Bancolombia - Q3 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Bancolombia's Third Quarter 2023 Earnings Conference Call. My name is Ryan, 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 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. José Humberto Acosta, Chief Financial Officer, Mr. Rodrigo Prieto, Chief Risk Officer, Mrs. Catalina Tobón, Investor Relations and Capital Markets Director, and Mrs. Laura Clavijo, Chief Economist. I will now turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer. Please go ahead, sir.

Juan Carlos Mora (CEO)

Good morning, and welcome to Bancolombia's third quarter conference call results. Please go to slide two. The results for the third quarter reflect the progressive slowdown in the economies in which the Bancolombia operates, particularly in Colombia, where the prevailing high interest rates and inflation kept credit origination weak, compressed net interest income, impaired loans, and maintained operating costs elevated. However, the good performance of the investment portfolio and the 23% drop quarter-over-quarter on net provision charges helped offset the lower net interest income on loans and higher costs, resulting in a net income of COP 1.5 trillion, equivalent to a 2.1% growth quarter-over-quarter. The loan book contracted near 1% on a quarterly and annual basis as a result of lower demand and a lower credit appetite, as well as more prepayments.

The cost of risk for the period reduced to 2.5%, a 60 basis points drop, driven in part by the lower pace of past due loans formation on consumer loans, as we will further elaborate. NIM increased to 6.8%, even as interest expense kept growing on this, coupled with lower provision charges, helped diluted higher operating expenses that drove the efficiency ratio to 47.6%. All in all, ROE increased to 16%, and Basel III Core Equity Tier 1 ratio increased to 10.9%, well above the minimum regulatory levels, reflecting the capacity to generate organic capital. These results reflect the strengths of the bank in terms of its balance sheet structure, access to low-cost funding, and risk management that allows it to better navigate the current economic and credit cycle and capture tailwinds.

Moreover, the latest regional elections in Colombia showed that democracy is effective and allows voters to express their preferences and agendas. As a result, a group of leaders focused on addressing the main local interests, problems, and needs will be leading the principal cities and regions. Issues such as security, mobility, infrastructure, and unemployment are at the top of the agenda for these new administrations. As we are a key player in most regions of Colombia, these government changes always bring new opportunities for local collaborations through strategic projects that promote growth and well-being for the population of each region. Infrastructure, healthcare, housing, entrepreneurship, and financial inclusion are areas where we should be able to provide value. I will also want to share how proud we are. As for the ninth year in a row, Bancolombia was recognized by Merco as the company with the best reputation in Colombia.

This is a comprehensive assessment from different stakeholders on economic, environmental, social, and ethics issues, among others. After these highlights, I turn the presentation to Laura Clavijo, our Chief Economist, for further detail on the macroeconomic outlook. Laura?

Laura Clavijo (Chief Economist)

Thank you, Juan Carlos. Now we can please go to slide three. The Colombian economy has been undergoing a significant slowdown throughout the year, expanding just 0.3% year-over-year during the second quarter of 2023, amidst weakening activity in retail, manufacturing, and construction. Persistent inflation and tighter financial conditions have continued pressuring consumer demand, investments, and exports. Hence, we confirm our GDP growth forecast of 1.2% for 2023, and 0.9% for 2024. Inflation has continued its downward trend, but remains in the double digits, 11% as of September, pressured by high oil prices and other regulated goods. Furthermore, core inflation has subsided at a far slower pace, falling just 100 basis points between March's peak, reaching 9.5% as of September.

As a result, we have revised upward our end-of-year forecast for inflation from 9%-9.6%, and from 5.3%-5.9% for 2023 and 2024. Additional pressures to inflation will be closely monitored. First, the drought season resulting from El Niño is expected to intensify in the following months and well into the first quarter of 2024, potentially increasing prices of food and energy. Second, the government has continued hiking gas prices and has announced it will continue thereafter with diesel in an effort to curb fiscal spending related to the Fuel Price Stability Fund. And finally, minimum wage negotiations for 2024 will begin in the following week and will very likely result in a double-digit increase, thus placing further pressure to inflation expectations for 2024.

