Bancolombia - Q2 2022

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Bancolombia's Second Quarter 2022 Earnings Conference Call. My name is Chad, 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 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 co-competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy, and various other factors that we describe in our reports filed with the SEC. With us today is Mr. Juan Carlos Mora, Chief Executive Officer, Mr. Mauricio Rosillo, Chief Corporate Officer, Mr. José Humberto Acosta, Chief Financial Officer, Mr. Rodrigo Prieto, Chief Risk Officer, and Mr. Juan Pablo Espinosa, Chief Economist. I will now turn the conference over to Mr. Juan Carlos Mora, Chief Executive Officer. Mr. Juan Carlos, you may begin your call.

The conference is now being recorded.

Hello and good morning. My name is Chad. I'll be assisting as the operator for today's event. I understand I have managers on the line at Bancolombia. Is that correct? Please, just one moment while we start our event. Thank you very much.

Juan Carlos Mora Uribe (CEO)

Good morning, everyone. Welcome to our second quarter 2022 conference call. I am pleased to report a strong second quarter for Bancolombia. We delivered a profit of COP 1.8 trillion and an ROE of 23% in 2Q 2022. The strategic emphasis on strengthening customer relationships is paying off. Our commercial and retail banking businesses present a solid evolution over the last quarter. Corporate and consumer confidence have been key elements to a significant economic growth in Colombia. Loan book grew above our expectations, expanding originations across all segments. This has resulted in important revenue growth. The improved macroeconomic environment in the different geographies where we operate has driven a higher volume of transactions, contributing to a stronger client engagement and higher fee generation. The economy in Colombia during the year has experienced a very positive performance. High commodity prices have improved the terms of trade.

A continuous pickup of domestic demand and a gradual recovery of employment rates are supporting a strong economic dynamic. For the second half of 2022, we see several challenges ahead. Colombia has experienced an accelerated contractionary monetary policy that started at the end of September of last year when the Central Bank raised gradually its reference rate from 1.75% to end in June of this year at a level of 7.5%, and it stands currently at 9%. As a result of this, economic growth should slow down in the upcoming quarters. Deceleration becoming more evident the next year. Trade demand is expected to decelerate in the second half and continue this trend in 2023. This impact should occur in all lending products. After exceptional strong growth levels in the economy, our asset quality has remained healthy.

However, we are aware that economic policy tightening trends might potentially cause credit deterioration going forward. Let me touch briefly on the highlights for the quarter. We increased loans and deposits at a very good pace. We have seen not only a high rate of new customer loan originations, but also improving utilization from existing clients. Net interest income has benefited from a dynamic commercial activity. The main drivers of profitability have been the continued expansion on margins alongside a good performance on loan volumes. On the credit losses side, better than expected economic trends have allowed us to release a portion of the reserve we built during the pandemic. Also, we are pleased to announce that Nequi was authorized by the Financial Superintendency to be incorporated as a financial company.

This constitutes a required step to obtain the operating license that will enable Nequi to function as a separate entity. Nequi will continue to be 100% part of Bancolombia. This new stage doesn't represent any change to Nequi's customers in terms of services, features, and products. At this point, I want to turn on the presentation to Juan Pablo Espinosa, who will further elaborate on the performance of the Colombian economy. Juan Pablo?

Juan Pablo Espinosa (Chief Economist)

Thank you, Juan Carlos. Now please go to slide number three in the presentation. Let me start by saying that between April and June, economic activity in Colombia kept the dynamic performance seen at the start of the year. Internal demand was again the main driver of growth due to a further expansion of private consumption and public spending. In addition, higher terms of trade and currency depreciation allowed exports to grow at a rapid pace. Our GDP growth estimate for the first half of 2022 is around 10.5% year-over-year, which is an outstanding result by global standards. However, we reiterate our call that the Colombian economy is entering into a phase of growth moderation. The leading indicators for the third quarter suggest that activity is already losing momentum.

For instance, our nowcasting model signals a GDP expansion of 4.6% year on year in July, down from the 12.4% estimate for the second quarter. Accordingly, our latest growth estimate for the second semester of 2022 is 4.1%. This trend will consolidate during 2023, when we foresee that the economy will grow below potential at a rate of 2.3%. This will be the result of lower global growth, the removal of policy stimulus, the stabilization of household consumption, and the uncertainty stemming from the measures that the new government might adopt. Another significant development is that inflation has accelerated during the past months so that it reached 10.2% year on year in July. This is the highest print since Colombia adopted the inflation targeting scheme at the start of this century.

