transaction. So we have the client base, and the activity of those clients continue to increase, and fee generation of Nequi continues in a, in a, performing performing very well. Regarding your question of our targets, at the level of customers that we have, we are not expecting to continue the same pace of growth. So we have a target of around 22 million customers in 2025. But with 19 million, we have a big enough base to have the those revenues that we are expecting.

We continue, as I said, with new products. We launched this year a platform to receive remittances. So fee generation in Nequi continues to increase. So we are happy with the performance of Nequi, how the clients are using the platform, but still we need to wait a little for Nequi to reach the point in which it's profitable. So we expect that to be in 2025, by the end of 2025. With this, I am going to ask Laura to give us her view on interest rates, and then José Humberto will address your question regarding sensitivity and the market related revenue. Laura, please.

Laura Clavijo (Chief Economist)

Thank you, Juan Carlos. Yes, indeed, our revised forecast suggests for the Central Bank policy rate we revised giving an additional space of an additional 50 basis points during this year. We've seen how during March and April the Central Bank cut 50 basis points, and we expect it may accelerate to the levels of 75 basis points somewhere early in the third quarter. This in line with how we're seeing inflation coming down. The most recent inflation number for April shows another decline.

Still a little bit of pressure on food prices, but we believe the phenomena, the climate effect, the phenomena El Niño will end to some extent its impact on inflation in April and May. So we are seeing declining inflation coming to a much more comfortable level that may give way to additional rate cuts. But I think it's important to take into consideration the upside risks in inflation. We still have some announcements from government regarding a diesel hike. We see with some uncertainty they're going to be able to do those much-needed price hikes, as well as gasoline prices, which have been more pressured in terms of kind of international oil prices and how that reflects an additional deficit.

So we still see some upside risk in inflation there. And the other thing factor to take into consideration, of course, is how the Fed is going to move, in terms of their own, rate reductions, if they are to occur in 2024. So it's something to take into consideration given kind of this outlook on interest rates, and we maintain that, the Central Bank will have, a somewhat a cautionary approach, which is favored again by receding inflation. I think, I believe our interest rates have been coming down, in the loan portfolio, since almost 12 months ago.

So that's something to take into consideration, not only kind of the policy rate and how that will have a lag effect, but also how loan portfolio interest rates have been coming down since the peak in March of last year.

Juan Carlos Mora (CEO)

... Ernesto, regarding your first two, first two questions, I would say that the sensitivity right now is in between 20-30 basis points for every 100 that the Central Bank interest rates move. Remember that, our structural balance sheet, almost 70% of our loan book is floating. Meanwhile, on the deposit base, we have more than 50% floating as well. The other point that I have to highlight is the fact that we have been, in advance, very aggressive, reducing interest rates from the time deposits, around 200 basis points in the first three months. Meanwhile, interest rates from the Central Bank reduced 100. So we have been prepared for the second half.

What is going to happen, Ernesto, is we are going to feel some pressure for NIM the second half, again, because our expectations is to interest rate from Central Bank to be at a level of 8.75 at the end of the year. Summarizing, that means a compression of the NIM of at around 20 basis points. Related market, what is going with the market, especially with our securities portfolio, high level of volatility. Remember that we are forecasting, NIM, structural NIM of at around 2% because of the investment portfolio, so we are expecting a normalization of that NIM during the second half of the year.

Ernesto Gabilondo (Analyst)

Now, super helpful. Thank you very much, Juan Carlos, José Humberto, and Laura.

Juan Carlos Mora (CEO)

Thank you. Thank you, Ernesto.

Operator (participant)

Thank you. Our next questions come from the line of Yuri Fernandes with J.P. Morgan. Please proceed with your questions.

Yuri Fernandes (Analyst)

Hey. Hi, guys. Thank you for the opportunity of asking questions and congrats on the quarter. I have a follow-up question actually on asset quality and provisions, and I think José Humberto already discussed this in the presentation. But when we look to the provisions, they were much lower because mostly on updating the expected loss models, right? Like, when we look to the thirty days past due loans, we still see a high new past due information, even considering that write-offs were lower this quarter. Like, there was a worsening on mortgages some other lines on the thirty days.

So I would like to ask you if you are seeing this is, you know, punctual, it's first quarter, sometimes there's seasonality, and 30 days we start to improve and we are pretty comfortable with this lower coverage ratio that we are seeing on the 30 days. I know your coverage on 90 days is higher than the 30 days, but trying to understand more the short-term delinquency to try to take your lower cost of risk guidance versus a worsening 30 days past due. That's my first question. And going to your guidance, I got that your ROEs are unchanged at 14%, despite a lower cost of risk. I think it's higher efficiency ratio, but can you comment on that?

