Bancolombia - Earnings Call - Q1 2025

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Bancolombia's first quarter 2025 earnings conference call. My name is Zico, 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 touch-tone 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 risk and uncertainty.

Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by the 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 are Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Mauricio Botero Wolff, Chief Strategy and Financial Officer; Mrs. Catalina Tobon, Investor Relations and Capital Markets Director; and Mrs. Laura Clavijo, Chief Economist. I will now turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer. Mr. Juan Carlos, you may begin.

Juan Carlos Mora (CEO)

Good morning. Welcome to Bancolombia's first quarter results call. Please go to Slide 2. During the first quarter of the year, the Colombian economy experienced some recovery with an increase in investment and domestic demand despite global trade tensions. Inflation rates remained stable for most of the quarter, resulting in unchanged interest rates. Additionally, increased public spending paired with decreased tax collection continued to impact on the fiscal situation, which will be discussed further. I would like to bring attention to some key issues of the quarter. The quarterly net income was COP 1.7 trillion, reflecting a 4.5% growth both on a quarterly and annual basis. A robust NIM of over 6.4%, coupled with strong performance in other income and expenses, resulted in an ROE of 16.3%. The loan portfolio decreased slightly this quarter but grew 7% annually.

Deposits fell by 1% in the quarter, yet increased almost 13% annually, demonstrating our ability to secure funding and competition without raising costs. We have achieved positive results in asset quality across the group due to our effective models, technical expertise, and precise credit policy. Due to consistently lower delinquency rates across all banks and positive trends in all segments, the cost of risk for the period was 1.6%. Banistmo saw a significant drop in provision expenses due to measures taken to reduce loan deterioration. Both 30-day and 90-day consolidated MPL ratios reflect improved performance, as we will explain further. Our capital remains strong, with a total solvency ratio of nearly 13% and a Core Equity Tier 1 Ratio of 11%.

Following our recent ordinary dividend distribution, we are pleased with shareholders' approval of our evolution into Grupo Cibest, allowing us to distribute more value, including an extraordinary dividend of COP 624 per share, resulting in a COP 69 total dividend payout for the year. Since approval, we have been completing legal steps to reorganize the entities under the holding structure, with closing expected on May 16th. Changes to Colombian operations will appear in May's financial statements. On August 6, we will release Grupo Cibest's second quarter consolidated results, including a new accounting structure and performance overview of key subsidiaries. This is Bancolombia's last earnings call. Future calls will be focused on Grupo Cibest's financial performance. We are planning a share buyback program for approval at an upcoming extraordinary shareholders' meeting. We recently transitioned our banking application to the Mi Bancolombia app, enhancing customer experience and saving IT cost.

To date, 8.5 million users have migrated, with a 93% activity rate over 30 days. I will now hand over to Laura Clavijo, Chief Economist, for a summary of the macroeconomic landscape. Laura?

Laura Clavijo (Chief Economist)

Thank you, Juan Carlos. If you could please turn to Slide 3. The beginning of 2025 has been characterized by a turbulent international financial context, nonetheless increasing macro strength for the Colombian economy. The environment of global growth uncertainty, tariff-led pressure on inflation, and monetary policy has triggered high volatility in financial markets and a widespread trend of risk aversion. For Colombia, according to preliminary analysis, the ongoing global trade debate would not pose a significant shock to its external position or the economic recovery. In fact, there are potential opportunities to exploit in terms of relative competitiveness in different sectors such as agriculture and manufacturing, in addition to gains from a weakening exchange rate. Thus, we maintain our view that economic growth will continue to gain ground as inflation continues converging towards its target.

Consequently, we maintain our expectation of 2.6% GDP growth this year and a slight upsurge to 3% in 2026, but we will continue to monitor closely the economic consequences of lower-than-expected growth for key trade partners such as the United States. Global risk aversion has impacted investor sentiment towards emerging markets and sets an uncertain financial backdrop, which at the outset of Colombia's fragile fiscal position has led to local assets being more severely impacted than regional peers. This has been particularly tangible for the exchange rate, which depreciated up to 8% during the second half of March, but is also reflected in higher country risk, resulting in a 100 basis point increase in Colombia's CDS spread compared to the end of 2024. Consequently, this volatile scenario brings additional pressure to an already challenging fiscal situation and limits the course of action in terms of monetary policy.

Indeed, the central bank kept policy rates unaltered during its January and March meetings, despite some apparent room to continue easing, at least from an inflation perspective. The disinflationary process continued its course during the first quarter, especially in terms of core inflation, but a higher-than-expected minimum wage poses pressure on regulated goods, which supports our revision of end-year forecast from 4% to 4.4% inflation. Accordingly, we increased our end-of-year policy rate forecast from 6.5% to 7.5% in the wake of these developments. Finally, it is worth mentioning the recent suspension of access to the IMF's flexible credit line, a loan facility that has been available to Colombia since 2009 and is conditional on meeting found macroprudential policy targets.

Even though recent announcements suggest that this does not imply a total cancellation to the funds facility, it clearly sets additional pressure for the government to develop a credible and adequate fiscal plan to address prevailing risks to Colombia's fiscal sustainability. 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. Please proceed to Slide 4. After 12 years of promoting financial inclusion in Colombia, Bancolombia A la Mano has merged with Nequi. Bancolombia A la Mano provided banking services for adults without access to financial products, while Nequi focused on helping young underbanked individuals manage their money. With 94% of Colombia's population now banked, our new goal is to meet the evolving technological and financial needs of our clients, a challenge Nequi is well equipped for. After the merger, Nequi will add around 2.1 million users, reaching 23.5 million, to whom it will start offering digital and physical debit cards, consumer credit, a broad portfolio of bill payments and top-ups, mobility services, among others. Additionally, former A la Mano customers will now be able to register their keys to move their money instantly and free of charge between participant entities enabled through Redeban.

