Bancolombia - Q2 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Bancolombia's Q2 2024 earnings conference call. My name is Christine, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. During the question-and-answer session, if you have a question, please press Star, then one on your touchtone phone. Please note that this conference is being recorded. Please note that this conference call will include forward-looking statements, including statements related to our future performance, capital position, credit-related expenses, and credit losses. All forward-looking statements, whether made in this conference call, in future filings, in press releases, or verbally, address matters that involve risks and uncertainty.

Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy, and various other factors that we describe in our reports filed with the SEC. With us today is Mr. Juan Carlos Mora, Chief Executive Officer, Mr. Julián Mora, Chief Corporate Officer, Mr. Mauricio Botero Wolff, Chief Financial Officer, Mr. Rodrigo Prieto, Chief Risk Officer, Mrs. Catalina Tobón, Investor Relations and Capital Markets Director, and Mrs. Laura Clavijo, Chief Economist. I will now turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer. Mr. Juan Carlos, you may begin.

Juan Carlos Mora (CEO)

Good morning, and welcome to Bancolombia's Q2 results conference call. Please turn to slide 2. As the year progresses, we continue to see modest economic growth across all the regions where we operate. Despite the low demand for credit, our quarterly results demonstrated strong operational performance. We achieved a loan growth of approximately 3% and maintained a stable net interest margin at 7.1%. This was underpinned by a robust financial strategy that enabled us to accelerate the reduction of interest expenses, thereby fostering credit origination and increasing our net interest income. Nevertheless, our net income saw a 13.5% decline from the previous quarter, and our return on equity fell to 15.6%.

This was primarily due to an increase in provision charges by 23%, which we will discuss in more detail, along with a one-time impairment charge associated with a joint venture. On a year-over-year basis, net income remained relatively stable, thanks to a slower rate of credit deterioration that contributed to improved asset quality and a stronger balance sheet coverage. Our capital ratios stand firm, with a Total Solvency Ratio of 12.6% and a Core Equity Tier 1 Ratio of 10.9%. In other significant developments this quarter, I would like to draw attention to a few key points. Firstly, the appointment of Mauricio Botero as the new Chief Financial Officer of Bancolombia, effective August 1, succeeding José Humberto Acosta for retirement. Secondly, the initiation of a reduced rate mortgage loan program on July 20, designed to boost the housing and construction sector.

Thirdly, the successful execution of a liability management and a new Tier 2 issue in the international market, aimed at optimizing our capital and funding structure, we will explore in more detail later. I will now hand over the presentation to Laura Clavijo, our Chief Economist, who will provide a deeper analysis on the macroeconomic environment. Laura?

Laura Clavijo (Chief Economist)

Thank you, Juan Carlos. Now please let us turn to slide 3. The Colombian economy expanded at a better-than-expected pace of 0.7% during the Q1 of 2024, and has continued to show signs of an economic upswing during the following months, in line with improving macro conditions. Leading monthly indicators such as the ISE and Bancolombia's NowCast suggest the economy may have expanded somewhere between 2% and 3% during the Q2. Consequently, we have revised our growth forecast upward from 0.6% to 1.3% for 2024, and from 2.4% to 2.6% for the following year. Even though key economic drivers are still lagging, such as investment levels, household demand, and credit conditions, some sectors are thriving and leading the path towards the recovery.

For example, the agriculture sector grew at an annual rate of 5.5% as the sector surpassed adverse weather conditions and has benefited from improving commodity prices and rising traditional exports. Moreover, the public sector, which contributes close to 15% of total GDP, has continued to thrive, expanding 5.3% during the Q1 of 2024, and has managed to bolster employment figures. Nonetheless, this support emerging from the public sector may be hindered moving forward as fiscal pressure has escalated.

Even though the medium-term fiscal outlook presented by the government sets a far more realistic setting, including lower expected tax collection, non-feasible additional revenues, higher interest payments, and expenditure cuts worth COP 20 billion, increasing debt levels and the fiscal deficit forecasted at 5.6% of GDP in 2024, compared to last year's 4.3%, reflect the fiscal policy challenges that lie ahead. Policy challenges are also being tackled on the monetary side. Even though inflation has continued its descent to the 7.2% level as of June, bringing down inflation to the central bank's range of between 2% and 4% is proving to be quite difficult, considering the indexation effect on services and housing prices.

Hence, the central bank's cautious approach to easing its policy interest rate, which still stands high at 11.25% at the end of the first semester. We anticipate the central bank may begin to accelerate to 75 basis point cuts before year-end, and low rates will continue descending, boosting consumer demand. Finally, in other events, Congress closed its legislature during June with the approval of the pension reform and the advancement of the labor reform. Furthermore, the government has announced its intention to press through its reform agenda during the remaining two years in office, including a failed health reform, public services, and an economic recovery package, which may include tax amendments. Now, please let me turn it back to Juan Carlos Mora, who will present Bancolombia's quarterly results.