Like, why aren't ROEs higher for the full year, given you have almost 18% ROE in the first quarter? Can we not see, I don't know, upside risk for this year at 14% ROE guidance you have for the full year? Thank you.

Juan Carlos Mora (CEO)

Thank you, Yuri, for your questions. Let me address your first point regarding the cost, the cost of risk and asset quality. Let me start by saying that the quarter was a good quarter regarding asset quality and kind of surprise side, on the positive side. But we need to read carefully that quarter. As you mentioned, past due loans, 30-day past due loans ended higher. That's something that we need to take into consideration, but it's punctual in the sense that the end of the month was Sunday at the end of Easter week. So it's something that is... And many people didn't pay back the loans that week, but the week after.

But we need to be careful on the development of what is going to happen in April. But the quarter was good. In that sense, we are, our guidance is that the cost of risk could improve during the year. But I want to highlight something. This is a year with high volatility, in which we need to be very careful regarding how the Colombian economy particularly is going to behave. So we have, on the consumer side, we see a good performance, provisions are lower than we were expecting, and, that, that's because we started changing our origination process at the end of 2022, and during all 2023, we have a tighter consumer loan origination.

What we need to be careful is how SMEs are going to perform during this year. We are looking very careful how those that particular segment is going to behave. So let me summarize. Better quarter than expected in terms of cost of risk, that could lead to a better year, but we are not very sure that that's going to be the way the year is going to behave, mainly because we are not clear how SMEs are going to perform during the year.

With that, let me go to. So we still think that we can have a better than we expected at the beginning of the year cost of risk, that our guidance was 2.6, that what we are saying that we can move to 2.4, but still there is a lot of uncertainty regarding that. Expenses, the quarter was very good, mainly because some measures that we took, but also because the devaluation or revaluation of the peso better. So that helped us. In past quarters, devaluation of the peso affected us, in this quarter revaluation was in favor of our expense.

Still, due to the performance of the interest income, we believe that efficiency thing is going to be, the efficiency ratio is going to be close to 50%, which is a, a deterioration of, of our, index or, or the, figure that we had, at the end of 2023. With all of that, still, the ROE, we, we think that we could be probably on the 14, higher, higher fourteens, probably close to 15% ROE, but with a lot of uncertainty. That's why we prefer to stay closer to the, to the 14% guidance, and waiting for the development of the year view.

Yuri Fernandes (Analyst)

No, super clear for me. Just to follow up on asset quality, the impression I have is that the situation is still a little bit uncertain on the credit cycle in Colombia. For sure it's improving, but maybe it's improving faster for you than other peers. Do you agree with that statement, like from these moving parts?

Juan Carlos Mora (CEO)

Completely. The economic environment is uncertain. GDP growth in Colombia is going to be close to 1%, which is low. So there is a lot of uncertainty as you mentioned, so I completely agree with your statement, Yuri.

Yuri Fernandes (Analyst)

Okay, now. Perfect. Thank you. Thank you very much.

Juan Carlos Mora (CEO)

Thank you.

Operator (participant)

Thank you. Our next questions come from the line of Julián Ausique with Davivienda Corredores. Please proceed with your questions.

Julián Ausique (Analyst)

Hi, everyone, and thank you for having me question. I have two questions on the first one is regarding, again, with efficiency, and I would like. I know you already explained, but I couldn't get it. Sorry, interference in my call. So I would like to understand why you're expecting a deterioration from the efficiency ratio from 45% that you reported to 50%. My other question is regarding the NIM. I would like to understand why the NIM of the loans deteriorated a little bit, even with the better performance of the cost of funding, like, why are you... What are you seeing in terms of collecting or in confirmed loans?

The third question is regarding the ROE. I would like to know. I know you have your guidance is 14%, but like I, I think, or because I, the thing that I have, I heard is that the 14% is like the base case, the base case scenario, but which one, which will be the best case scenario and maybe the worst scenario, or maybe the 14% is also the worst scenario in terms of the ROE. Thank you.

Juan Carlos Mora (CEO)

Thank you, Julián. Sound quality was poor, so I am going to try to address your what I understood of your question and or your questions. I am going to start for the last one regarding ROE and regarding the answer that we gave, Julián. There is a lot of uncertainty of the performance of the economy, particularly in Colombia, how interest rates are going to behave. That's why we prefer to give a guidance of 14%, which is the base guidance.