Given this macro scenario, the central bank maintained stable its policy rate at 13.25% during October's board meeting, completing seven consecutive months of interest rates at peak level. Furthermore, last month's policy decision was divided between five members choosing to maintain and two in favor of cutting rates by 25 basis points, showing signs that monetary policy stance may begin its cutting cycle before year-end or early 2024. Consequently, our policy outlook has been revised upward and considers gradual cuts of interest rates up to 400 basis points during 2024. The fiscal outlook has improved throughout the year due to the less than expected government spending and stability in revenues, mainly coming from taxes and oil. The government has committed to compliance of the fiscal rule, which seems possible for 2023 and the following year.

Nonetheless, higher social spending and resources committed to implementing the reform agenda, if approved, are sources of fiscal uncertainty in the medium term. We maintain our view that 2024 will be a year of gradual recovery, especially during the second half of the year, when receding inflation and interest rate cuts will pick up the pace. Nonetheless, higher for longer interest rates, both in the international and local scene, will prove challenging for consumer demand, investment prospects, and the overall performance of the financial sector. Now, please let me turn the presentation back to Juan Carlos, who will present Bancolombia's quarterly performance.

Juan Carlos Mora (CEO)

Thank you, Laura. Now, please go to slide four. Before we move into explaining the results for the third quarter, I want to refer to what are our 4 value-driving pillars. These pillars contain the main sources of our current and future capabilities and competitive advantages, and thus, the foundation for present results and the roadmap for profitable growth in the future. The first pillar relates to our client-centric approach, under which we deliver customized, integrated solutions for their everyday needs under an ecosystem model, orchestrating experiences in our own channels and allowing third parties to develop their own under a banking-as-a-service model. One of our best testimonies of our capabilities in this space is the successful development of the QR code. Leverage on our API resources, we have enabled merchants to integrate payments, acceptance models within their sales digital experience.

Soon after its launch, the QR code has experienced exponential adoption, becoming the largest acceptance payment network in Colombia, with more than 1.8 million merchants in more than 1,100 municipalities and used by 3.2 million people. The power of this payment tool relies on its capacity to capture flows, retain deposits, originate fees, and gather data to feed our analytic models and further enhancing our deposit structure. On slide five, our second value driving pillar that focus on evolving our digital capabilities and an interoperable multi-channel platform. In this opportunity, I want to comment on our digital wallet, Bancolombia A La Mano, in its tenth year of operations, as a proof of our consistent progress and proven delivery on digitalization.

Bancolombia A La Mano has allowed us to complement our offer to the low-income adult population segment, who lacks access to financial products, permitting us to capture low-cost deposits via payrolls, money transfer, remittances, and fee income on the sale of bancassurance, resulting in a growing segment. As of today, it has 6.4 million clients that hold more than COP 700 billion in deposits, and whose volume and value of transactions increases year-over-year. The next two years, we plan to reach 8 million clients, tapping the underbanked population market and further increasing their monthly activity. In Slide six, under our third value driving pillar that consists of structural capabilities that provide us with certain market advantages.

I want to refer to the significant progress made on our collections model, which is one of our top priorities within our risk management framework, given the current credit cycle and its underlying challenges. Leverage on our channel platforms and data analytics tools, we are currently working under a threefold approach, consisting of, first, enabling new digital channels to increase coverage and client awareness at a lower cost. Second, extracting insights to better understanding payment propensity, allowing us to anticipate loan deterioration. And third, incorporating behavioral language to ease frictions, and thus increasing the acceptance of refinancing options. We are confident that these complementary strategies will provide us flexibility to keep up with our collections performance. Slide seven, our fourth value driving pillar is the culture of efficiency and productivity we have created to ensure the continuous improvement of our process and an optimal use of resources.

Two of the main initiatives we are currently working on are, first, Journey to Cloud, to reduce fixed cost and provide more flexibility. As of September, 68% of our applications have successfully migrated or have been developed in the cloud, laying grounds for cost efficiency. And second, Journey to Open, seeking to migrate licensed IT components onto open source to capture savings and achieve governance. To conclude, we strongly believe that a well-articulated management of all of these value-driving pillars explain, to a large extent, our market leadership, the soundness of our operation, and the scalability of our business model. Thus, we are committed on further developing and enhancing those capabilities to strengthen our competitive advantages and deliver sustainable value on the short, medium, and long term. Now, I want to turn the presentation to José Humberto Acosta, who will further elaborate on our third quarter 2023 results.