Even though food is still the component of the CPI with the largest price increases, core inflation has steadily intensified. This shows that the current inflationary phenomenon is not only due to supply shocks, but also to surging demand pressures and to the operational indexation mechanism. We believe that these forces will not dissipate soon. Hence, we anticipate that annual inflation will fluctuate between 9% and 10% for the remainder of the year. Furthermore, risks are biased to the upside in case the new administration decides to revise subsidies to gasoline prices. As a response to this challenging scenario, we expect that the central bank will adopt a more contractionary monetary policy stance. Although we rule out further 150 basis points hikes by session as seen recently, we think that there is still some room to go in order to contain inflation expectations.

Accordingly, we believe that the terminal level of intervention rate in this cycle could be between 9.5% and 10%. After this economic overview, let me turn the presentation back to Juan Carlos. Juan?

Juan Carlos Mora Uribe (CEO)

Thank you, Juan Pablo. Moving to slide number four, I want to continue this presentation by explaining the loans and deposits performance. The main driver for growth during the second quarter was commercial loans growing over 10%, where we highlight the operation in Colombia that presents a good dynamic on originations. Retail loans continue with a strong momentum with a growth of more than 23% year-over-year. Our strategy to expand pre-approved lines of credit has paid off, delivering a higher rate of utilization by our customers while preserving a healthy risk-reward ratio. Home lending grew 16%, showing a very positive evolution. In our liability structure, we continue to see a strong activity in deposit taking. We still see an important contribution from saving and checking accounts to support our funding needs.

Although growing at a slower pace than time deposits that have reactivated significantly and recovered its pre-pandemic share within the deposit mix, growing 12%. Our strategy intends to promote medium to long-term deposits growth, seeking to have a stable source of liquidity. Moving to slide five, I'd like to continue this presentation by providing some details on our funding strategy with multilateral banks. We are proactively financing our liquidity needs for the medium and long run with multilateral development banks. Bancolombia has been granted lines of credit for over $900 million tied to sustainability goals by the International Finance Corporation, IFC, and by the Inter-American Development Bank, IDB. As you may see on slide six, we remain committed to our plan to disburse COP 500 trillion under ESG criteria by 2030.

By the end of second quarter, we have originated COP 80 trillion out of a goal of COP 100 trillion for this year. These loans have been directed mainly to climate finance, sustainable credit lines, and gender equality. ESG continues to be one of our focus areas. During this year, Bancolombia obtained the first place on Merco's ranking for its efforts in applying environmental, social, and corporate governance criteria in making its business decision. Bancolombia is recognized as a responsible company and the bank with the best corporate governance in the country. Moving to slide seven, we see an important improvement on the dynamics of the credit and debit card business. The volume of transactions has increased quarter-over-quarter, and the bank has gained market share in Colombia, not only in terms of value, but also in the number of cards outstanding.

On top of that, the good evolution of POS adoption by merchants and consumers represents an opportunity for expansion in fee generation. The devaluation of the peso during the second quarter had a negative impact on the net results, considering there are some of the expenses of these products in U.S. dollars. Digital sales continue to have excellent performance, consolidating its share within the distribution channels. We continue improving the efficiency in the way we interact with our customers. Digital shows an important weight in the total share. Transactions on our mobile app have grown 30% year-on-year, whereas transactions in branches have increased at a lower rate, indicating a positive trend, while we keep up serving customers through a multichannel strategy.

Banking agents transactions increased 23% yearly, thanks to a faster adoption by our clients and a geographical expansion that allow us to reach more customers. Moving to slide nine, let me summarize our progress in Nequi. We are very happy with the trend we are seeing. We closed the quarter with 13 million users, COP 1.5 trillion in deposits, and positive levels of NPS, as well as low churn rates. The loan portfolio continues growing, but more important than that, the number of customers using credit lines has multiplied in the last year, reaching 111,000. We see an important evolution in terms of customer experience. The activity ratio is higher, and we perceive a good client engagement. Users are gradually consuming more services in the app and the marketplace, which increasingly contribute to fee generation.

Now, I want to turn the presentation to José Humberto Acosta. José?