It could be an upside, and we could reach 15%, 15% ROE, but with that uncertainty that there is on the Colombian economy, we prefer to stay on the 14. And regarding NIM, we also elaborated on how we expect the interest rates to behave, and we are managing our cost of funds. But at the end, the Central Bank is probably going to reduce the reference rate around 300 basis points, but the effect, we will see the full effect of those reductions in 2025. Some at the end of the year, at the last quarter of the year.

But mainly we can manage our cost of funds and the interest income in a way that we just expect a reduction to 6.8 of our net interest margin. So we will see probably the full effect or the main part of the effect of interest rate reduction during 2025. Regarding efficiency, with the increasing inflation that we are having still in Colombia, inflation is around 7%. So costs will continue to increase. Labor costs increase in a very important manner during the last three years.

So, managing the cost is a priority for us, but still, because of the statistical or the comparison of previous, we still think that if our efficiency ratio will be closer to 50%. I'm going to ask José Humberto if he has something to add to these comments.

José Humberto Acosta (CFO)

Thank you, Juan. Just to highlight the fact that regarding your second question, why the NIM compressed a little bit the first Q, that there is a combination of two factors. First, the reduction on savings accounts, because obviously people shift from savings accounts to time deposits, so we increase a little bit more time deposits. But the good news is, 67% of the time deposits is less than a year, so the repricing of the liability will be at the same pace of the repricing of the, of the assets. That's the main reason why you see a small contraction of the NIM this first quarter.

Operator (participant)

Thank you. Our next questions come from the line of Andrés Soto with Santander. Please proceed with your questions.

Andrés Soto (Analyst)

Good morning, José Humberto, Juan Carlos, thank you so much for the presentation. My first question is related to expenses. Juan Carlos, you were mentioning about this plan with medium-term targets for efficiency improvement. I understand this is going to be, 2024 is going to be a challenging year because of the indexation of inflation in Colombia. But looking forward, what we can expect in terms of expenses and efficiency, you are currently running at a cost to assets of 4.4%. Do you have any number in mind of what could be attainable over the medium term based on this plan?

Juan Carlos Mora (CEO)

Thank you, Andres. As you mentioned, 2024 is a challenging year regarding the expenses. We still maintain our midterm target of 45% efficiency ratio. I think it's achievable. Now, I mean, the first quarter and last year, we will help because of income, net interest income, because of higher interest rates and better margins increase. So our efficiency ratio improved because of that, and at that part. Now that interest rates are going down, we need to work on expenses, so the pressure on the efficiency ratio indicator is big. But we still believe that the 45%, it's achievable next year.

So, our inflation year forecast for the end of the year is 5.7% during 2024. But the average, so that's year end, but the average inflation is going to be closer to 7%, probably. So there is a pressure. And I want to remind you that labor costs, in general, during 2024, increased 12%. On top of 16%, that was the figure that the labor cost increase in 2022. And before that, that was 10%. So if you do the compound rate of 10, 16, and 12, it's a big pressure on labor costs. So we are carrying that during this year.

So we need to work on that for 2024, and the results we will see it in 2025, Andres.

Andrés Soto (Analyst)

Thank you, Juan Carlos. My second question is regarding these mandatory loans that the government is proposing as part of the package to reignite the economy, and this in the context of, you know, you have a target of COP 500 trillion pesos in loans to sustainable or ESG factors. So how do you see those discussions evolving? Do you think that with this targets that you have for this loan portfolio will be sufficient for what the government wants to achieve in terms of mandatory investments? Or do you expect any additional pressure from the government in terms of where you have to put the money on?

Juan Carlos Mora (CEO)

Andres, the president mentioned mandatory investments for financial institutions, but still we don't have sufficient details to have a view that we can elaborate on. So at this moment, we are engaged in conversations with officials from the government through the banking association to have the details of what is the government thinking about these mandatory investments. Let me say that we in Colombia have already some mandatory investments that are focused on agricultural investments. And in the past, that we had that in Colombia, and the results were very, very poor.

So, that's what the conversations that we are having with the government at this moment to have more details and to see how they are planning or what they are planning and what their views are regarding these mandatory investments. And your second part that you mentioned our ESG strategy, and we do that loans because we are convinced that that's the way to go. We are dedicating funds to clean energy, renewable energy, mobility, green construction.

So those are loans, lines of credit that we are building, because we are convinced that that's the way we can help the economies in which we operate to tackle climate change. It would be ideal if we can. And we think that all those initiatives could easily be regarding or close to what the government is thinking. Also, we are dedicating big efforts to agricultural loans and mainly to small producers. So those are in lines of what the government is thinking, construction, agriculture, and we already have a big portfolio on those loans.