Jose Humberto?

José Humberto Acosta (CFO)

Thank you, Juan Carlos. Please go to slide eight for a snapshot of our Central American operation. During the quarter, these banks faced weaker loan and income growth, coupled with higher cost of risk and operational costs that lowered the profitability and contribution to the consolidated results. Moreover, Banco Agromercantil accrued two one-offs that lowered interest income and increased provisions on consumer loans, thus driving the net income to a loss. Notwithstanding the above, the aggregated NIM of the three banks have been growing steadily on a yearly basis, thus increasing its contribution to the consolidated net income relative to Colombia's for the last nine months of 2023 versus the same period in 2022, as shown on the upper right-hand side graph.

It is also worth to mention that despite higher loan deterioration, all the three banks run with a comfortable level of 90-day past-due loans coverage, providing balance sheet protection. We remain positive on the political and economic outlook in El Salvador, but more cautious about Guatemala, given the most recent political and social unrest. Please go to slide nine. The consolidated loan book contracted 1.2% during the quarter and almost 1% year-over-year, as high interest rates have lowered credit demand, encouraged short-dated loans and prepayments in the commercial portfolio, and risk appetite adjustments on consumer segment. As a matter of fact, in the last 12 months of the share of the consumer loans have yielded to mortgage and commercial loans, down to 21.8% of the total portfolio.

Moreover, a 3% peso appreciation in the quarter reduced the contribution of the loans denominated in U.S. dollars. Net of effects, the loan portfolio will have decreased 0.2% quarter-over-quarter. However, from a client perspective, we continue acquiring new customers on almost all segments, laying grounds for loan growth on the future. Please go to slide number 10. Despite the slight drop of the loan book, deposits did grow 0.3% quarter-over-quarter and 2.8% year-over-year, driven by a more conservative approach towards liquidity. As a result, our Net Stable Funding Ratio was running at a comfortable level of 117% as of September.

The growth was led by time deposits that increased 3.3% in the quarter and 31% year-over-year, still attracted by the prevailing high interest rates, though reflecting a slower pace of growth. Conversely, savings contracted 1.6% quarter-over-quarter and 11% year-over-year. Moreover, as a part of our liability management strategy, seeking to optimize our funding structure, in July, we launched a cash tender offer for the 2025 senior bonds, by which $468 million were purchased, thus reducing the outstanding bonds balance by 10% quarter-over-quarter and 12% on a yearly basis. On the other hand, trade and working capital loans in dollars have reduced 7% quarter-over-quarter and 14% year-over-year on the back of lower demand.

All in all, the cost of funding increased to 5.8%, still well below the central bank reference rate, reinforcing our competitive advantage in attracting low-cost deposits. Aided by our asset-sensitive balance sheet structure, we have increased to 68% the share of fixed-rate time deposits maturing in less than a year to provide some margin protection when interest rates starts coming down in the foreseeable future. Please go to slide 11. Interest income slightly increased 0.2% quarter-over-quarter, as interest and valuation on the investment portfolio grew 934%, offsetting the 2.8% drop on interest income on loans and financial leases on the same period. On a yearly basis, interest income grew 24% due to the repricing dynamic as per our asset-sensitive condition, and because new loans are disbursed at higher interest rates.

Consistent with the growth on time deposits discussed above, interest expenses grew 2.7% during the quarter and almost 80% year-over-year, as it continues to capture the rise in interest rates. Thus, NII fell 1.7% quarter-over-quarter and 2.7% on a yearly basis, reflecting the lower income generation capacity as loan volumes has contracted. Consequently, a NIM breakdown shows the lending NIM fell 34 basis points quarter-over-quarter to 7.6%, whereas the investment NIM returned to its normal level, close to 1%, contributing to an increase of total NIM to 6.8%. Given the higher reference rate for year-end, as per the updated forecast, we reaffirm our view on a sustained NIM of at around 7% for the coming quarter. Please go to slide 12.