José Humberto Acosta Martín (CFO)

Thank you, Juan Carlos. Now turning to slide 10, we provide a snapshot of provisions and asset quality. Asset quality continues to improve with delinquency ratios at lower levels and new originations reflecting the healthy balance sheets. Cost of risk for the quarter starts to indicate a closer correlation with credit deterioration, standing at 1.1% that shows a gradual increase when compared to previous quarters. However, it continues to be below a normalized cost of risk. The main factors driving this ratio are, first, a natural deterioration amounting to COP 981 billion, mainly associated to the consumer portfolio, following a fast growth in this segment during the last 12 months. Second, provision releases associated to the previously covered customers performing better. And third, a better macroeconomic outlook. The net result is COP 613 billion.

When discounting the coverage releases completed in the quarter, the estimation for cost of risk will result in 1.6%, or COP 981 billion pesos provision charges. Our allowances as a percentage of loans ended the quarter at a level of 5.78%, which is the lowest level seen in two years. We maintain a strong coverage of 150% on our 30-day past-due loans and 212% on 90-day past-due loans to face the next quarter and possible variations. During the second half, we will see provisions caused by credit deterioration and no longer high changes explained by risk model adjustments or macroeconomic variables. We estimate that the cost of risk at the end of the year could be at around 1.3%.

On slide 11, we present the breakdown of provisions during the quarter. During the quarter, we have already updated the forecast of GDP in three of the four geographies where we have a presence. It has implied a recalculation in our provisioning models regarding macroeconomic projection, particularly in Colombia. It had more pronounced shift on our estimation, moving from 4.7%-7.2% for 2022. For the second half of the year, we could see deterioration in retail loans following interest rates hikes. On slide 12, we present the consolidated and standalone capital adequacy. Consolidated sub-total solvency ratio stands at a level of 10.9%, while CET1 at a level of 10.3% under full Basel III for the second quarter.

This reduction in solvency ratios is explained by an accelerated activity in loan originations and partially by the impact of the provisions. For the second half of the year, loan growth will be lower, and the bank will continue to accrue significant earnings that will contribute to maintaining a core equity Tier 1 at around 11%. Slide number 13 shows the asset sensitivity to interest rates. The bank has benefited net from the interest rates environment experienced in recent quarters. We can see a clear correlation on the reference rate and the bank's margin expanding after the fourth quarter of 2021. A shift in the share of deposits indexed to fixed rates during the last three years has allowed us to offset the higher expansion of interest expenses in this rate hike cycle.

On the credit portfolio, we can see the largest share of floating rates in commercial loans when compared to retail loans, allowing us to expand interest income in the first half of 2022. On slide 14, we present the liquidity position of the bank. On an annual basis, deposits are 70% higher, balancing a solid growth in the loan book through recent quarters. Deposits grew across all products, showing a faster increase in time deposits, up by more than COP 7 trillion in the last quarter. Whereas savings and checking accounts grew at a slower pace. We expect this trend to continue for the rest of the year. The rate hike cycle in Colombia has extended during the last quarter. The Central Bank raised its reference rate from 3% at the beginning of the year to 7.5% at the end of June.

This way created pressure on interest expenses for time deposits. The bank has been preparing its balance sheet to further support additional needs for growth by increasing trade lines from multilateral financial institutions and debt instruments. These resources are allowing us to have a more stable source of funding. On slide 15, we see the evolution of margins and net interest income. Margin expansion continues to be an important driver for earnings during the quarter. Net interest margin closed at a 6.7% level, expanding quarterly by 70 basis points following the reference rate increases by the Central Bank in Colombia. Net interest income increased by 52% over the last three months, mainly due to three elements. First, the repricing on assets that explain most of the increase. Second, at a lower extent, growth in the loan book. Third, a solid performance in investment activities.

The high margin obtained during the quarter is a result of the interest rate cycle that we have benefited from in the derivatives portfolio. We expect the reference rate to be higher in the second half of the year, although quarterly margins will not grow at the same pace, thanks to an increase in interest expenses as the repricing of deposits starts to more fully offset growth in interest income during the remaining quarters. We are confident with the good dynamics in lending, although we expect that in the third and fourth quarters, credit demand will slow down in line with economic developments, particularly in Colombia. Given the results as of June, we expect to close the year with a NIM of around 6.5% level. On Slide 16, we present an overview of Colombia and Central America.

Our outlook for the full year continues to be optimistic across the different geographies where we operate. The trends show a gradual normalization of the credit cycle, a sustained growth in the loan book and the deposit base, an improvement in efficiency ratios, and higher margins. As of June, the loan book in Panama, El Salvador, and Guatemala accounts for 27% of our portfolio. When looking each operation, we see mixed dynamics. Banistmo reported during the second quarter lower provision expenses due to overlay releases and particular situations related to corporate loans. Originations have improved, especially in the commercial portfolio. In Banco Agrícola, on the other hand, we saw provision charges related to sovereign bonds rating downgrades that have impacted its bottom line. In its operational dynamics, the bank shows a solid performance.