Juan Carlos Mora (CEO)

Thank you, Laura. Please proceed to slide 4. Before we dive into the results of the quarter, I would like to highlight strategic advantages that Bancolombia has cultivated to remain competitive and to capitalize on growth opportunities within the dynamic financial landscape. At the core of the first value-driving pillar is our comprehensive value proposition, which merges both financial and non-financial business models further to a diverse range of sectors. This is delivered through a universal banking model that currently serves over 20 million customers in Colombia. Our integrated, complementary, and scalable approach not only facilitates cross-selling opportunities and diversification, but also enables the bank to adapt to emerging market trends and enhance our value proposition. A prime example of our capabilities is the recent introduction of Wenia, a digital asset company that offers a gateway from traditional financial systems to the emerging digital asset economy.

This positions us at the forefront of financial innovation, providing a platform for learning and iteration. Building on this, our second value-driving pillar involves an interoperable multi-channel platform designed to serve all customer segments efficiently through an ecosystem model. This platform has proven to be a powerful tool for attracting new customers, especially those who are unbanked or underbanked, by offering accessible money transfer services and convenient cash-in and cash-out options. As a result, we have significantly expanded our distribution reach and witnessed exponential growth in transaction volume, which has contributed to an increase in fee-based income and the accumulation of low-cost deposits that bolster profitability. For instance, Nequi has seen a remarkable surge in monthly transaction volume, with a 20% increase quarter-over-quarter and a 70% increase year-over-year.

This growth is driven by increase in the average monthly transaction activity per user, which has grown nearly 15% quarter-over-quarter and 33% year-over-year. The Colombian financial system advances toward greater interoperability. Bancolombia is well positioned in the market with the technological and operational capabilities to further product and integrate our financial services into new marketplace. This will promote financial inclusion, enhance our proposition, and improve the client experience. Indeed, Colombia has been transitioning over the past decade into an interoperable market with real-time payment solutions like Transfiya, PSE, and ACH Network. Bancolombia leads the market with the successful implementation of QR code technology, which is now used over 1 million merchants across more than 1,100 municipalities, and by more than 3 million unique payers, and currently accounts for approximately 90% of interoperable incoming payments.

This, combined with our strong foothold in the transactional domain and a solid customer base of over 20 million customers at Bancolombia and north of 20 million users at Nequi, presents us with a unique opportunity to further enhance the interoperable features of our payment infrastructure and see distribution and sales opportunities. Now, please turn to slide 5. Transitioning to our third value driving pillar, I would like to discuss our recent transaction in the international capital market, which serves as a testament to our expertise in financial management. In early June, we capitalized on favorable market conditions to initiate a liability management transaction. Our goal was to enhance our Tier 2 capital to support continued growth and to mitigate short-term refinancing risk.

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

Mauricio Botero Wolff (VP of Administrative Services and Security)

Thank you, Juan Carlos. Please go to slide 6. The contribution of the Central American operation to the consolidated book continues increasing, providing credit risk and currency diversification to our operation. Loan growth on the regional banks was mainly driven by an increase in commercial loans and supported by an 8% peso depreciation during the period, resulting in a higher aggregate share of the offshore books relative to Colombia. However, when we're looking at each operation, we see mixed dynamics. Banistmo recorded higher provision expenses as per lower growth prospects in Panama, resulting in net income contraction quarterly, which implies an ROE of 5.5% in the period. On the other hand, Banco Agrícola posted a 21.6% ROE on the back of growing interest revenue, coupled with a reduction in provision charges.

Similarly, BAM presented a strong quarterly performance, as reflected on a sharp ROE rebound to 12.3%, driven by a growing NII and lower provision charges associated to releases on corporate clients and progress made in controlling retail deterioration. All in all, the net income contribution of Central America to the consolidated figures remained flat during the quarter, but decreased year-over-year, largely attributed to the lower average exchange rate in Colombia during the last twelve months. Please go to slide 7. The loan portfolio grew 3% quarter-over-quarter, and notably reassumed growth on an annual basis with a 2.7% expansion. Net of forex, however, growth on the quarter was low, at 0.5%, yet higher on the year, reaching 3%.

Growth was mainly driven by commercial loans with a 3% quarter-over-quarter, as we implement the special lines to stimulate demand on mid-sized companies and corporates, which in turn contributes to interest income generation with good asset quality. Moreover, mortgage loans registered a notable expansion of 4.8% over the quarter and 7.4% over the year, fueled by the renewal of the social housing subsidy program in Colombia. This, coupled with the recent launch of our cut rate program for certain mortgage loans, should induce loan growth going forward. On the flip side, consumer segment increased 1.9% quarter-over-quarter, which if adjusted by forex, represents a 0.6% drop with the restrained origination standards on unsecured loans. Please go to slide eight.

Growth on deposits outpaced loans growth, posting a 5.3% growth over the quarter and almost 6% on an annual basis, largely explained by a prudent approach towards liquidity in our ALCO strategies. Time deposits grew the most, with a 6.7% quarterly and 8.6% yearly, mainly explained by a pickup in time deposits with institutional clients and in digital short-term time deposits with retail customers. Thus, time deposits reached a 37% share of our funding mix.

On the other hand, saving and checking accounts both grew over 4% in the quarter, maintaining a 39% and a 12% share, respectively, on the total funding mix, providing an anchor to the overall cost and a stability to the funding structure. All in all, cost of deposits decreased 35 basis points during the quarter, driven by a 73 basis points cost reduction on time deposits, outpacing the 50 basis points repo rate cut carried out during the same period. We deem this very relevant, as it provides our ability to adjust the time deposits maturity profile to secure a fast repricing and mitigate NIM contraction going forward. Please go to slide 9.