Net fee income dropped 4% quarter-over-quarter and was almost flat year-over-year, as fee expenses growth outpaced fee income growth, driven by higher third-party-provided costs and processing charges. Consistently, fee income ratio fell to 18.4% for the quarter. Payment and collection-related fees grew the most on the annual and yearly basis, provided the growth on clients and the positive evolution of our digital channel-oriented strategy. Income related to the fleet leasing operation keeps a growing trend, posting a 4.6% increase during the quarter and 27% year-over-year, contributing to almost 48% of others' income performance that grew 152% year-over-year, despite contracting at 70% during the quarter. Please go to slide 13.

Net provision expenses for credit losses for the quarter was COP 1.6 trillion, a 23% decrease quarter-over-quarter, and equivalent in a cost of risk of 2.5%, implying a 60 basis points drop from the previous quarter. The drivers behind this reduction were threefold. First, COP 240 billion released due to the sale of a massive transportation system-related corporate loan in Colombia. Second, a COP 141 billion decrease quarter-over-quarter on the consumer segment in Colombia, given its better performance. And third, lower provisions related to macro inputs.... All the above helped to compensate the one-off provision charge that Banco Agrícola had to accrue in the quarter related with the change in its credit card core system.

Moreover, commercial loans kept showing an overall good performance, except for some cases for which extra provisions have been accrued. On the flip side, the 90-day past due loan ratio for the quarter increased to 3.2% from 3% in the last quarter, due to more past vintages consumer loans running into past due and a couple of specific commercial loans. This, coupled with the above-mentioned provision release, resulted in a drop of 90-day past due loans coverage ratio to 188%, although still providing a strong coverage to the balance sheet. Consistent with the lower past due loan formation in consumer segment in Colombia, there was a slight increase on the share of loans in stage one that reached 87.3%, and those stage two remain well contained at a level of 6.7%.

The combined coverage for stage one and stage two loans remains at a level of 41%. Moving to slide 14, I will further discuss on credit quality in Colombia. Personal loans that represent 52% of consumer loans accounted for most of the deterioration during the period, increasing its 90-day past due loan ratio to 6.6%, and therefore the share of loans in stage two and three to 21%. However, given the lower pace of past due loan formation discussed above, the cost of risk decreased to 15.5%. Moreover, credit cards, auto loans, and payroll loans perform alike personal loans, pushing the 90-day past due loan ratio upwards to 5.1% and reaching a 17.8% share of loans in stage two and three, but posting a lower cost of risk of 12.9%.

We have reduced the volume of pre-approved loans offered to individuals in almost 45% year-over-year, and the 7% quarter-over-quarter. Therefore, the evolution of past due loan formation in consumer loans in Colombia continues showing a descending trend, and it's running below the average of the first half of the year, although admittedly at a slower pace than expected. Although far from ideal, we remain with the lower 90-day past due loan ratio for the Colombian financial system as of July 2023, driven by our superior credit assessments, data-based credit models, and collection process that provide us with more accurate insights that allow us to better mitigate deterioration. Please go to slide 15. The cost-to-income ratio for the quarter was 47%, as operating expenses grew to close to 2.2% quarter-over-quarter and almost 20% year-over-year.

The main driver for this growth continues being the higher transactions and deposits related taxes, introducing the last year fiscal reform that had a 73% year-over-year, a 15% quarter-over-quarter increase. Personnel-related expenses decreased 1.4% quarter-over-quarter, driven by lower severance payments, but increased to close to 20% year-over-year as per annual wage increase. And last, administrative-related expenses grew 5% quarter-over-quarter and 20% on a year basis, due to the higher expenses devoted to business transformation. Net of effects, taxes, and natural valuations on certain employees benefits, OpEx annual growth would have been 13.4%, percent in line with inflation. We continue committed on cost control initiatives to increase efficiency and boost productivity, which, coupled with a sound NIM, should maintain efficiency ratio of around 46% for the year-end.