Finally, in Banco Agromercantil, we have started to see cost of risk returning gradually to normal levels despite good asset quality metrics. Its credit portfolio has expanded steadily with significant improvements in retail. Slide 17 shows the evolution of expenses and efficiency. Operating expenses increased 21.4% on an annual basis. In line with the trend seen in the first quarter, we continue to see three main factors explaining the growth. First, most of this variation comes from the performance related to compensation expenses, considering bonus provisions adjustments much lower a year ago. Second, labor expenses reflect an annual increase and in-house talent strategy to retain employees who were previously serving under outsourcing schemes. Finally, administrative expenses were up 14% associated to a very active performance of the renting division and technology-related costs of the bank of the digital transformation.

The bank has been able to keep the budget execution at a level of 99% so far. We expect expenses to grow around 12% by the end of the year. We see good trends in efficiency ratio, closing at a 44% level in the quarter as a result of the revenue growth outpacing expenses growth on a yearly basis. The slide 18 shows the evolution of fees. In the first half of the year, net fees have increased 12% when compared to the same period of 2021. We would like to highlight the main components that have contributed to such growth. Fees from debit and credit cards and retail activity maintain a strong performance caused by an increased dynamism in transactions carried out through traditional merchant businesses and e-commerce.

Second, payments and collections present a positive performance due to a growing number of customers leveraging in our wide distribution network. Third, bancassurance shows a strong recovery year-over-year linked to a dynamic activity in loan originations. For the full year, we estimate the fee growth will be at a level of 10%-12%. The slide 19 shows the profitability metrics. Net income for the quarter was COP 1.8 trillion and delivered a return on equity of 23%. This result represents an important growth as of June when compared to the same period last year.

Despite challenges in the economy, we see good trends toward our revenue expectations for 2022, driving growth and higher profitability based on the following elements. A dynamic activity in the lending business. A fast expansion on margins. Asset quality remains healthy. Fees continue to deliver a strong performance. Operating expenses grow consistently to the budget. Finally, a solid capital structure and sound activity to operate the business. Now, I want to turn the presentation to Juan Carlos for the closing remarks. Juan Carlos?

Juan Carlos Mora Uribe (CEO)

Thank you, José Humberto. Let me now update you on what we expect for the bank going forward.

We continue to be confident on the good results for the rest of 2022. Considering our macroeconomic estimations in terms of GDP, inflation, and employment rates, our guidance for 2022 includes a loan growth between 12%-14%, a net interest margin of around 6.5%, a cost of risk of 1.3%, and an ROE in the 20% area. For the next year, however, we foresee a significantly lower economic growth. In this scenario, we are aware of the impacts for the credit business. At Bancolombia, we expect a moderation in loan demand after a very dynamic activity during 2022. The higher base effect in the loan portfolio will also be reflected in growth rates at single digits for 2023.

The turning point in the monetary policy for the next year will further impact NII by a contraction on lending margins. Cost of risk will likely move higher following a normalization in the credit cycle. Expenses could be increasing below 10% in line with inflation rates adjusted at lower levels. Altogether, we expect that earnings for 2023 could be lower when compared to this year. It is also important to highlight the current political situation. A new government in Colombia has taken office in recent days. Undoubtedly, there are many challenges ahead that need to be addressed by the new president. From a social perspective, the country demands greater efforts to face unresolved issues such as economic inequalities and sustainable development. A national agreement will be fundamental for policy changes. A coalition led by the government will be of great relevance to achieve the execution of these initiatives.

The agenda to be followed by the Executive and by the Congress includes proposals in several fronts, such as energy transition pathway and fiscal policies, as well as reforms in health and pension systems, just to mention a few. We are in an early stage to foresee the evolution of the national development plan. In the upcoming months, we will have a more comprehensive outlook about the potential impact and the opportunities for the country. At Bancolombia, we are aware of the impact of our actions for the countries and for the communities where we operate. We have prioritized the promotion of sustainable economic development in our daily activities. For this purpose, we have contributed to expand financial inclusion so that more people and companies can access opportunities generated by financial services.

We continue to be focused on achieving our goals in environmental, social, economic, and corporate governance terms as one of our top priorities. After elaborating on these topics, we want to open the line for questions.