Total interest income on loans and financial leases further contracted 0.4% on the quarter and 7.2% over the year, driven by the interest rates decline that affects income generation on new and existing loans, as well as per the contraction of the consumer portfolio, which has higher yields. Consequently, total interest income, including loans and investments, fell 1.7% over the quarter and 1.4% over the year. However, our ability to outpace the repo rate cut on our time deposits and reduce overall interest expense resulted in a decrease in interest expense of 4.6% quarter-over-quarter and 9.3% year-over-year.

As a matter of fact, interest expense reduction compensated for the declining yield on loans, so NII resumed its growth, reaching COP 5.2 trillion in the quarter, equivalent to a 0.5% increase over the quarter and 5.1% over the year. As you can see, NIM remained flat during the quarter at 7.1%. Going forward, we will continue managing the sensitivity and maturity profile of our assets and liabilities to mitigate NIM contraction. For example, securing a fast repricing of total time deposits, out of which 68% will mature in the next twelve months. Please go to slide 10.

Fee income grew 11.2% quarter-over-quarter and 10.2% year-over-year, mainly explained by bancassurance that resumed its growth dynamics, posting a notable 37.3% increase for the period and 12.4% year-over-year. Similarly, payments and collections increased close to 10% quarterly and annually. Additionally, credit and debit card fee income increased 1.5% quarter-over-quarter and 5.8% year-over-year, driven by a higher volume of cards and transactions. On the flip side, the expenses grew 22% over the quarter and 19% over the year, outpacing fee income growth, explained by the increase of both credit card processing charges and correspondent banking fees.

Thus, net income increased 2.9% in the quarter and 3.2% on an annual basis, resulting on a fee income ratio of 20.1%, as compared to the 18% registered in the previous quarter. Please go to slide 11. As shown in the upper left chart, there was a significant reduction on past-due loan formation compared to the previous quarters, mainly explained by the slower pace of consumer loans deterioration in Colombia, as we will further elaborate. This, coupled with an increase in charge-offs over the quarter, denotes our efforts and commitment to preserve a healthy balance sheet.

On top of that, net provisions for the quarter were COP 1.6 trillion, a 23% increase over the quarter, yet a 22% drop year-over-year, reflecting the better performance of new vintages on the tighter origination standards and an enhanced collection process. The three main factors behind the provision charge performance in the quarter were, first, COP 213 billion charged in SMEs. Second, COP 153 billion charged in companies from constructions and health sectors. And third, COP 34 billion charged on certain clients on the large exposures segment, given an expected deterioration. On the flip side, there was a COP 237 billion provision release associated to macro variables, as the downward trend in interest rates positively impacts consumer loans.

Regarding asset quality, the 30-day past-due loans ratio decreased to 5.2% on the quarter, driven by the consumer loans, with a slight increase in coverage reaching 112%, whereas the 90-day past-due loan ratio slightly increased to 3.4%, explained by past-due loans rollover, thus reducing coverage to 169%, but still providing an ample cushion. From an expected loss perspective, we highlight the stability accomplished in Stage 2 loans, provided all measures taken to contain defaults. Moreover, the combined coverage for Stage 2 and Stage 3 loans remain steady at 40%.... we remain confident that as interest rates continue its downward path, the pace of loan deterioration will tend to normalize, but we do expect higher delinquencies on SMEs associated to a weak performance of construction, manufacturing, and retail sectors. Please go to slide 12.

The consumer portfolio in Colombia posted a COP 210 billion reduction on new past-due loans quarter-over-quarter, given the slower pace of defaults and higher recoveries, pushing down the deterioration during the quarter to 7.8%. We highlight the improvement in personal loans that account for almost 48% of the consumer loan portfolio in Colombia, as reflected in its 90-day past-due balance and its Stage 2 and Stage 3 share, which have declined for two consecutive quarters. Thus, the overall consumer segment posted a lower 90-day past-due loan ratio cost of risk dropped from 8.9% to 8.7%.

Given the better performance of new vintages and the visibility provided by our trade models, we continue increasing gradually loan originations on specific client niches under a more conservative approach, which, coupled with better macro conditions going forward, should contribute to restore asset quality while increasing the loan portfolio profitability. Please go to slide number 13. Operating expenses grew 3.4% quarter-over-quarter and 3.7% year-over-year, notably lower than the inflation rate in Colombia during the period. This reflects the stringent cost control and efficiency program discussed on our past conference call, coupled with a lower average exchange rate that reduced overall operating expenses denominated in U.S. dollars. Besides, personal expenses only grew 1% quarter-over-quarter and decreased 0.4% year-over-year. In both cases, below the annual wage increase in Colombia, which certainly reflects efficiency gains.

On the other hand, administrative expenses grew 5.2% quarter-over-quarter and 6.8% year-over-year, mainly driven by local taxes and IT and licensing expenses directed to the business transformation and migration to the cloud. We remain highly committed to cost reduction and efficiency gains while we continue evolving our business transformation underway. However, the result of expense growth outpacing operating income growth increased efficiency ratio to 48.8% during the quarter. Please go to slide 14. Net income for the quarter was COP 1.4 trillion, 13% below the previous quarter, mainly attributed to lower net interest income, higher provision charges, and a one-off impairment charge on a joint venture. On a yearly basis, however, the bottom line remained relatively flat, as the lower net interest income generation was offset by a much lower cost of risk.