Also, by centralizing operations in one single platform, we will capture operational efficiencies in avoiding duplicated efforts and, in turn, increase Nequi's scalability and revenue generation, contributing to its profitability potential. As a matter of fact, after the merger, Nequi will increase its deposits by nearly COP 700 billion and forecasts an incremental credit portfolio of COP 130 billion by the end of 2025. This, coupled with an outstanding portfolio that grew over four times in the last year and a low loan-to-deposits ratio, will enable Nequi to threefold its portfolio balance for year-end, reaching close to COP 1.5 trillion by the end of 2025.

This move certainly contributes to achieving Nequi's break-even in the first quarter of 2026, driven by a reduction in the cost to serve and the increase in ARPAC on the back of a broader base of users adopting value-added services under an enhanced financial inclusion proposal. Now, please proceed to Slide 5. Additionally, I would like to present some market metrics that illustrate the progress of our performance in various business lines with the retail segment following the pandemic. First, regarding deposits, Bancolombia's market share in savings accounts and time deposits has increased by 110 basis points as of February 2025, compared to December 2021, outperforming the growth of our peers, some of whom have lost market share with the entry of new participants.

This demonstrates our well-defined strategy under a universal banking model to attract and retain granular deposits, which explain our low funding cost and strong market position. Also, I would like to highlight that Nequi's deposits have also experienced significant growth, with a 70% year-over-year increase contributing to the overall growth. Regarding credit card loans, our market share increased by 20 basis points during a period of high interest rates and competition, without compromising portfolio quality. With a 16.5% share of outstanding balances, we represent nearly 30% of the transaction value, which raises to 37.7% when debit card transactions are included as of February 2025. We firmly believe that this well-defined strategy, combined with our solid market presence, equips us to effectively navigate new competitors and regulatory changes. I will now hand over the presentation to Mauricio Botero, who will provide further insights into 2025 first quarter results. Mauricio?

Mauricio Botero Wolff (Chief Strategy Officer and CFO)

Thank you, Juan Carlos. Please go to slide number six. Let's start with an overview of our Central American operations. Banco Agrícola in El Salvador had another strong quarter with increasing profitability. Higher net interest income on the back of a growing loan portfolio, coupled with lower operating expenses, compensated for an increase in provisions driven by loan growth in higher-risk segments. Net income for Banistmo in Panama increased 11.5% this quarter, highlighting a recovery in asset quality, driving its cost of risk to 0.2%, mainly by an improvement in the performance of its retail portfolio, more effective collection strategies, and better risk segmentation. Coming to Guatemala, it had a modest quarterly improvement. Despite recording a 12% decrease in provision expenses for the period, deterioration on consumer loans remains a concern, and so the bank is implementing a program focused on improving collections by reinforcing controls in the credit origination process.

All in all, Banco Agrícola recorded an ROE of almost 23%, Banistmo of 7%, and BAM 4%. Let's now proceed to Slide 7. Given a 5% peso appreciation during the quarter, the loan portfolio slightly declined on nominal terms, while posting a 7% annual expansion. Net of FX, the loan book grew 1.3% in the quarter and 4.1% annually. Mortgages continued with positive momentum, growing at the fastest pace both quarterly and annually, driven mainly by the operation in Colombia, where more competitive interest rates have stimulated credit demand and helped increase our market share. Commercial loans grew across all geographies at a moderate pace both quarterly and annually, led once again by Colombia as per an effective commercial strategy focused on corporate clients that boosted demand.

On the other hand, the consumer loan book experienced a contraction during the quarter as the peso originations was offset, with maturities given its short-term nature. Please go to Slide 8. Consistent with the loan portfolio performance, deposits slightly decreased in the quarter. Yet, year-over-year, deposits delivered a strong 12% growth, but spacing loan growth, which reflects our ability to attract and retain funding. When breaking down by type of deposit, the aggregate balance of side deposits outpaced time deposits, mainly attributed to the performance across our Central American operations, whereas in Colombia, online time deposits maintained a solid growth, gradually overcoming institutional deposit-taking activity, ensuring a more stable and costly efficient source of funding.

As a matter of fact, the cost of deposits fell 37 basis points during the quarter, a remarkable achievement given that the repo rate remained unchanged during the period, reflecting our effective funding strategy, even under a more competitive environment. All in all, savings accounts and time deposits increased their respective share on the funding mix on a quarterly and annual basis, at the expense of interbank loans and long-term debt, further contributing to reducing the overall cost of funding, as illustrated in the table. Please proceed to Slide 9. Interest income fell by almost 3% in the quarter, driven by a combination of lower-yielding loans and securities as per the current monetary easing cycle and a smaller investment portfolio.

However, this was more than offset with a 7.6% drop on interest expense, such that the NIM bounced back to 7% in the quarter, resulting in a 1% net interest income growth. Consistently, the NIM remained at a solid 6.4%, underscoring our ability to manage margin sensitivity effectively throughout interest rate cycles and market competitive dynamics. Moreover, we continue to adapt our asset and liabilities strategies to mitigate NIM compression on the current easing cycle. As shown on the upper right-hand side graph, during the quarter, we further decreased the net sensitivity to interest rates, driven by a reduction in non-sensitive to interest rate liabilities, in other words, current and savings accounts, as previously discussed. Please proceed to Slide 10.