Operator (participant)

Thank you, sir. We will now begin the question and answer session. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press star then two. If you're using a speakerphone, you may need to pick up your handset first before pressing the numbers. Once again, if you have a question, please press star then one. The first question will come from Jason Mollin from Scotiabank. Please go ahead.

Jason Mollin (Managing Director and Latin American Financial Services & Fintech Equity Research Analyst)

Hello, everyone. Congratulations on the strong results, specifically ROE, well above the 20%. One question I had is on the outlook for Central America. I mean, you mentioned, I mean, we do have lots of uncertainty on what's going to take place in Colombia, given the new political environment or administration. I think that it's uncertain, but it didn't sound like the tax proposal had anything different for the financial sector. If you can give us your thoughts there, but also the outlook for Central America. We did see positive contributions, but as you showed in the presentation, El Salvador and Guatemala had lower earnings, negatively impacted by provisions. Perhaps you could give us a sense of the outlook there as well going into next year.

One, taxes, and two, Central America. Thank you.

Juan Carlos Mora Uribe (CEO)

Thank you, Jason. Let me address both points that you touched. Taxes in Colombia, you are right. The tax reform was presented by the government to the Congress last Monday. We are still analyzing the effects. In the case of the financial sector, the only provision that the reform has is the income tax rate that we already have; it's maintained. We don't see, so far, a material impact on financial institutions. We will need to wait how the discussions are going to develop in Congress, but so far what the government presented is not anything different than what we already have in terms of taxes.

Regarding your second question, in Central America, I want to separate the answer in two parts. First, the performance of the banks and how we are developing our activities in Guatemala, El Salvador and Panama. We are very happy with the development of the banks. Banco Agrícola is performing very well. The loan book is growing. The quality of loans are under control. So the bank is running well. We are aware that there are some uncertainties around the fiscal stability of El Salvador, and I think the government is addressing that issue.

We are confident that the government is going to handle the fiscal situation with some measures that they are taking. Regarding our operation, it's running well, it's growing on a healthy pace. Its credit risk is under control. We are also adding new products, features. The digital transformation of the bank is going very well. We are happy with the results that we are getting there. Guatemala, as you remember, we took full control of the operation almost three years ago. The bank now it's improving its performance, it's doing pretty well. The economy in Guatemala, it's also. It was probably the least affected economy by the pandemic. Now it's growing.

Trade demand is there, so the bank is performing well. In Panama also, we are improving our operation there. We are taking all the measures that we need to take in order to improve operations to grow. All in all, we are happy with our operations in Central America. I know that we have challenges around or particular challenges in each country related to or political issues or economic issues. We are navigating those I think in a very well manner with operations that are improving and are running well.

Operator (participant)

Thank you. The next question is from Yuri Fernandes from JPMorgan. Please go ahead.

Yuri Fernandes (Executive Director and Equity Research Analyst covering LatAm Financials)

Good morning, and thank you all for the opportunity of asking questions, and congrats on the strong quarter. I had two questions. First, what is the outlook for asset quality for 2023? You mentioned the cost of risk they are below the normal level. What is the normal level for cost of risk? Is this the 1.8% you used to mention in the past? Like, just try to understand this because my concern for 2023 is that we are seeing our GDP decelerating, higher inflation, higher rates, and you are growing consumer loans quickly. My concern is that maybe we can see cost of risk returning or even higher than historical, maybe the 1.8% you used to mention in the past.

That's the first question, the outlook for asset quality. I have a second question regarding the ROE. You are having very sound ROE levels, so congrats on that. But my question is what is the sustainable level? Do you think this 20%+ sustainable or given cost of risk may move up? Margins are getting close to a peak. Like how to think about the cost of your ROE? Also in line with the cost of capital, what is the cost of capital you are seeing in Colombia? How to think those two variables for the bank. Again, congrats. Good second quarter for you. Thank you.

Juan Carlos Mora Uribe (CEO)

Thank you, Yuri. Regarding cost of risk and outlook for 2023. We are aware that we have at this point normal cost of risk. The long term cost of risk of Bancolombia should be around 1.7% and 1.8%. We are foreseeing that we are going to be at that level during 2023. You mentioned that we are growing fast on consumer loans, and that's correct, but I think we are originating in a way that is not going to significantly impact the cost of risk above those levels. I mean, we are moving the cost of risk for the quarter, for this quarter that we are reporting was 1.1%.