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

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

Juan Carlos Mora (CEO)

Thank you, Mauricio. Please proceed to slide 16. As a part of our business with purpose strategy, we have successfully originated COP 21 trillion during 2024, contributing to a cumulative total of COP 162 trillion since the year 2020. In our commitment to environmental matters, we have carried out climate-related assessments with clients in the cement, food, steel, and manufacturing sectors. This initiative is aimed at ensuring their climate strategies are in alignment with our own. We are also proud to announce the release of the fourth edition of our Principles for Responsible Banking report. This publication, which has received limited assurance from PwC, highlights our dedication for sustainability. Please go to slide 18.

... Last, I will share our guidance for year-end 2024, based on the current data and our updated macroeconomic forecast. We expect a loan growth of 8%, broken down in a 4.3% growth from the peso-denominated loans and 7.7% in the dollar-denominated loans. NIM cost of risk between 2.2% and 2.4%. Efficiency Ratio in the 50% area. ROE between 14% and 15%, and Core Equity Tier 1 between 11% and 11.5%. Now, we will take any questions you may have. Thank you.

Operator (participant)

Thank you. 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 two. If you're using a speakerphone, you need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touch-tone phone. Thank you. Our first question comes from the line of Ernesto Gabilondo with Bank of America. Please proceed with your question.

Ernesto Gabilondo (BBVA Financial's Equity Analyst)

Thank you. Hi, good morning, Juan Carlos. Welcome, Mauricio, and good morning to all your team. Thanks for the opportunity. My first question will be on your NIM expectations. So you, you're expecting an interest rate of around 8.75% in 2024 and 6% in, in the next year. So what should we see the NIMs normalizing in the next coming years? Then my second question is on your effective tax rate. We noticed it came at, 20% during this Q2. So how should we think about the effective tax rate for, for this and, and next year? And my last question is on Nequi.

We see you already have an important number of active clients, so just wondering if you can share a little bit of your recent strategies to monetize those clients, and how do you see Nequi at breakeven? And also, well, if you can provide some key target ratios for Nequi in the next years, or when do you think you can start providing those indicators? Thank you.

Juan Carlos Mora (CEO)

Thank you, Ernesto. Let me address your questions. Your first, I will have a comment on the tax, effective tax rate, and on that, I will ask Mauricio to give you more color. And then, and I'm going to also to answer your question or your comments about Nequi. So let's start with the NIM. We know that in Colombia, we have had a monetary policy that is, at this moment, fight inflation, and inflation has been kind of resistant to go down. So at the end, our NIM will depend on how the monetary policy will behave. And we are expecting or there are expectations around two additional reviews of the interest rate from the Colombian Central Bank.

Due to the inflation news that were released yesterday, probably we will see probably the rate will go down around 125-150 basis points. So with that, we expect our NIM to be around 6.8% by the end of this year, and that will depend mainly on the speed of the transmission of the monetary policy and if the central bank is going to decrease the rate 25 or 50 basis points in each of its meetings this year. So for next year, we expect the inflation to keep going down, and still, we don't see that the rate, the inflation, sorry, will be in the bank, Banco de la República, target. So the monetary policy will continue trying to control inflation.

So with that, we expect that our NIM for 2025 will be around 6.5%. So that will decrease our net interest income, but also that will cost of risk to see the results. Regarding your second question, the effective tax rate, I'm going to make a comment, and then we will go back after I answer your question about Nequi to the effective tax rate. So our expectation is that effective tax rate for the year will be between 26 and 28. That's in line with our past guidance. The quarter was around 25%, and Mauricio will explain that later.

Regarding Nequi, Nequi now has more than 20 million clients. Around 14% of them are active customers, and our path to monetizations is going well. We are improving or we are in the path to monetization is definitely through credit. And we are month by month improving our credit performance. So, that will take a little while. We think that our profitability will be by the end of 2025, beginning of 2026, but it will depend on how fast we can go on the credit side. We need to be careful, and we will be measuring how the clients are performing.

So far, as I mentioned, we are doing well. So, those are our expectations. The transactions are there. We have now a lot of information about our clients. They are transacting through Nequi, so that's going to help us a lot, knowing the clients and with that, we'll be able to offer them credit lines. Mauricio, let's go back to the second question about the effective tax rate, please.

Mauricio Botero Wolff (VP of Administrative Services and Security)

Yeah. Hi, Ernesto. To understand the tax rate we used for the Q2, it's important to understand that the aggregated tax rate among all the different segments, businesses, and geographies in which we participate was 25%, as Juan Carlos mentioned. But there was a one-off reversal of provision for taxes from the previous year. If you normalize that, you get the 25%, and that's why it was 20%, and the guidance should continue to be between 26%-28% for this year and the coming year.

Ernesto Gabilondo (BBVA Financial's Equity Analyst)

Excellent. Thank you so much. Just to follow up in terms of your NIM expectation. So, in this first half, I think NIMs were at around 7.1%, and you're expecting that for the full year or in the second half, the NIM should be going to 6.8. So that will be NIM pressure of 30 basis points for this year. And then for next year, you are saying it could be around 6.6%, so that will be only NIM pressure of 20 basis points. So I just wanted to double-check these numbers with you.