Please go to slide 16. Net income for the quarter was COP 1.5 trillion, equivalent to a 2.1% growth quarter-over-quarter, driven by lower provisions. In turn, return on equity for the period increased to 16.1%, which, if adjusted for goodwill, results in a Return on Tangible Equity of 28%, reflecting the profitability of the operation isolated of goodwill-related costs. On a yearly basis, however, net income fell 8.4% on the back of the loan book contraction, minus the net income generation, higher provision expenses, and overall costs, as discussed earlier. And finally, on slide 17, I will present the evolution of capital generation.

Shareholders' equity grew 2.8% on a quarterly and yearly basis, well above assets that remained flat over the same periods, reflecting the bank's capital generation capacity to sustain a sound balance sheet. Basel III total capital adequacy ratio stood at 12.8%, increasing 29 basis points over the quarter, with a CET1 ratio of 10.87%, a 42 basis points growth, driven by a combination of lower risk-weighted assets, FX appreciation, and a combination of net income during the year.... Now, I will hand over the presentation back to Juan Carlos for some final remarks. Juan Carlos?

Juan Carlos Mora (CEO)

Thank you, José Humberto. Please go to slide 18 for some remarks regarding our sustainability strategy. Moving ahead with our strategy, as of third quarter, we had disbursed almost COP 28 trillion during the year, and an aggregate of COP 131 trillion since 2020, for small scale agribusiness, green buildings, and gender-related loans, among others. Moreover, as a part of our sustainability framework, we made progress on the following three initiatives: First, from an environmental perspective, we included Blue Taxonomy, seeking to promote maritime ecosystem conservation and protection. Second, we continue making progress on our financial well-being strategy, by which we provide our clients with financial education regarding savings and investment, financial planning, and retirement, among others, for better decision making.

Third, as part of our social initiatives, we launched our human rights due diligence protocol under the Ruggie framework, aimed to identify, control, and monitor the risk over our stakeholders and mitigate them accordingly. Finally, on slide 19, I will share our guidance for year-end 2023. Based on the information we have today and the updated macro inputs forecast, we maintain the guidance for NIM on around 7%, as the average rate of the central bank will remain high during the year. For the efficiency ratio on around 46% and for core equity Tier 1 on around 11%. On the other hand, we now expect loan growth of around 3.4% in peso-denominated loans and 1.2% in dollar-denominated loans.

However, given the slower downward trend in inflation and interest rates, we now expect more deterioration and higher expenses for the last quarter than three months ago, pushing our cost of risk guidance to 2.7%-2.9%, and consequently adjusting guidance on ROE to 15% area. With this, we conclude our remarks for the third quarter results. Now, we can take any questions you may have. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question is from Beatriz Abreu with Goldman Sachs. Please go ahead.

Beatriz Abreu (Equity Research Analyst)

Hi, good morning, everyone. Thank you for taking my question. My first question is regarding the profitability outlook from here. Just revised guidance for 2023 for ROE downwards to around 15%. Just wondering for next year, what are you thinking for profitability, given the revised economic outlook, more challenging macro scenario? If you could talk a little bit about that, that would be great. And a second question would be on provisions and cost of risk. If you could talk a little bit more about the provision release that happened this quarter, if you're expecting any additional releases coming from that specific loan. And if you could also discuss a little bit your expectations for provisions and cost of risk for next year, that would also be great.

Thank you very much.

Juan Carlos Mora (CEO)

Thank you, Beatriz, for your questions. Regarding profitability, the key factor, as you know, for the profitability of Bancolombia this year and next year, will be the cost of risk. The third quarter, we had a cost of risk of 2.5%, but we have that cost of risk as the influence of one-off. We saw a commercial credit, a loan, sorry, and that's why we are reversing some provisions. Regarding your question, that's not going... Particularly regarding that loan, that is not going to happen. We are very active on managing our portfolio of loans, and we actively look to sell or manage those loans, but those every case is different.

So from now on, what we are expecting is that the Cost of Risk for the end of the year will be around 2.5%, and for the whole year will be between 2.7% and 2.9%. That drives the ROE down to 15% area. Regarding 2024, we expect the trend to continue, even though we expect that the Cost of Risk should be lower than the one that we are going to have during 2023. But loan growth is not going to be very healthy during 2024.