If we normalize that cost with some extraordinary issues, it could be around 1.5%-1.6%. Returning to 1.8%, I think is what we expect. We expect further deteriorations. As I mentioned, we are originating with a lot of new information. We are reaching customers that we were not reaching before. As I mentioned, we are confident that we can be at that level of 1.8% cost of risk during 2023. Regarding your second question, ROE. ROE for 2023 will be again closer to our long-term ROE, which we define to be around 16%-18%. I particularly don't think that we are going to reach 20%.

It will be, again, more around 16%-18%. You mentioned cost of capital. The cost of capital have increased, particularly in Colombia and in other countries or in which we operate. What we are seeing is that we will be performing 2 points above the cost of capital. We think that with the margins that we are getting due to the increases in interest rates, that will allow us to grow net interest income in a very healthy way. That will allow us in 2023, not just to cover the cost of risk, but also to deliver what we consider a healthy ROE, Yuri.

Yuri Fernandes (Executive Director and Equity Research Analyst covering LatAm Financials)

No, super clear. Thank you very much.

Juan Carlos Mora Uribe (CEO)

You are very welcome.

Operator (participant)

Thank you. In the interest of time, if you can please limit yourself to one question. If you have additional questions, you may reenter the question queue. The next question is from Ernesto Gabilondo from Bank of America. Please go ahead.

Ernesto Gabilondo (Director of LatAm Financials Bank of America)

Hi. Good morning, Juan Carlos and José Humberto, and good morning, everybody. Congratulations on your strong quarter, and thank you for your presentation. I have a couple of questions from my side. The first question is on regulation and the political outlook. We have seen that Petro would like development banks to have a more active role in Colombia. We have been hearing in the proposals that wants to have a higher democratization of financial services. Just wanted to see your first thoughts on this. Also within this context, how is Nequi helping to increase the financial services of the population and reducing costs? My second question is on competition. We have seen that the regulator has approved Nubank in Colombia.

How do you see this type of competition, and what do you think will be Bancolombia's and Nequi's advantages toward this type of competition? Thank you.

Juan Carlos Mora Uribe (CEO)

Thank you, Ernesto. Regarding regulation, I think we are in a on a very early stages of the government. We need to separate what is or what are campaign promises or ideas and what actually the government is gonna be. Let me share with you my thoughts around what is happening. I think developing banks they have a very important role, and my view is that they will complement what commercial banks are doing or what we are doing. Let me elaborate a little bit on this. I truly believe what is happening in Colombia around digital wallets and access to financial services is a revolution.

It's a revolution in the sense that now all the Colombians, and I mean all of them, has access to financial service in a very easy way, with very, very low costs and most of the times free to basic financial services. Already in the case of Bancolombia, we have 13 million users that have Nequi and 6.2 million in the other platform that we have, which is Bancolombia A la mano. Close to 19 million Colombians are now using financial services through Bancolombia. What I said this is the revolution is because the usage of these platforms are really transforming the way that those Colombians manage their money. They are using these platforms to pay.

They are using these platforms. The independent workers and many informal workers are using these platforms to receive the payments of their work. We are starting to give them credit because we are having information on how they manage their money, how their flows of money. We are starting lending them. What you mentioned, the development banks, again, I think they have a role. They complement what we are doing. What is happening in Colombia is really amazing in terms of access to financial services through these platforms. I don't think that is going to be sufficient to try to replace what commercial banks are doing well.

I think the government will move more on complementing to those areas in which it's difficult for commercial banks to have a business case, so the government complement what we are doing. Regarding your second questions in terms of competition in Colombia is intense, not just with new players, but also among the traditional players. There are many operators on digital platforms that the people could choose. You mentioned Nubank. Nubank entered Colombia last year. I think competition is healthy and it's going to benefit consumers.

In the case of particularly Nubank, that they are offering in Colombia, credit cards, we still we are growing at a very fast pace or a very good pace, credit cards, not just in terms of outstanding and number of cards, but also the utilization of the cards. Business is going well. Nubank announced a couple of weeks ago that they will become a commercial financial company, which is good because they will be under the supervision of the Financial Superintendency, which means that we will have the same rules for all of us.

I think competition is healthy, are making us better, but we are in Bancolombia very well equipped to compete with all these new companies that are entering the market, Ernesto.

Ernesto Gabilondo (Director of LatAm Financials Bank of America)

Great. Okay.