Fee income fell almost 8% over the quarter, explained by lower credit and debit card fees as per the seasonal effect related to year-end, coupled with a slower peso originations in consumer loans that led to a drop on bank assurance fees. However, fee income increased 9.7% on an annual basis, given the positive aggregate performance of fee income sources derived from a higher volume of transactions and digital adoptions. On the other hand, fee expenses decreased almost 10% on the quarter, also explained by seasonality, yet increased by 22% year-over-year due to higher credit and debit card royalties, third-party collections, and increased banking agent costs. Therefore, net fee income was almost flat over the year, accounting for a fee income ratio of 17.1% in the quarter. Please go to slide number 11.

Building on the positive trend from last year, asset quality continued to improve in the quarter, as evidenced by the consistent slower pace of past due loan formation and, consequently, lower expected losses. As a matter of fact, the positive performance expected for all segments and the incorporation of improved macroeconomic data into our risk models led to a net provision charge of COP 1.1 trillion. This figure represents a 16% year-over-year drop in an annualized cost of risk of 1.6%. Moreover, delinquency ratios registered declines over the quarter and over the year, both on a 30 and a 90-day basis, reflecting the better performance of vintages in an overall healthier loan portfolio. Coverage for 30-day past due loans stayed almost flat at 111%, whereas the coverage for 90-day past due loans increased to 162%.

The breakdown by stages confirms the better outlook, as you can see stage one loans now representing 88.1%. Also, the coverage ratio for stage two and stage three loans maintained at 41%, ensuring adequate loan loss reserves. Our improved results on asset quality reflect our efforts on developing robust credit risk models and predictive capabilities leveraged on analytics to support decision-making throughout the credit cycle. Please go to Slide 12. Operating expenses decreased 7.7% compared to the previous quarter, mainly attributable to a seasonal effect, as expense related to business transformation tends to gradually increase towards year-end. Personal expenses, on the other hand, increased due to the annual wage adjustment in Colombia and inflation index items, whereas variable bonuses declined.

Seen from an annual perspective, operating expenses grew 9.8%, largely explained by IT-related costs, annual wage increase, and a base effect on bonus plan provision, given the low provision accrued one year ago. When measured in terms of cost to income, the efficiency ratio fell to 49.6%. Please proceed to Slide 13. All in all, net income reached COP 1.7 trillion in the period, marking a quarterly and annually increase of 4.5%. This represents a return on equity for the quarter of 16.3% and a return on tangible equity of 20.4%, demonstrating the robust operational and financial performance in the beginning of the year. Now, please proceed to Slide 14. Shareholders' equity fell 6.7% quarter-over-quarter, provided the COP 3.8 trillion dividend payout that was approved at our annual shareholders' meeting. Year-over-year, it grew 11.4%.

Consistently, the Core Equity Tier 1 Ratio ended at 11.2%, a 73 basis point decrease over the quarter, given the dividend payout, yet increased 71 basis points during the year on the back of organic capital generation. On the other hand, total solvency stood at 12.9%, both ratios well above Basel III total requirements. With this, I will now hand the presentation back to Juan Carlos for the final remarks. Juan Carlos.

Juan Carlos Mora (CEO)

Thank you, Mauricio. Please proceed to Slide 15. We originated over COP 13 trillion under our business with purpose strategy this quarter, reaching a total of COP 210 trillion towards our 2030 goal. We financed more than COP 5 trillion to support the transition to a low-carbon economy through renewable energy and sustainable transport. We were recognized by Mercos as Colombia's top ESG company for the sixth consecutive year, reaffirming our leadership in sustainability and corporate governance.

Please refer to Slide 16. Finally, I would like to present our revised guidance for 2025, following our latest macroeconomic update for year-end, which reflects an increased inflation forecast of 4.4% and central bank interest rates of 7.5%. We anticipate a loan growth of approximately 5%. We expect the net interest margin to be around 6.2%, with the cost of risk decreasing to a range of 1.8%-2%, attributed to strong loan performance in Colombia. Furthermore, we project the efficiency ratio to be approximately 51% and the return on equity to be between 14.5%-15%. This concludes our presentation of the first quarter results. We are now ready to address any questions you may have.

Operator (participant)

Thank you. We will now begin the question and answer session. If you have a question, please press star, then one on a touchstone phone.

If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on a touchstone phone. Our first question comes from Yuri Fernandes from JPMorgan. Please go ahead.

Yuri Fernandes (Executive Director)

Thank you and congrats on the quarter, everyone. I have a question regarding your bonus line, your cost line. When we go to personal expenses, it is tracking above inflation, well above inflation. I know bonus can be volatile, right, during the year. Just checking what you expect that line was the first quarter, you know, higher because of some reason. If you can explain that line, that would be interesting. I have a second question regarding margins.

I think you have been doing a good job on the funding cost, but I believe there is a limit, right? How much optimization you can have? We see a somewhat competitive environment for funding in Colombia. Just trying to understand if your guidance for NIM, this 20 basis points decrease that you are forecasting for the year versus the first Q, if this implies that you are, you know, calling for funding optimization to be, you know, less pronounced going forward. Thank you.

Juan Carlos Mora (CEO)

Thank you, Yuri. I am going to address your second question, and I am going to ask Mauricio to address your first one regarding the cost line. Margins, as you said, we have been working very hard on the cost, and the results are there.