Juan Carlos Mora (CEO)

Mauricio, could you please state Ernesto's question?

Mauricio Botero Wolff (VP of Administrative Services and Security)

Ernesto, you need to understand the sensitivity that we have in the net interest margin to the movement in the repo rate. So for every 100 basis points decrease in the repo rate, we would have an impact of 10 basis points in the net interest margin. So it will all depend on the velocity of the decrease in interest rates from the central bank. It would make sense to look at the second half at 6.8%, and according to the velocity, you may see that interest margin moving from 6.8% to the 6.5% area during 2025. But it won't be from the beginning of the year. It would depend on the velocity of the central bank to decrease interest rates.

Ernesto Gabilondo (BBVA Financial's Equity Analyst)

Okay, perfect. Thank you very much, Mauricio.

Juan Carlos Mora (CEO)

Thank you, Ernesto.

Operator (participant)

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

Tito Labarta (Vice President and Senior Equity Analyst)

Hi. Good morning, everyone. Thank you for the call and taking my question. My question is on your provisioning. You know, we saw provisions increased in the quarter, although asset quality looked better, the tone on the call in general sounds a bit more optimistic, and you did lower the guidance a cost of risk. so just to think about, I want to understand the increase in the quarter a little bit more specifically, given the somewhat better trends overall that you're seeing, and thinking maybe a little bit more longer term, you know, you're still cost of risk. do you think you can get back to those levels, or you expect a better GDP growth next year?

How do you cost of risk can continue to evolve into 2025? Thank you.

Juan Carlos Mora (CEO)

Thank you, Tito. If you compare Q2 with the Q1, yeah, cost of risk. but overall, and that's because the Q1 of the year was abnormally low. What we see is a trend of better asset quality, and the behavior in the Q2 was better than in the Q1. Now, that's why cost of risk for the end of the year; it's between 2.2 and 2.4, and previous guidance was 2.5. So what we are seeing is a better behavior on the consumer loans, some deterioration on SMEs, but all in all, we cost of risk for the rest of the year.

Regarding your question about 2025, we expect a better performance in terms of GDP for 25. On top of that, we cost of risk and a more normalized, as you mentioned. In cost of risk was around 1.8, 2025 to be between 2 and 2.2, which is towards normalized cost of risk detail.

Tito Labarta (Vice President and Senior Equity Analyst)

Okay. No, that's very clear. Thank you, Carlos.

Juan Carlos Mora (CEO)

Thank you.

Operator (participant)

Our next question comes from a line of Yuri Fernandes with J.P. Morgan. Please proceed with your question.

Yuri Fernandes (Executive Director in Equity Research)

Hey, guys, good morning, and congrats on the quarter. I have a question regarding your guidance and your ROE. You are increasing this a little bit, but when we look to the metrics and when we look to the first half, like, you had almost 18 ROE in the Q1, this ROE was higher and there were, you know, maybe some one-time events on impairments. My question is: Can we see higher ROE, or is this, I don't know, tax rate normalization, a headwind or margin pressure? I'm just trying to understand if you're not being, you know, too conservative on the ROE here, and what can, you know, maybe make the ROE to be within your guidance, if it's taxes, if it's higher expenses, if it's the margin normalization. Just trying to get some color on this. Thank you.

Juan Carlos Mora (CEO)

Thank you, Yuri. The first semester was a good semester and actually was better of we were expecting. Regarding the second semester and what we expect by year-end, and if we will be able to deliver a higher ROE, that basically will depend on, and this is quite obvious, on two main variables. The speed of interest rate changes, or if, as I mentioned, if the central bank will reduce 25 or 50 basis points and the effect on our NIM. So that 6.8% NIM suppose a more aggressive reduction on interest rates, so there could be an upside possibility. And the cost of risk, and we are the cost of risk improving.

So to your question, our past guidance of ROE was around 14%. Now, we are saying 14%-15%. It is an upside possibility regarding NIM. It will depend on how, at the end, the interest rates will behave and the Colombian economy will perform. We had in the couple of past months, a good surprise, positive surprise regarding economic activity in Colombia. If that continues, I think we could deliver a little bit higher ROE, Yuri.

Yuri Fernandes (Executive Director in Equity Research)

Well, super clear, Mauricio. If I may, a second one more strategic structural, like, one of the good things about Bancolombia is the funding, right? Like the funding cost and the franchise. And now in Colombia, we have the newcomers, and like we discuss a lot on the bank here, and they are offering 13% yields on the cuentas de ahorros. Is that a problem for funding costs in Colombia at some point? I know probably your answer will be they are too small, but like thinking 2, 3, 5 years from now, how do you see players offering above benchmark rates on liabilities impacting the dynamics, like on competition, for the industry?

Because maybe it's not a direct impact for Bancolombia, but some peers of you will start offering higher yields to attract deposits and, you know, like in the end, the entire industry funding cost moves up. So not a question for the quarter, but more, you know, how you see players offering yields above benchmark rates and how this can be a threat for your funding cost. Thank you.