So 2024 will be a challenging year regarding loan growth, but we think that we can maintain or we can manage the cost of risk in a level that is lower than the one that we will have at the end of 2024. 2023, I'm sorry. So, with all of that, we expect, as I said, a challenging year, 2024, but, with a profitability that will cover our cost of equity. I don't know, José, if you want to add something to this?

Beatriz Abreu (Equity Research Analyst)

That's fair.

Juan Carlos Mora (CEO)

Okay. That's it, Beatriz.

Beatriz Abreu (Equity Research Analyst)

Just a quick follow-up, if I may, just to make sure that I understand. So for the fourth quarter, the coming quarter, you mentioned you're expecting Cost of Risk roughly stable at 2.5%, is that correct? And then finishing the whole year at around 2.7%-2.9%.

Juan Carlos Mora (CEO)

That's correct, Beatriz. Yes.

Beatriz Abreu (Equity Research Analyst)

Okay. Even though this quarter you had the one-off, you still expect to deliver a stable cost of risk in the last quarter?

Juan Carlos Mora (CEO)

Yeah, that's correct. And that's because the main deterioration is coming from consumer loans. And now the vintages that now we have are or were originated with a different risk profile. That risk profile changed at the end of 2022. So the maturity of those loans and what we are seeing is that those loans are behaving better than those that were originated before that, at the beginning of 2022 and 2021. So that's why we are expecting that the deterioration in the consumer loans will not drive a higher Cost of Risk at the end of 2024.

José Humberto Acosta Martín (CFO and VP of Finance)

Beatriz, regarding your question, if we have more cases like this one of... This was a very opportunistic sale of a loan that was fully provisioned, but we don't expect any other releases during at least the next quarter of this year.

Beatriz Abreu (Equity Research Analyst)

Perfect. Perfect, that's very clear. Thank you.

Juan Carlos Mora (CEO)

Mm-hmm. Thank you.

Operator (participant)

Thank you. Our next question is from the line of Jiten Singh with HSBC. Please go ahead.

Jiten Singh (Analyst)

Hi. Thank you for taking the question. So my question is on the asset quality. So you still see some deterioration in quality, especially on the consumer loan. So I just wanted to understand, when do you expect the peak of NPAs or cost of risk? And should we expect provisions to at least remain at the current level in the next few quarters? Thank you.

Juan Carlos Mora (CEO)

Thank you for your question. I had some issues with the line, so I'm going to try to answer your question. Regarding consumer loans, I mentioned that that was the main source of deterioration during the quarter, the last third quarter, and has been the main source of deterioration during the full year. So your question, if when are we expecting the peak of that consumer loan deterioration? I think we are pretty much at the peak, and what we expect is that next quarter, fourth quarter of this year, we'll have a deterioration above our long-term deterioration for consumer loans, but will be lower than the one we had during the third quarter.

So that will drive to a cost of risk for the fourth quarter of around 2.5%. And mainly, the main driver of that cost of risk is the consumer loan deterioration. I don't know if I answered your question.

Jiten Singh (Analyst)

No, that's helpful. Thank you. And if I can ask a second question on the operating expenses. I mean, OpEx growth has been slightly higher in nine months, and I guess the part of it has to do with the higher inflation and FX. What should we expect for this year and for the next year?

Juan Carlos Mora (CEO)

Okay, regarding OpEx, for next year, we are expecting that OpEx should grow a lot, around 10%. Inflation in Colombia should be around, I don't know, probably 8% or less than that, probably more towards 7%. But we have pressure on what is going to be the wages increase in Colombia, the minimum wage increase in Colombia. And we expect that to be around 10%, probably, or maybe even higher than that. So we will have some pressure from the cost of the labor cost. And regarding the general expenses, we expect those to grow less. That's our guidance for 2024. I don't know, José, you have a comment?

José Humberto Acosta Martín (CFO and VP of Finance)

Yes. Regarding 2023, we are expecting at the end of the year an expenses growth of at around 22%. And remember that the main impact of this deviation of expenses, it is because of two reasons. The first one is taxation related to business, that was increased more than 60% annual basis. And the second one element is the FX variation that was at around 9%. If you deduct these two elements, FX and taxation related to business, the expenses growth for this year, it's going to be at the area of 13%, aligned with the inflation that Juan mentioned where, at the beginning of the presentation.