I mean, the cost of funds due to our diversification, the mix we have among the different instruments, savings accounts, CDs, allow us to manage the cost. On that front, I think we have been doing a good job, and we'll continue even though the space there is limited due to what we can do because of the level of interest rates. On the income side, our expectations were that the central bank was going to lower the interest rates faster. What we are seeing is that the speed in which they are addressing or applying the monetary policy is less than we were expecting. In the last meeting, the central bank lowered the repo rate 25 basis points. Our expectations today are that the reference rate will end the year around 7.5%.

There, we think there is a risk that it's not 7.5%, but could be more 8%, even though even the central bank is talking about that right now. If that is the case, that means that we could defend the interest income due to what is going to be the interest rate in the economy. We are confident that the guidance that we are giving around NIM, around 6.2%, is achievable due to what we are seeing is the behavior of the interest rates in the economy and what we are doing in the cost front. Mauricio, about the cost line.

Mauricio Botero Wolff (Chief Strategy Officer and CFO)

Yeah. Hi, Yuri. As you mentioned, we have a significant increase in operating expenses regarding labor expenses, and that's due mainly to bonuses. That is because at the first quarter of 2024, our expectations for net income for the year were lower.

The provisions for bonuses were lower. If you remember, we had a pickup in net income in the fourth quarter of the year. Provisions for bonuses in the fourth quarter of the year were higher. This year, we're expecting better net income for the year. Provisions for bonuses started significantly higher from the beginning of the year. That's a comparison we're going to have throughout the year, and it's only going to match in the fourth quarter.

Yuri Fernandes (Executive Director)

Super clear, Mauricio. If I may just follow up to Juan Carlos on the need. Juan Carlos, can you remind us the sensitivity for rates? I remember it was something closer to 20 basis points, but you have been changing your liability sensitivity on the funding, Nequi health. What is the current sensitivity for 100 basis points change on rates?

Juan Carlos Mora (CEO)

Yuri, our sensitivity is still the same, between 20 and 22 basis points for every 100 basis points in the central bank rate, but taking into account that that's the average repo rate.

Yuri Fernandes (Executive Director)

Perfect. Thank you very much, guys, and congrats again.

Juan Carlos Mora (CEO)

Thank you, Yuri.

Operator (participant)

Thank you. We have Ernesto Gabilondo with Bank of America on the line for a question.

Ernesto Gabilondo (Director of LatAm Financials)

Thank you. Hi, good morning, Juan Carlos, Mauricio, and Catalina. Thanks for the opportunity to ask questions. I have three from my side. The first one will be on the political and economic outlook. We have seen recent polls such as Invamer, Guarumo, and Ecoanalítica showing that Gustavo Bolívar is leading the polls. On the other hand, the recent suspension of the IMF agreement indicates there are some fiscal challenges for the country.

I would appreciate your thoughts on both topics and if you think the fiscal situation of the country would be the key challenge to be addressed by the new government next year. I have a second question related to the subsidiaries. We continue to see El Salvador with very strong ROE levels. On the other hand, Panama, I believe it posted something around 7%, and Guatemala around 4% ROE. I would like to hear what could be your potential ROE targets among your subsidiaries. My last question will be on your net income per quarter or what you have said about your guidance. This quarter, it came at COP 1.7 trillion, as you mentioned, an ROE of 16.5%. You have guided an ROE of around 14.5%-15% for the year.

When making the numbers, would it be reasonable to expect net income per quarter below COP 1.7 trillion in the next quarters, or what should we think about it? Thank you.

Juan Carlos Mora (CEO)

Thank you, Ernesto. Regarding the political environment in Colombia, as you mentioned, there are several polls that show Gustavo Bolívar leading the polls, but I think it's too early to have a clear view of what is going to be the situation next year. Remember that in Colombia, we will have elections, Congress election in March and the first round of presidential elections in May. I think that we will start seeing a clearer picture by the end of this year who definitely is going to run. At this moment, there are too many candidates or people with intentions to run, but those are just intentions.

By the end of the year, I think October, November, we will have a clear picture, as I mentioned, who is going to run for which party, who is going to go as an independent candidate, and a clear picture of who is running we will have at the beginning of next year. At that moment, I think polls will give us good information of who is really having a chance to go into the first round of presidential elections with opportunities to move to the runoff. It is too early is my conclusion. In terms of your second question about the fiscal situation in Colombia, definitely the fiscal situation is the biggest challenge that the Colombian economy has right now. The deficit, the fiscal deficit that the government presented for last year was too high. It is something that definitely the government needs to work in.

Let me pass Laura Clavijo to give you additional color regarding the SMA line of credit.

Laura Clavijo (Chief Economist)

Yes, thank you. Indeed, the fiscal situation is the main weakness in terms of our macro outlook. We revised to 5.9% of GDP expected fiscal deficit for end of this year. Let me say that this is a base case scenario given also recent international turmoil that has, of course, impacted to some extent the FX rate and has expanded kind of the spreads on risk premium. Given kind of the levels of oil prices, this may impact further some of the fiscal expectations that this government presented back in February. It is still kind of an uncertain landscape for the fiscal situation. Of course, a significant budget cut is needed somewhere between COP 30 billion or COP 40 billion or COP 46 billion depending on kind of the stress scenario.