But still, Andres, we don't have enough information to see if those are going to coincide or not.

Andrés Soto (Analyst)

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

Juan Carlos Mora (CEO)

Thank you very much, Andres.

Operator (participant)

Thank you. Our next questions come from the line of Nicolas Riva, with Bank of America. Please proceed with your questions.

Nicolas Riva (Analyst)

Thanks very much, Juan Carlos and José Humberto, for the chance to ask questions. And first of all, I think it important that both equity analysts and fixed income analysts can ask questions during the earnings call, so I hope that going forward, us on the fixed income side, we can also ask questions. So thanks again for the opportunity. Okay, so with that, I have a few questions on your capital. First one, if you can talk a bit about the call option you can exercise on the 2029 Tier 2 bonds in December. If I look at capital, on a consolidated basis, your total capital is at 12.3%. That's only 80 basis points above the minimum requirements.

And given that the 2029, the Tier 2s, will start losing capital treatment if not called, my view is that sooner or later you will need to raise more Tier 2 capital. So again, if you can discuss a bit, your thoughts regarding the call option that you have on the 2029 Tier 2s, in December. And also, if you can confirm that even if you do not exercise the call option, and you can only exercise that once, after the call date, you could still do a tender offer, for the 2029s or even, currently the 2027s, assuming that you get approval from the bank regulator, to do, to take out some of the '27s and/or the '29s.

In that case, if you could even think about doing a larger Tier 2 issue, and then calling the '29s in December, and also doing a tender offer for the '27s. And finally, on your CET1, clearly there was a drop of roughly 100 basis points in this quarter. I assume, given that you declared the dividend payment this quarter, I want to check if the entire dividend declared in the quarter, the $873 million, if that was fully deducted from your CET1 in this quarter? Thanks.

Juan Carlos Mora (CEO)

Thank you, Nicolas, and thank you both for your question. I'm going to pass your question to José Humberto.

José Humberto Acosta (CFO)

Thank you, Nicolas. Regarding your first question, yes, we are, we are losing for the '27, part of the Tier 2 treatment, and next year we begin to at a level of 60% of the '29. Next year, we begin to lose the 20%. Our calculations based on that, it is that we are going to close the year at a level of 1.7% this year, and maybe next year the level will be 1.22%. And our target for Tier 2 is to maintain a healthy level in between 1%-2%, and all depends, Nicolas, of market conditions. You mentioned that we are having a lowest level of BIS of 12.3 at the end of this quarter, but this is basically because our dividend payout....

because of our COP 3.4 billion in dividend, but in our calculations, because of the net income, because of the loan growth that will be below 10%, we are going to close the year at a level of at least 11% of Q1, and at around 13% at the end of the year. So at the end of the day, this is basically because of our dividend. Your third question, yes, we are able to do a tender offer, but all of that will depend on market conditions first. Second, the level of liquidity that we will have in the next coming quarters.

We talk about it with several investors, we are checking every month market conditions to see what will be the best opportunity for the bank if we think about to do something in the market. So that would be very monitoring process, but all depends on market conditions. Again, the market right now is very active. You mentioned that. It is true, but again, this is an opportunistic measure that we will take in the next coming months.

Nicolas Riva (Analyst)

José Humberto,

if I can just-

José Humberto Acosta (CFO)

Please another question.

Nicolas Riva (Analyst)

Okay.

José Humberto Acosta (CFO)

You asked about the dividend. The dividend was fully deducted for the calculation of CET1.

Nicolas Riva (Analyst)

Exactly.

José Humberto Acosta (CFO)

Go ahead.

Nicolas Riva (Analyst)

Thanks very much. I was gonna say, so then basically you're saying that you're guiding for a CET1 of roughly 11% at the end of this year, and then you're saying we wanna have between 100 and 200 basis points in Tier 2 capital. So that means that then your CET1, basically, you're guiding for 12%-13% as kind of a sustainable level. That would be only between 50 and 150 basis points over the minimum requirements. Would you feel comfortable with that kind of buffer over the minimum requirements?

José Humberto Acosta (CFO)

The answer is, for this period, we feel comfortable because there is one main driver why we feel comfortable, because of loan growth. We are expecting below two digits loan growth, 2024 and 2025. If you grow less than two digits, less than 10%, 11%-11.5%, Q1 is more than enough to sustain this loan growth.

Nicolas Riva (Analyst)

Okay, understood. Thanks very much, José Humberto.

José Humberto Acosta (CFO)

Mm-hmm. Thank you, Nicolas.