Jiten Singh (Analyst)

Thank you.

Juan Carlos Mora (CEO)

Thank you.

Operator (participant)

Thank you. Our next question is from the line of Julian Ausique with Davivienda. Please go ahead.

Julián Ausique (Equity Analyst)

Hi, everyone, and thank you for having my question. I would like to ask you a few questions. The first one is, how are you feeling about the deterioration of asset quality indicators, also in the 30 days and the 90 days? Because if we see the results, the deterioration has increased, but because of risk or the provision have decreased. The second question is regarding the taxation effective tax rate. We have seen during the last quarters that the effective tax rate is not as higher as other, as your peers. So we would like to understand what are the reason of that, and why the effective rate of Bancolombia is below its peers. Thank you so much.

Juan Carlos Mora (CEO)

Thank you, Julian. As we mentioned already, the third quarter was affected by a one-off that explains why the cost of risk was lower. But we see deterioration, as we already mentioned, on the consumer loans, and that's why the 30-day and 90-day past due loans increased during the quarter. As we mentioned, we expect that to be the peak for this year, and that the behavior of the consumer loans during the fourth quarter should be better than the one that we had during the third quarter. Regarding taxes, our effective tax rate is lower or is low because some special, or a special situation.

The source of net income during this year, the distribution of that source of net income during this year is it's more from our operations outside Colombia than have, and those operations have a lower tax rate. So the contribution of the Central American operations is bigger during this year. That's why the mix between the lower tax rates outside Colombia and the tax rate in Colombia it results in a lower effective tax rate on consolidated basis. The other reason is that the leasing business in Colombia has a special tax treatment in the case of Colombia. So that benefit and because we are having a good performance on that line also affects the effective tax rate.

Even though the tax rate, the effective tax rates, during this year is around 23%-24%, we expect, by the end of the year to end that effective, tax rate around 26%. And for next year, we expect that effective tax rate to be 28%, Julian.

Julián Ausique (Equity Analyst)

Okay, just a follow-up on the asset quality. I would like to know your position about the commercial loans, if there is any sector that you are worried about or, and in which sector the Bancolombia has. There is any, like, worries about the sector in specific, like construction, energy, or something like that?

Juan Carlos Mora (CEO)

... The loans regarding commercial or commercial loans have been performing well. The sectors that has been affected are mainly around construction, housing construction, but that is already incorporated in our provisions. So we don't see a particular sector that has a or with a deterioration that worries us. So it's more regarding probably construction next year, and agriculture worries us a little bit because of climate and because of an El Niño that could affect the performance of the agricultural sectors. I think, Julian, those are the main concerns that we have as of today.

Julián Ausique (Equity Analyst)

Okay. Thank you very much.

Juan Carlos Mora (CEO)

Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and one. Once again, if you wish to ask a question, please press star and one. Our next question is from the line of Andres Soto with Santander. Please go ahead.

Andrés Soto (Executive Director and Equity Research Analyst)

Good morning to all, and thank you for the presentation. I have a couple of questions. The first one is regarding liquidity conditions in the Colombian financial system. This year was tough due to the under execution of the government. And we see that the budget for next year implies a significant expansion. Are you confident that this will translate in improvement in liquidity conditions? And based on that, what is your expectations for margins in 2024? That will be my first question. My second question is regarding the Nequi monetization process. Can you please walk us through how do you see this process going on? What is the source of monetization?

Is transactional income, it is floating, it is, new loans, and when are you expecting Nequi to be accretive to Bancolombia results?

Juan Carlos Mora (CEO)

Thank you, Andres, for your questions. Let me answer first your second question, and I'll pass your first one to José Humberto. Nequi continues its evolution. Now we are focusing on separating Nequi from Bancolombia, and that's where we are, or what we are doing now. We expect that process to end probably at the middle of next year. So Nequi will be a separate entity, fully owned by Bancolombia. We continue growing the number of users, it's now close to 18 million, one eight million, and the number of active users, monthly active users, is close to 13 million.