Operator (participant)

Thank you. The next question will come from Carlos Gomez from HSBC. Please go ahead.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

Hi, good morning, and also congratulations on a very good result. I'm going back to Jason's questions, asking for a bit more specifics. On the tax rate, could you tell us, given the current exchange rates, and we know that it is very dependent on that, what you expect the tax rate to be this year and next year for the consolidated company? Second, regarding El Salvador, you mentioned that you have taken some provision for the sovereign bonds. We know that there is, as you say, a very difficult fiscal situation, and they cannot print dollars. Can you give us an idea of where you have marked the bonds in El Salvador, and how low can they go before you might need to think about recapitalizing your bank in El Salvador? Thank you.

Juan Carlos Mora Uribe (CEO)

Thank you, Carlos, for your questions. Let me address your the first one, and I'm going to pass the second one regarding the the bonds in El Salvador to José Humberto. What the tax reform is bringing is not a change for us. What is there is that we already have the the tax rate for financial institution in Colombia, it's now 38%. That's what we are paying now. What the reform is saying is that the 38% should remain. It was temporary. Now it's not. That's the change. It's not going to go to the rate that all industries have.

`We will maintain the 38% or 3 points above the rate for the other industries. No big changes to what we have today. We will need, if the reform is approved in the way it was presented, to record a deferred tax that is going to be a one-time effect during 2022. Going forward, it will maintain our effective tax rate of around 32%-33%. Watch that. That's what we have now, Carlos. Let me pass your second question to José Humberto.

José Humberto Acosta Martín (CFO)

Thank you, Juan. Carlos, regarding the sovereign bonds, we in Banco Agrícola, we have around 8% of our total assets in local bonds. Those bonds are in between 1 year-2 years, and it's not more than 8.5% of the total assets. The situation with the bonds on international market regarding El Salvador is in the Eurobonds that they will come due next January. The price, as you mentioned, is very high right now. It's about 30%, but it's not correlated with the bonds that we are having in our books. Because again, this is a very local with a very low level of secondary market. At the end of the day, we are increasing our level of provisions because of these local sovereign bonds.

It is right now at around 5%-6% of the total exposure. We are expecting what is going to happen with the Eurobonds for next year. The government said several times that they are going to pay that. Again, we are having provisions for our local exposure, and this is local exposure. We don't have any particular position in Eurobonds, Carlos.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

Okay. Again, you said you have 8% of total assets in this short-term local paper, then you said 1.5%, 2%. Which one is it? Is it 8%?

José Humberto Acosta Martín (CFO)

8% of the total assets, and short-term means 1 year-2 years.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

Okay. That's the rest of it. That is in U.S. dollars, right?

José Humberto Acosta Martín (CFO)

Exactly. U.S. dollars.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

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

José Humberto Acosta Martín (CFO)

Okay. Thank you, Carlos.

Operator (participant)

The next question is from Olavo Arthuzo from UBS. Please go ahead.

Olavo Arthuzo (Equity Research Analyst)

Good morning, Juan, Mauricio, José Alberto. Thank you for taking my questions. I have two and one, the first one is related to the OpEx, because I just wanted to hear from you what could we expect for costs during the second half, considering the salary increase in expenses that the bank reported during this quarter and also the ongoing pressure for inflation rates. Also, if you could add what are the expectations for your tax for the next year, it would be great. I know that you just mentioned during the presentation, but could you just repeat? My second question is a follow-up on competition.

My question is related to Nequi, because the operations continue to gain traction with the increasing number of users, higher deposits. Do you have a target for the number of users for the next years? You show it on your presentation that in this quarter, Nequi recorded more than 13 million users, but how many of them are actually active users? I mean, how many clients are monthly active user? Thank you.

Juan Carlos Mora Uribe (CEO)

Thank you, Olavo. Thank you for your questions. I will take your second question regarding competition and Nequi. I will pass your first question regarding OpEx and our expectations on expenses and taxes for 2023 to José Humberto. Let me address first your question regarding Nequi. As we mentioned, we have now 13.3 million registered users in Nequi. Of those, 70% are what we consider active users. What we mean for active users are those that make at least one monetary transaction a month. It's really healthy what is happening around activity in Nequi. People are using the platform.

We have been growing at a pace of between 300,000 new users-400,000 new users a month. We expect that pace to slow down. What we are seeing is that only we will peak around 15 million users. What we are seeing is that with that level of engagement, as I mentioned, 70% active users, we foresee that the offerings on the platform will start to increase and introducing new products like insurance or investments on different level, an offer that is more sophisticated and we can start charging. That will move on the path of profitability.

With that, let me pass your question regarding OpEx and expectation for 2023 to José Humberto.