Operator (participant)

Thank you. Our next questions come from the line of Carlos Gomez-Lopez with HSBC. Please proceed with your questions.

Carlos Gomez-Lopez (Analyst)

Hello, good morning, congratulations, and thank you very much for taking the question. I wanted to ask you first about the tax rate. I know that we update this every quarter. I wanted to know where you land now, what you expect for this year and for the coming year. And second, you mentioned that Bancolombia represents now so much of the earnings of the Colombian banking system, which is great for Bancolombia, maybe it's not that great for Colombia itself. Are you concerned about the situation in which the rest of the system is? Now, are you perhaps a bit more careful now when you take counterparty risk with any of the other institutions in the system? Thank you so much.

Juan Carlos Mora (CEO)

Thank you, Carlos. Regarding taxes, income, income tax, we are expecting our effective tax rate on a consolidated basis to be around 26%-27%. Remember that we have income from different geographies, different jurisdictions with different tax treatments. So on a consolidated basis, we have a tax rate, income tax rate in Colombia of 40% four-zero, but combining the income from the different jurisdictions, our tax rate should be around 26%-27%, as I mentioned. Regarding your second question, I am going to be very clear, we are not concerned about the situation of the financial institutions in Colombia. All of them are solid, with good level of capital.

What we see is more a situation that is particular to conditions regarding interest rates and how some companies are funding their operations. But it's more a situation of a market situation that is currently or happened during last year and the beginning of this year. But we are not concerned at all regarding the systemic risk in Colombia, because all the institutions, as I mentioned, have a good level of capital. They are taking the measures, so we are not concerned at all.

Carlos Gomez-Lopez (Analyst)

Okay. That's clear. Thank you so much.

Juan Carlos Mora (CEO)

Thank you, Carlos.

Operator (participant)

Thank you. Our next questions come from the line of Tito Labarta with Goldman Sachs. Please proceed with your questions.

Tito Labarta (Analyst)

Hi, good morning. Thank you for the call and taking my question. Sorry, some of this is repeated, I joined a little bit late. But, just as you maintained your ROE guidance of 14% for the year, despite a pretty good quarter, and I know there's still some headwinds.

... going on, but just, what do you think is sort of gonna drive that ROE lower from here? Is it mostly a function of interest rates, and as rates come down, you see pressure on margins? Are you concerned about asset quality getting worse? I know, you know, provisions were a bit lower, but could that increase from here? And also in terms of loan growth, which is still somewhat muted, any concerns on that? And then, you know, just thinking a little bit beyond 2024, if the economy is maybe beginning, maybe inflection and improves in 2025, do you think that 14% ROE is sustainable beyond 2024? Or, or how could it evolve, particularly if rates continue to come down in 2025?

Just some color on, you know, the sort of the path from the current ROE, which is very strong, to that 14% that you expect for the full year. Thank you.

Juan Carlos Mora (CEO)

Thank you, Tito. Let me answer your question this way. Very clearly, the variables that you mentioned are going to take or impact our performance and the ROE. But for us, the key factor for this year is cost of risk. It's when we see more uncertainty and when we... And the 14% is achievable, and we think that we can reach that level, and probably that's our base case. At this moment, I could say that we have an upside possibility of getting a better ROE, but the key factor, repeating, is cost of risk.

In terms of NIM, how the loan book is gonna grow, we have that pretty much clear, and we think we have the elements to manage the margin, the NIM, to be in the levels that help our results. Loan growth is not going to be very healthy. It's going to be slow because of the performance of the economy, but we have the tools to manage that. Where there's much uncertainty, as I mentioned, on cost of risk, and it's what we are going to monitor very closely and taking the measures to manage risk.

Again, repeating, SMEs is one of our main focus now, is where we are. And also consumer loans, even though they are performing well, better than expected, to be frank, also we need to monitor, to monitor consumer. But our main focus for the next quarter is going to be how SMEs are going to perform. Another factor to take into account is how fee income is going to behave. Economy is not growing much, so fee income generation is going to be a key factor. Again, repeating, to conclude, cost of risk is the key factor to achieve our ROE during 2024.

Operator (participant)

Thank you. We have reached the end of our question and answer session. I would now like to turn the call back over to Juan Carlos Mora for final remarks.

Juan Carlos Mora (CEO)

We would like to thank you for attending our first quarter 2024 conference call. As we said during the call, it was a good quarter. We are, we are very happy with, with the results. Uncertainty remains an important factor to determine our results for 2024, so we expect to see you on our second quarter conference call to see the development of Bancolombia. Thank you very much, and have a good day.

Operator (participant)

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.