Juan Carlos Mora (CEO)

... Yes, Yuri, definitely competition is tougher now. There are new players that are more active now, as you mentioned. They are offering rates in savings accounts that are high. One of our advantages is that we have a lower funding cost and a presence in all parts of the country. So, regarding if that is going to affect our position in the future, definitely we need to adjust our strategy and our strengths, but still, as it's important, cash in and cash out and our presence through physical channels, it's also important. So, overall, we will need to adjust our strategy.

We don't think that is going to affect materially our cost of funds, but we need to keep an eye on the development of those competitors and how they behave. So far, the players that are offering a higher or high interest rates for savings account are the newcomers and the Fintechs mainly, not the traditional players. We will see if we need to adjust a little bit our strategy. And at the end, if the cost of funds increases, that will also... We will need to see if we are able to transfer that to the economy through the interest rate we charge to our customers.

So that is something that we need to keep an eye on and see how it develops. And as you said, that will probably come in 2025, by the end of 2025 or 2026, we will see the effect of that strategy from some competitors.

Yuri Fernandes (Executive Director in Equity Research)

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

Juan Carlos Mora (CEO)

Thank you, Yuri.

Operator (participant)

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

Brian Flores (VP in Equity Research)

Hi. Hi, team. Congratulations on, on the quarter. Wanted to ask on two, on two things. One is maybe seizing the opportunity. I follow up on Yuri's question. You have a very strong franchise in terms of credit card, right? You have a 30% market share in terms of volume transactions, and as Yuri was mentioning, you have a new entrant that is accelerating in this segment, that, as you mentioned in the call, appears to be in a very risky segment in this point in time, right? So, how is your strategy in terms of preparing to defend this market share, or would you be willing to, you know, open space in terms of market share given the current market conditions?

I think maybe just, this question is more focused on the asset side, more than on the funding side, that, that you covered with Yuri's answer. And then my second question is: in your presentation in the Q1, you opened, the duration of your assets and liabilities, and we saw that you have, around, 590 days duration in liabilities, which was already reducing, around 530 days in, in assets. Can you, elaborate a bit on where is it now, and where is this, gap, the matching, the mismatch between those, as of the Q2? It would be very, very helpful. Thank you.

Juan Carlos Mora (CEO)

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

So we have, as you mentioned, a strong franchise. We have a diversified client base. We have a very strong, a very wide distribution network in terms of branches and in terms of banking agents. So we are going to leverage that. And the other point that is important and different to other markets, besides the maximum interest rate that we could charge, is that there is a transaction fee in Colombia, which promotes the use of cash. So that also is something that we need to take into account.

As I mentioned, we need to prepare for different conditions, and we think that we have all the tools to defend our market share, and we need to adjust our strategies regarding those new competitors and new players that are entering into the market. Mauricio, could you address Brian's second question, please?

Mauricio Botero Wolff (VP of Administrative Services and Security)

Yeah. Hi, Brian. Our strategy has been very focused on the deposit mix, to how to keep a low cost of funding based on the deposit mix. So as you can see, both the interest income from loans and interest expenses from deposits, both of them decreased, but the interest expense from deposits decreased a little faster, defending the NII. So in terms of duration, what we're having is a repricing strategy for time deposits, as two-thirds of the time deposits have a maturity of one year or less. So that allows us to reprice our time deposits and keeping savings and checking accounts with healthy growth figures. So all in all, we keep on having a low cost of funding, which allows us to have a resilient net interest margin.

Brian Flores (VP in Equity Research)

Perfect. Just a quick follow-up. So in terms of the magnitude of, of this sensitivity, I know, maybe the, the dates are now not being disclosed, but should we think it's a bit more, again, on the, on the passive side of the balance sheet, or, or is it more much now, more neutral? Just to get a, a big picture idea. Thank you.

Juan Carlos Mora (CEO)

Mauricio, could you take that, please?

Mauricio Botero Wolff (VP of Administrative Services and Security)

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

Brian Flores (VP in Equity Research)

Sure. Sure, Mauricio, no worries. So basically, in the Q4, we saw the gap, right? In already contracting. I think in the Q1, it was around 56 days, negative, basically on the duration of liability, right? This asset duration gap between assets and liabilities was minus 56 days. Should we think that as of the Q2, is this at similar levels, is it closer to zero? Just a big picture idea would be helpful.

Mauricio Botero Wolff (VP of Administrative Services and Security)

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

Brian Flores (VP in Equity Research)

Super clear. Thank you.

Juan Carlos Mora (CEO)

Thank you, Brian.

Operator (participant)

Our next question comes from the line of Andrés Soto with Santander. Please proceed with your question.

Andrés Soto (Executive Director in Latin American Equity Research)

Good morning, Mauricio, Juan Carlos, thank you for the presentation. I have a question regarding the numbers that you are commenting on the 2025 outlook. You have mentioned margins around 6.5%, so that will imply a 30 basis points compression versus the one that you are expecting for 2024, and you cost of risk that is 20 basis points below the range that you are providing for 2024. With that, we will assume some ROE compression next year. I would like to confirm if that's your view or you are expecting some efficiency improvement to offset that ROE compression.

If you can give us what is your preliminary outlook for ROE next year?