Definitely something to put all eyes on. I would just add that we're very expectant to see what the government will present in the medium-term fiscal outlook, which should be presented somewhere end of June. All expectations on how budget cuts can be performed, of course, given some inflexibility. On the IMF decision to constrain access to the flexible credit line, this is, of course, still in a discussion in terms of kind of the facility as a whole. As of today, the access has been blocked on account of giving far more reasonable messages on the fiscal outlook. Again, come June, we should have somewhere a more grounded scenario of how the government expects to address these many challenges.

Juan Carlos Mora (CEO)

Thank you, Laura. Regarding your second question about the subsidiaries' ROE, as you mentioned, the performance is not the same in all countries.

Banco Agrícola in El Salvador is doing very, very well. I mean, and this year, what we see is that that performance will continue, and ROEs in El Salvador will be above 20%. In the case of Banistmo in Panama, it's notable the recovery of the ROE. Remember that we are coming from an ROE for year-end 2024 of 4.3%. Now, this first quarter was 7%, and we think that this recovery will continue, and we are targeting an ROE above 10% for Banistmo. In the case of BAM, it's low for the quarter. Also, we are expecting the BAM to have a better performance. It's in the middle of a recovery, and the full potential ROE is not going to be delivered this year. We are targeting more 2025, and we are expecting BAM to deliver an ROE close to 14%-15%.

The outlook, I think, is positive in terms of what Banco Agrícola is delivering and the trend that the other two operations in Central America are having. Regarding net income, as you mentioned, COP 1.7 trillion for the quarter is the highest figure for the last two years. The average is more close to COP 1.5 trillion. Since there are still some uncertainties regarding the macro performance of the different countries, what is happening in the global economy, we prefer to be cautious. That is why we are talking about an ROE between 14.5%-15%, even though the ROE for the quarter, for the first quarter, was 16%, as you mentioned. Is there an upside potential? I think so, but all depends on external factors.

I think the performance of the economies in which we are and how the global tensions, the geopolitics, and the global economy is going to behave. We will want to remain cautious in terms of our guidance for the full year, Ernesto.

Ernesto Gabilondo (Director of LatAm Financials)

No, super careful. Thank you very much, Juan Carlos and Laura.

Juan Carlos Mora (CEO)

Thank you, Ernesto.

Operator (participant)

Thank you. We have Andres Soto with Santander on the line with a question.

Andres Soto (Executive Director of LatAm Equity Research)

Good morning to all, and congratulations on another strong set of results. My question is probably more related to macro. First quarter of 2025 was a good quarter for Colombia, but conditions materially deteriorated in the second quarter. What it had been with oil prices at $60, $62, this is $10 lower than what the government expected for the full year.

I would like to understand how these lower oil prices trickle down into your GDP forecast and fiscal forecast, and if you expect to make any revisions, any update to your provisioning model considering this new environment.

Juan Carlos Mora (CEO)

Andres, let me pass your question to Laura, and once she elaborates on the answer, I will take the part of the provisions.

Laura Clavijo (Chief Economist)

Yes. Indeed, we maintained during our first quarter our 2.6% expectation of GDP growth for this year. This was prior to kind of the whole Trump trade volatility as well as more recent events on the fiscal side. We will have a revision again mid-June, where we expect to incorporate whatever the government brings to the table on the fiscal outlook, as well as kind of the settling of some of these international variables, especially considering oil prices, as you mentioned. It will impact revenues expected.

I believe the fiscal plan as to date looked at prices more in the $65 and $70 per barrel range, whereas we are now closer to $60. Definitely something to look at from that perspective. The fiscal outlook could impact especially government expenditure that has been one of the leading factors in the economy. On the flip side, and the reason perhaps why we feel kind of comfortable to this extent on the 2.6% GDP growth end of year, which is also what the central bank published yesterday, emphasizing that same estimated growth, is the fact that we are seeing far more resilience on internal demand. Consumer households are exhibiting quite resilience coming from remittances, other types of spending.

We are seeing an upswing also in consumption of more durable goods, and leading sectors such as entertainment and agriculture are faring relatively well, in addition to kind of these new sectors also bringing some dynamics to the table. To kind of counter effects that lead us to some extent to feel comfortable around this 2.6%, nonetheless, a revision will come mid-year.

Juan Carlos Mora (CEO)

Regarding the effect of this macroeconomic outlook in our numbers, and particularly the cost of risk, Andres, that's why we are cautious about the guidance of the cost of risk.

Even though we have had two very strong quarters in terms of cost of risk, we remain cautious, and that is why our guidance of the cost of risk is between 1.8-2, even though the cost of risk for the first quarter this year was 1.6, and the cost of risk for the last quarter of last year even was better. That is why we remain cautious because there are some risks associated to the macro environment that we are considering in our guidance, Andres.

Andres Soto (Executive Director of LatAm Equity Research)

Thank you so much, Juan Carlos and Laura. If I may follow up on Laura's answer, what would be the solution for the government to fix at least temporarily the big budget challenges that they have for this year?

Do you see a possibility for some of the measures that have been proposed, such as bringing forward tax payments for companies to be the solution? What other solutions can the government implement to patch the hole that is being created and is growing as the everyday passes?

Laura Clavijo (Chief Economist)

Our base case scenario, 5.9% of GDP fiscal deficit, suggests breaking the fiscal rule again this year. It is already a stressed scenario, which kind of incorporates some space to endure expenditure cuts. Of course, we know there is a lack of flexibility and maybe also lack of willingness in a pre-electoral year. I think it would have to be a combination of many things, as you mentioned, kind of delaying some budgets' execution, in effect, cutting expenditure to some extent, and kind of all these different initiatives that are ongoing.