So the usage of Nequi, it's very, very, very high, and that's a source of a lot of information, but also regarding your question of monetization, of giving us the ground to move to profitability. You ask if what is our source of monetization, and it's going to come from different sources. Loans will be one, and we are already moving on that direction. The fees and transactions are also a source of monetizations. Insurance is also a good source of monetization. But that process will take time. So summarizing, we are focusing on separating Nequi.

Then from there, we will start, or we will continue our journey to profitability that we'll expect to consolidate during 2025. Andres, and your first question, I'm going to ask José Humberto to address.

Andrés Soto (Executive Director and Equity Research Analyst)

Yeah. Thank you, Juan Carlos. Before we go there, just to follow up.

Juan Carlos Mora (CEO)

Sure.

Andrés Soto (Executive Director and Equity Research Analyst)

So when you speak about the spin-off, that implies that Nequi will operate under a separate banking license?

Juan Carlos Mora (CEO)

Yes, that's correct, Andres. Nequi already applied for a separate banking license, and that process already conclude with the Superintendencia Financiera and was awarded. So we are in the process of completing all the requirements to operate as a separate financial entity with a separate license, a banking license, Andres.

Andrés Soto (Executive Director and Equity Research Analyst)

Perfect.

José Humberto Acosta (CFO)

Andreas, uh-

José Humberto Acosta Martín (CFO and VP of Finance)

... Okay, Andres, regarding your first question, we don't, we don't see any particular concern regarding banking industry with liquidity. Remember, in the first Q, there were potentially some pressure in order to the financials, institutions to comply with the Net Stable Funding Ratio. Today, we are having a very, very good level of comfort as a industry, particularly in Bancolombia. Remember that we have a very strong funding composition, basically because of our new level of transactionality. So just to give you an idea, the CASA funding is at around 60% of our funding. So for the end of the year, we don't see any particular concern.

Regarding your second question, margins for 2024, there will be some pressure of margins next year, particularly in Bancolombia, because of, loan growth next year, will be the main driver will be commercial with tighter NIMs. So we are expecting at the end of the year, maybe a compression of the NIM in between 20-50 basis points.

Andrés Soto (Executive Director and Equity Research Analyst)

Perfect. Thank you, Jose Humberto. And now that you are speaking about the general condition, the financial system, obviously, Bancolombia stands out because of the access to funding and, you know, like, the balance sheet. But, are you concerned in any way with what is going on with the economy and financial system? Can we see some banks belly up under these conditions that are not apparently to improve in the short term?

Juan Carlos Mora (CEO)

No, Andres. What we see is more a short-term, not a structural situation. Liquidity was an issue, as you mentioned, during the year. So some banks should go to the market and go for resources, and they had to pay an interest rate that affected their margins. But we don't see an structural situation that could be... Or that could generate some issues in the financial sector. We see more... I think that the level of capital, how the banks are performing in general in the financial system, it's good, so we don't see any issues from there.

José Humberto Acosta Martín (CFO and VP of Finance)

The best way to clarify that point, Andres, is if you double-check the Net Stable Funding Ratio of the system. All of us, we are complying above 105%. All of the banks, so we don't have any particular concern.

Andrés Soto (Executive Director and Equity Research Analyst)

Perfect. Thank you so much.

José Humberto Acosta Martín (CFO and VP of Finance)

Thank you, Andres.

Operator (participant)

Thank you. As there are no further questions, I would now hand the conference over to Juan Carlos Mora, CEO, for closing comments.

Juan Carlos Mora (CEO)

Thank you all for participating in the third quarter conference call. We expect the year to end in the same trend that we are seeing now. And we will present the results for the full year in February, where we will present the results of Bancolombia. As we mentioned during this call, what we are watching very carefully is the risk behavior of our clients, particularly on consumer loans, and also that's what we will be watching during 2024. So, that's the main, that is going to be the main driver of our results in the coming quarters.

So, hope you'll see, hope you be in the, in our next conference call, and I wish you a very good day. Thank you very much.

Operator (participant)

Thank you. The conference of Bancolombia has now concluded. Thank you for your participation. You may now disconnect your lines.