Juan Carlos Mora (CEO)

Thank you, Andrés. As you mentioned, our guidance for 2025 regarding NIM is 6.5%, and that's because interest rates will go down. Also, as I mentioned in the previous answer, that variable, meaning in net cost of risk will be key. so what we cost of risk between 2 and 2.4, 2.2%, I'm sorry. With that, our expectations regarding NIM are, you know, in the 14% area. We will expect some efficiencies in terms of expenses, of operating expenses. We expect to have less pressure from inflation during 2025....

With all of that, our expectations of NIM is around 14%, between 13.5% and 14% for 2025, Andrés.

Andrés Soto (Executive Director in Latin American Equity Research)

That's very clear, Juan Carlos. And cost of risk expectations, specifically for this year, your guidance implies that for the second half of the year, you are going to be at around 2.2-2.6%. When I look at your number in the Q2, excluding the provision releases cost of risk is significantly higher than that level, at almost 2.9%. So how confident are you cost of risk improvement in the second half of the year? And if you can comment, we have discussed a bit about the performance in Colombia, but we see that continued deterioration in Panama.

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

Juan Carlos Mora (CEO)

Yes, Andrés. If you see the behavior of the Q2, in terms of provisions, in terms of how the loan book performed in general, we see an improvement. It's more regarding a specific situation for the quarter. cost of risk for the quarter is 2.5%. With that, and the behavior that we are seeing in the different books, we cost of risk. so, as of your question, yes, we are expecting an improvement in the second semester.

That's because we are seeing a better performance on the Colombian economy that we were expecting at the beginning of the year, even after the Q1. Regarding your second part, or the second part of your question, Panama, yeah, cost of risk in panama. but and that's mainly on the consumer side. We don't expect an additional deterioration, but it's going to impact the results of the year overall. So we don't expect an additional level of deterioration, but it's going to continue at similar levels. And because of that, ROE for Banistmo will be below 10% for the year.

But we expect that situation for Panama improves during 2025. Remember that Panama was specially affected by the pandemic and some measures coming from the supervisors regarding payments. And still we are seeing some effects on that, particularly on the consumer side and some on mortgages. But we expect that to improve in 2025.

Andrés Soto (Executive Director in Latin American Equity Research)

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

Juan Carlos Mora (CEO)

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

Andrés Soto (Executive Director in Latin American Equity Research)

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

Juan Carlos Mora (CEO)

Thank you, Andrés.

Operator (participant)

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

Nicolas Riva (Managing Director and Head of Latin America Credit Research)

Thanks very much, Juan Carlos and Mauricio, for the chance to ask questions. As I have said before, I think it's very useful that both credit analysts and equity analysts can ask in this call. So with that, I have two questions on your Tier 2 capital. The first one, looking at the change quarter-on-quarter, so it declined by $226 million. You did the buyback on the 27th, you bought back $283 million. I believe they compute 80% of Tier 2 capital, so that would explain the buyback of the 27th, would explain the $226 million decline in your Tier 2. However, it looks like you didn't include the $800 million raise that you did by issuing the 2034s.

So I wanna confirm that the $800 million new Tier 2 capital has not been included in, in your capital ratios at the end of June, and in that case, that will increase, I believe, your capital ratios by 110 basis points, which means that pro forma, your total capital would be 13.7 rather than 12.6, if you can confirm that? That's my first question. And then my second question, you have the call option on the 2029s, in, in December. I know that the decision has not been made yet, but if you can maybe just talk about your thoughts, regarding that, that call option.

I would assume that calling the 2029s without any capital replacement is not a feasible possibility, because in that case, you would lose, I believe, 8 basis points of capital, which is all the capital you raised by issuing the 2034s net of buying back some of the 2027s. But again, if you can discuss your thoughts regarding capital ratios now, including the issuance of the 2034s, and any early thoughts regarding the call option on the 2029s in December. Thanks.

Juan Carlos Mora (CEO)

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

Mauricio Botero Wolff (VP of Administrative Services and Security)

Hi, Nicolas, let me take the first question. You are right. We didn't account in the solvency ratio for the Q2, we didn't account for the $800 million bond issuance, and that's because by the close of the Q2, we hadn't received the approval of the Superintendency of Colombia to get capital credit for that issuance. But we already did. We did, we did receive it, it on July, and the pro forma figure is exactly what you just mentioned. It would have added 117 basis points. So if you normalize that, our solvency ratio would have been 13.7, and not the 12.6% that you see. And we're gonna be able to see the updated figures for the Q3.

So, for the second question, you need to take into account that the 2027s are decreasing their capital credit, so, by the end of this year, the capital credit would amount to 56%. So according to that, we're gonna have an open window to make up our mind in terms of the call option. But, one different thing from the previous situation, in which we didn't call the bond, is that markets are open. We just did an issuance. Markets are open. We're able to replace capital if we want to. But the other thing to take into account is that our long-term guidance for Tier 2 is between 1.5% and 2% in Tier 2.

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

Nicolas Riva (Managing Director and Head of Latin America Credit Research)

Great. Thanks for that, Mauricio. Maybe just one follow-up. So your total capital, we said 12.6% at the end of June. It's gonna increase to 13.7%, by including the $800 million on the 2034s, but then you're gonna have the 20% phase out of the 2027s by the end of the year. Do you have a target? Because so the minimum capital requirement total is 11.5%, right? So that means that pro forma with the 2034s, you would be around 200 basis points above the minimum requirement. Do you have a target for the total, for the total capital, or for the buffer over the minimum requirement?