But it is a scenario that, in any case, our base case scenario is of not compliance of the fiscal rule, and especially given kind of those very high expenditure objectives.

Andres Soto (Executive Director of LatAm Equity Research)

Thank you, Laura. Juan Carlos.

Juan Carlos Mora (CEO)

Thank you, Andres.

Operator (participant)

Thank you. Our next question comes from Brian Flores with Citi. Please go ahead.

Brian Flores (VP of Equity Research)

Hi team. Congratulations on the results. Thank you for the opportunity. Two questions here on my side. The first one is I wanted to understand how should we think of provisions, right, and the relationship with growth. You reduced your guidance in terms of both items slightly, quarter-over-quarter. Just wanted to confirm you are expecting lower growth, particularly in consumer. Also, if you could expand your guidance by segments, I think that would be really helpful. My second question is you made very interesting comments on Nequi and Bancolombia A la Mano.

Just wanted to confirm if you said two things. One, you're reaching break-even in the first quarter of 2026, and you will reach COP 1.5 trillion in loans also by the end of this year. Just wanted to confirm those data points. Maybe a derivative of this question, right? You're seeing more transactions increase in the LDR. Can you say or quantify if Breve is having an impact or should have an impact on fees? This is already incorporated in your guidance. Thank you very much.

Juan Carlos Mora (CEO)

Thank you, Brian, for your question. Let me address your second question regarding Nequi. As you mentioned, we decided at the beginning of this year to merge Bancolombia A la Mano and Nequi, and that's undergoing. By the end of May, we are expecting to finish the clients of Bancolombia A la Mano moving to Nequi.

That will give Nequi a considerable size. We expect Nequi to end May with around 24 milion-24.5 million clients. I would like to highlight that of those, the level of activity is very high. I mean, 78% of the clients of Nequi are active at least once a month moving money. That's very, very, very high. That means that Nequi is used very frequently by Nequi users. As you mentioned, we are very happy with the development of the loan portfolio. You said that we were expecting to have COP 1.5 trillion in loans by the end of the year. The figure at the end of April is COP 1.2 trillion. We are in line, and our expectation is that we are going to have a better performance in terms of loans for Nequi. Those are loans of average of $500.

It is a small amount of credit, and the performance, as I said, is very good. This is to ratify that we are expecting Nequi to reach the break-even point by the beginning of next year. That is a very, very important milestone for Nequi. We are very, very happy with the performance, the development, how the loan portfolio is behaving, not just in terms of volume, but in terms of quality. It is very much in line with our expectations, even better than our expectations. We are very positive and very optimistic about the performance of Nequi. Let me pass your first question to Mauricio, the one regarding provisions.

Mauricio Botero Wolff (Chief Strategy Officer and CFO)

Thanks, Brian. Regarding provisions, as we mentioned before, it was a very positive quarter in terms of cost of risk, 1.6%. The good thing I would like to highlight is how we got there.

It is basically the deterioration of the different segments was better than expected. If you take a look at the different metrics regarding asset quality, they are looking good. We do not have any one-offs in the quarter that would explain the 1.6%. Provisions are looking good in the quarter, looking good for the year, but we still need to be prudent because of the macro scenario that we have mentioned before. In terms of guidance, the breakdown of the guidance is commercial loans growing at 4%, mortgage loans growing at 4.5%, and consumer loans growing at 8%. No, that is very helpful. Just a quick follow-up on the first answer. I think we did not discuss the impacts of Breve. Do you think Breve could present any downside risk to maybe your fees in the coming quarters?

Brian Flores (VP of Equity Research)

Thank you.

Mauricio Botero Wolff (Chief Strategy Officer and CFO)

Thank you.

Juan Carlos Mora (CEO)

Thank you, Brian.

Sorry that I did not address that part. Yeah. I mean, Breve is going to have an impact in terms of how people are moving money. Let me say that we are expecting that impact is going to be mild. We, in January, opened the Bancolombia and Nequi platforms to have free immediate transactions among several banks. Today, it is possible to move money among several, I mean, more than 10, probably 15 banks in Colombia without fees and costs. Immediately, I am sorry. There will be some effect, definitely, but we are very well prepared to manage that effect. As I mentioned, we move forward, and we did not wait for Breve to be ready, and we make available for our customers the possibility to move money freely among banks.

I think at the end, the effect will be positive in terms of how money is going to move in Colombia. We think we are very well positioned to take advantage of that possibility, Brian.

Brian Flores (VP of Equity Research)

No, super clear. Thank you, team.

Mauricio Botero Wolff (Chief Strategy Officer and CFO)

Thank you.

Operator (participant)

Thank you. Our next question comes from Tito Labarta with Goldman Sachs. Please go ahead.

Tito Labarta (VP)

Hi, good morning. Thanks for the call. Thanks for taking my question. A couple of follow-ups, if I may. First, Juan Carlos, on the margin, because you kept the margin guidance the same, but you also mentioned that you expect the policy rate to be higher than what you were initially expecting at 7.5%. I think you had mentioned initially 6.5% with the risk that it can be even 8%. You said the sensitivity to rates did not really change.

Just to understand why you kept the NIM guidance the same, even though it looks like rates could be higher than initially expected, or is there just some conservativeness and potential upside there? My second question, following up on the loan growth a little bit, because you did lower the guidance, even though asset quality is doing well, there's still a little bit of uncertainty on the economy. Just to think, is there some more downside risk to the loan growth? When can that inflect and maybe see some upside? Just to get a sense, because you have some good asset quality trends, but some uncertainty on the economy, just to think about the maybe longer-term outlook for loan growth. Thank you.