José Humberto Acosta Martín (CFO)

Thank you, Juan. Olavo, as we mentioned, the level of expenses this year, we will reach a level of 12% at the end of the year. The reason why it is 22% this quarter compared with the previous year is because last year was abnormally low, and we mentioned that the main cause was, it's basically the bonus plan. Regarding 2023, we are expecting an expenses growth above inflation, around 100 basis points-200 basis points, which means expenses growth for next year would be on the 9% area, assuming an inflation of around 7% at the end of 2023. That's our goal in the two years. 12% this year is positive because you have to consider that inflation will be in the range of 9%-10%.

Regarding your second question, the taxes for next year, as Juan mentioned, our taxation for this year, we are expecting at a level of 34% or so. We are expecting to maintain the same level of taxes. Remember that our operation, a combination of 75% Colombia, which is in taxation 38%, but the rest is, the taxation is below 25%. That's the reason why overall the tax rate for next year will be 33%, 34% or so.

Olavo Arthuzo (Equity Research Analyst)

Oh, that's great. Thank you very much, guys.

José Humberto Acosta Martín (CFO)

Okay. You're very welcome.

Juan Carlos Mora Uribe (CEO)

Thank you, Olavo.

Operator (participant)

Thank you. The next question will be from Tito Labarta from Goldman Sachs. Please go ahead.

Tito Labarta (VP)

Hi. Good morning. Thank you for calling and taking my question. My question is on your you know very good trends there continues to increase. You mentioned interest rates you may go up still a little bit more from here. If thinking about also where interest rates can go next year they start to come down. How sustainable is the current margin? How sensitive will it be to rates if and when they come down? Like how quickly would that come down? In the quarter also you had you know very high securities margin. Should that you know normalize at 1% level and what does that mean for the total margin?

If you can help, just help us think about the evolution of margins from here for the second half of the year, but also into next year and once rates come down. Thank you.

Juan Carlos Mora Uribe (CEO)

Thank you, Tito, for your question. Let me give you some general comments, and I pass José Humberto for the details. As you know, interest rates are going up at a very fast pace, on top of the Central Bank increases in policy rates. Our margin is expanding. As we mentioned, we expect this year to continue or to reach a margin of around 6.5%. Next year, we expect interest rates to continue on a level that will allow us to have a healthy margin.

When the monetary policy starts to change direction, it will be some margin contraction. With that, those general comments, let me pass your question to José Humberto for more color on that regard.

José Humberto Acosta Martín (CFO)

Thank you, Juan. Tito, one, the answer is very clear what we expect with margins. The highest level we are touching this quarter may be a little bit more the third quarter, but again, maybe the margins will stabilize at least for the first half of 2023. We are expecting to 2023 to maintain that NIM because of our loan portfolio, because of our structure of the loan in between consumer and commercial. Regarding your second question, Tito, this is particularly for this quarter, and the main reason is part of our security portfolio, it's in U.S. dollars. The big devaluation or the huge impact of the devaluation of this quarter was 10%. That explains why the NIM is above 4%.

In our forecast for the rest of the year and for 2023, we always expect at least a NIM of the treasury of the securities portfolio in between 1%-1.5%. It's not going to change.

Tito Labarta (VP)

Great. Thanks, Juan Carlos and José Humberto. Just a quick follow-up just so I'm clear. That security then you should normalize already in 3Q at 1%-1.5%? Does that mean to get to that total NIM of 6.5% for the year, does the lending margin remain around the 7% level at least if rates remain high, and that only starts to come down once rates come down? Just to be sure.

José Humberto Acosta Martín (CFO)

Yes. That is correct. For the second half of the year, the loan portfolio.

Tito Labarta (VP)

Okay.

José Humberto Acosta Martín (CFO)

Will continue to expand a little bit more because remember that the interest rate hike from the central bank was two weeks ago. The repricing of the assets will continue at least for the third quarter.

Tito Labarta (VP)

That lending NIM can even go up a little bit as rates go up.

José Humberto Acosta Martín (CFO)

Absolutely.

Tito Labarta (VP)

In the second half.

José Humberto Acosta Martín (CFO)

That's correct, Tito.

Tito Labarta (VP)

Perfect. Great. All right. Thanks, José Humberto.

José Humberto Acosta Martín (CFO)

Okay. My pleasure.

Juan Carlos Mora Uribe (CEO)

Thank you, Tito.

Operator (participant)

Thank you, ladies and gentlemen. We have no further questions at this time, and this concludes today's e-event. We thank you for participating, and you may now disconnect. Take care.