Mauricio Botero Wolff (VP of Administrative Services and Security)

Our target has always been around 11.5 in Tier 1, but you need to take into account that that's our target for year end. As we have seasonality in terms of Tier 1, after declaring the dividend payment that we always do during the Q1, capital decreases as we, it did in the Q1 of this year. And after that, we organically accumulate capital with the retained earnings, as you can see, in a very positive manner for the Q2. So you're gonna see Tier 1 increasing above 11.5% by year end, and if that's the case, we're gonna be okay. Especially, according with the loan growth we're seeing. So we believe we're very confident in terms of capital, both Tier 1 and Tier 2.

Nicolas Riva (Managing Director and Head of Latin America Credit Research)

Okay, so roughly, so 11.5% roughly target for CET1, plus 150-200 basis points, Tier 1. So your target for total capital would be 13-13.5, kind of over the cycle, roughly, which is roughly like 150 basis points over minimum requirements. Okay. Thanks very much, Mauricio.

Mauricio Botero Wolff (VP of Administrative Services and Security)

Thank you.

Juan Carlos Mora (CEO)

Thank you, Nicolas.

Operator (participant)

Our next question comes from the line of Carlos Gómez-López with HSBC. Please proceed with your question.

Carlos Gómez-López (Executive Director and Head of Latin America Financial Institutions Research)

Hi, thank you for taking my question. So my call got dropped, so apologies if you have already answered my question. So the first one was on impairment costs with JV in Tuya. So can you elaborate why the bank decided to record impairment losses on JV? And what is your outlook on the remaining equity investments in your portfolio? And second, I just wanted to get your sense on liquidity. How has been the bank's or the financial systems' liquidity position evolved since the issues faced last year? Can you just give me the numbers, like, what is your NSFR ratio currently versus last year? Thank you.

Juan Carlos Mora (CEO)

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

Carlos Gómez-López (Executive Director and Head of Latin America Financial Institutions Research)

Yes, yes, that's right.

Juan Carlos Mora (CEO)

Okay, thank you very much. Okay, regarding your first question, we have an impairment of around $75 million regarding our investment in Tuya. As you may know, Tuya it's a company that we have with Éxito, a retailer, it's a joint venture. And that business, particularly in Colombia, has been affected because of the behavior of interest rates. So we have an impairment, as I mentioned, close to $75 million during the quarter, regarding that investment. So that's a joint venture. That's just for one-off for this quarter, and we don't expect in terms of valuation, additional effects of that business. So that's regarding the impairment.

I will pass your second question to Mauricio.

Mauricio Botero Wolff (VP of Administrative Services and Security)

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

Carlos Gómez-López (Executive Director and Head of Latin America Financial Institutions Research)

Thank you.

Juan Carlos Mora (CEO)

Thank you.

Operator (participant)

Our next question comes from the line of Julián Ausique with Davivienda. Please proceed with your question.

Julián Ausique (Senior Equity Research Analyst)

Hi, everyone, and thank you for taking my question. My question is cost of risk. i would like to understand why you have this expectation. I know you already mentioned some explanations cost of risk, but i would like to understand why this reduction, if we have seen an upward trend of the SMEs deterioration during the quarter. So I would like to understand cost of risk estimation, and what is the expectation of the deterioration of SMEs for the second part of the year? Thank you.

Juan Carlos Mora (CEO)

Thank you, cost of risk, what we have seen, it's a better performance on the retail part of the business. Consumer loans are behaving better since we starting to change our policies at the last year, at the end of the Q3. So we see the effects now that the vintages are behaving better. Regarding, and we mentioned that we are seeing some deterioration on SMEs, but let me remind you that SMEs are around 11% of our total loan book. So that part of the business is limited, and the cost of risk is not that important. So overall, we see a better performance on the retail business.

We're seeing some deterioration in SMEs, but it's a relatively small part of our portfolio. And we are also seeing a good performance in terms of some on corporates. And the economy is performing better in the last quarter, and there are some expectations that that continues. So with all of that, that's why cost of risk should be around 2.3%-2.4% with that.

Julián Ausique (Senior Equity Research Analyst)

Okay, and just a follow-up. You, during, in the report that you released yesterday, you mentioned that the construction and corporate segment had a deterioration in the corporate segment. Like, you are seeing something especially in those sectors, or it's just like the common behavior of those sectors during this part of the year?

Juan Carlos Mora (CEO)

Yeah. We mentioned that we are seeing some deterioration on construction and health sectors, additional retail deterioration on the retail business and manufacturing, but that's, they are behaving aligned with our expectations. So, and particularly on the construction segment, we have been working with those clients now for almost 9 months, helping them. So we think that we can manage that deterioration. And we also have included some provisions already for those segments. In terms of the health sector, our exposure it's limited there, so we don't see a big impact of the health sector.

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

Operator (participant)

Does that complete your question?

Juan Carlos Mora (CEO)

Yeah. Thank you, Julián. Thank you, Julián.

Operator (participant)

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

Juan Carlos Mora (CEO)

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

Operator (participant)

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