Juan Carlos Mora (CEO)

Thank you, Tito.

Let me give you some color on your two questions, and I will pass to Mauricio to see if he wants to add something. Margin. What we saw at the end of last year and probably before is that this year, 2025, the interest rates will go down faster, and our expectations at that moment was even the NIM was going to be close to 6% or even below 6%. With the behavior of the inflation and what the central bank, the Banco de la República, is doing regarding that inflation and the speed on which they are applying the monetary policy, that is why we are talking about 6.2% of NIM for the full year. We ended this quarter in 6.3%. What we are seeing is a 100 basis points reduction, and the interest rate is the reference interest rate at this moment is 9.25%.

We mentioned that could be 7.5%, but with the risk that it could be 8%. That is 125 basis points or 175 basis points reduction. That is why in that sensitivity, it is where we are moving regarding the margin. What we see is that if there is a risk now, it is a positive risk that we can defend the margin in terms of the speed at which the interest rate is going down in Colombia. We are on the conservative side. It is possible. It depends on how the interest rates move in the economy, but definitely could be a positive risk in terms of the interest rates remaining higher for longer, and that will allow us to maintain the NIM for longer also, increasing the interest income. Loan growth definitely is a challenge. Let me put it this way.

What we have seen in the economy is that the economy is performing pretty well. I mean, the asset quality is good. Demand, it's affected for the political uncertainty and what we see in terms of what is happening globally. There are some uncertainties, but in terms of consumption, it's strong. What we are seeing is, and what we mentioned on the terms of loan growth and dividing in the different segments, is that consumption or consumer loans could grow a little bit faster. What we are seeing is that there are demand, and I mentioned Nequi, which is now performing very, very well, better than we were expecting. Also, disbursements in terms of consumption or consumer loans are improving. Commercial loans, I think, will depend on projects that, due to the expectations of the new government, will start demanding some credit.

The performance on mortgages is very good. It's really, really good. It will depend at the end on macro and expectations regarding the political environment. Mauricio, I don't know if you want, no? Okay. That's our point of view regarding your questions, Tito.

Tito Labarta (VP)

Okay. No, that's very clear. Thanks, Juan Carlos. Just to be clear, on the NIM guidance, it sounds like there could be maybe some upside risk there, but the trend should be coming down as rates come down, but with some potential upside given rates may be coming down slower than expected.

Juan Carlos Mora (CEO)

That's correct.

Tito Labarta (VP)

Okay. Perfect. Thank you, Juan Carlos.

Juan Carlos Mora (CEO)

Thank you, Tito.

Operator (participant)

Thank you. Our next question comes from Carlos Gomez with HSBC. Please go ahead.

Carlos Gomez (Head of LatAm Financial Institutions)

Hello. Thank you for taking my questions. Two brief ones. One, you have modified slightly your guidance. We have gone through different elements.

I see that the CET1 that you had between 11%-11.5% is no longer part of the guidance. I was wondering if you want to have more flexibility as to how much capital you want to hold. Second question is, once you have a Grupo Cibest set up, is your priority still to do the buyback for $300 million? Or what else do you think you can do immediately that you could not do as Bancolombia? Thank you.

Juan Carlos Mora (CEO)

Thank you, Carlos. Let me address your second question, and we will pass your first one to Mauricio. Definitely, we are in the way of setting up Grupo Cibest. Our expectation is by the end of May, we will have everything in place. We will have a Cibest shareholders meeting in June. Our idea is to present to that shareholders meeting the buyback program.

As you mentioned, we are planning to present a $300 million, the equivalent in pesos, of course, $300 million program of buybacks at that first Cibest shareholder meeting that, as I mentioned, we are expecting to take place in June.

Mauricio Botero Wolff (Chief Strategy Officer and CFO)

Hi, Carlos. Yeah. Complimenting that, Grupo Cibest, as we mentioned, gives us a lot of options. That optionality is going to be targeted in parallel ways in the different options, as we say, capital allocation, corporate development, more flexibility, and I guess the simplicity to understand the operations. One of them is capital structure. We already had a distribution of an extraordinary dividend, which is the result of that optimization of the capital structure. The buyback is another thing, and things will keep going on.

Regarding the guidance for core equity Tier 1, the reason why we did not include it is because the guidance is going to be basically Cibest guidance. At the end of the year, we are going to be presenting Cibest's results. For Cibest, CET1 will not be a metric to take into account. That would be a metric to take into account in the operational companies. So Bancolombia's CET1 will still have a target between 11%-11.5%, but Cibest will not. I guess the metric that we will be including would be double leverage starting from second quarter.

Carlos Gomez (Head of LatAm Financial Institutions)

Yeah, it is very clear. Thank you.

Juan Carlos Mora (CEO)

Thank you, Carlos.

Operator (participant)

Thank you. Our next question comes from Olavo Arthuzo with UBS. Please go ahead.

Olavo Arthuzo (Equity Research Analyst)

Hi, good morning, everybody. Thank you for taking my question. Actually, I have just one.

It's related to the profitability of the bank because I just wanted to understand what would be the leverage for the ROE to increase again and return to that high-teen figures that we used to see in the past? Because I totally understand the top-down elements, which they are key in this process, but what could you share with us in terms of bottom-up initiatives? Just for us to understand the focus of the bank on the in-house efforts and trying to do some analysis here. Also in this context, if possible, of course, could you remind us or update about the long-term ROE of the bank, which the bank is targeting for the long term? Thank you very much, guys.

Mauricio Botero Wolff (Chief Strategy Officer and CFO)

Hi, Olavo. Thanks for the question. I'm going to start from the end. Our long-term ROE goal is to reach 16%.

Maybe you have ROE figures from a couple of years ago when margins were significantly higher, and we reached ROEs of even higher than 20%. Those are not sustainable, but we do believe we can reach 16% ROE going forward. The way to think about that in terms of upside would be with the initiation of Cibest, managing the capital structure, taking advantage of the possibilities Cibest gives us, along with a transition in terms of macro and economic that allow us to grow the loan book faster than it is growing now. That would push fees also and give us or take us to a more sustainable cost of risk, long-term cost of risk of around 1.8%. If we reach that in the long term, ROE could be higher than 16%, maybe reaching 17% or so.

But long term, you should think about 16% in a sustainable way.

Olavo Arthuzo (Equity Research Analyst)

Okay. That's great. Thank you very much, guys.

Juan Carlos Mora (CEO)

Thank you, Olavo.

Operator (participant)

Thank you. Our next question comes from Nicolas Riva with Bank of America. Please go ahead.

Nicolas Riva (Director)

Thanks very much, Juan Carlos and Tim, for the chance to ask questions. I have two questions. One, it's a follow-up from the question that I think Carlos Gómez López had asked on capital. If you can give us your thoughts regarding plans to raise additional capital, basically because I look at the buffer or the minimum requirement for total capital, it looks a bit on the thin side for a bank of your size. I think total capital was 12.9% at the end of March, which is about 140 basis points above the minimum.

If you can give us some thoughts regarding your plans, if any, to raise additional capital. The second question, also a follow-up regarding the creation of the new holding company of Cibest. If you are thinking of using that new vehicle in a way to raise funding senior debt, but also to raise capital in the sense that you could raise senior debt out of Cibest, the new holding company, and then downstream it as capital to the bank, to the Colombian bank. Thanks.

Mauricio Botero Wolff (Chief Strategy Officer and CFO)

Hi, Nicolas. Thank you for the questions. First, regarding the capital position, in order to distribute dividends, we have used a year-end target of 11%. Last year, for example, when we distributed dividends, it dropped to 10.5% as expected and came up above 11% at year-end. This year, after distributing dividends, it only went down to 11.2% basic capital.

The figures that you mentioned give us comfort. We have run all the stress tests. We have run all the scenarios. We are very conservative. We keep in touch with risk-rating agencies, and we feel comfortable with the capital levels we have at this time. Regarding this year.

Nicolas Riva (Director)

Mauricio, Mauricio, if I can do a follow-up there because I see, as you said, at the CET1 level, you have quite some buffer, I think, over 400 basis points. If I look at total capital, given that the 27s, well, you are about two years away from maturity, and they are losing capital treatment. That is why I am thinking more regarding Tier 2 capital, if there are any plans to replace the capital you are going to be losing with the 27s. Again, given that the buffer on total capital looks a bit thinner.

Mauricio Botero Wolff (Chief Strategy Officer and CFO)

Right. Right. Yeah.

That was your second question that I was going to address. The answer is, Nicolas, in the short term, that means 2025, we're not planning any capital or any issuances of different instruments. Of course, that's going to be an optionality that Cibest will bring us both at the holding company and at the operating company levels. We might be tapping the market for Tier 2 instruments in 2026, but we can also do 81s at the holding company. We do not know. It's not a short-term need, but we do know the options are there. The market is asking about us.

Juan Carlos Mora (CEO)

Nicolas, let me. Okay. Go ahead, please. Go ahead, Nicolas.

Nicolas Riva (Director)

I was going to say one last follow-up. Yeah. Sorry to interrupt, Juan Carlos. One last follow-up question for Mauricio on that.

I would imagine that, as you said, the holding company does not have capital requirements other than perhaps double leverage. I would assume that you would either issue senior debt at the holding company level at Cibest and then downstream that as an equity injection to the bank, or you could raise AT1 or Tier 2 capital at the Colombian bank level because that is the entity that has the capital requirements. Is that kind of fair?

Juan Carlos Mora (CEO)

It is fair enough, Nicolas. I just want to highlight what you just mentioned. The evolution of our corporate structure will give us flexibility. As you described, we can look for additional resources at the holding level, at the Cibest level. The level of double leverage that we have at Cibest is very comfortable, so we have space there. We can also look for additional instruments at the subsidiaries level.

We have the flexibility to tap the market depending on what are our requirements, the interest. We have that flexibility. I want to emphasize what Mauricio said is this year, we feel comfortable with the level of capital that we have on both levels at the holding company Cibest or at the operational banks in the different geographies. Now we have the flexibility, again, to go to the market with any of the operations to go for resources if we need additional capital in any of the operations, Nicolas.

Nicolas Riva (Director)

Okay. Thanks very much, Juan Carlos and Mauricio.

Juan Carlos Mora (CEO)

Thank you.

Operator (participant)

Thank you. We have no further questions at this time. I would like to hand the conference over to Mr. Juan Carlos for closing remarks.

Juan Carlos Mora (CEO)

Thank you, everybody, for attending this conference call. Our next conference call, we will present the results of Cibest.

The results for the second quarter will be Cibest results due to our corporate evolution, as I mentioned. Again, thank you very much, and hope to see you in our next conference call. Thank you very much, everybody, and have a good day.

Operator (participant)

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