Bancolombia - Q4 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to Bancolombia's fourth quarter 2023 earnings conference call. My name is Robert, and I'll be your operator for today's call. At this time, all participants are on 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 hit star one on your telephone keypad. 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 current 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. 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'd now like to 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 fourth quarter results conference call. Please go to slide 2. As anticipated, 2023 has proven to be a year of significant challenges for the Colombian financial system. The prevailing high interest rates and inflation have had a discouraging effect on credit growth, resulting in reduced net interest income generation. Furthermore, these factors have adversely impacted loan quality and led to an overall increase in operating costs. In light of the prevailing macroeconomic environment, Bancolombia's net income for the quarter reached COP 1.4 trillion, indicating a 2% reduction compared to the preceding quarter. For the entire year, the net income amounted to COP 6.1 trillion, representing an approximate 10% annual decline.

The primary drivers contributing to this decline are, firstly, a 1.5 quarterly and 6% annual contraction in the loan book portfolio due to the reduced credit demand and diminished risk tolerance, resulting in slower growth of interest income. Secondly, a net provision charge that increased by 7% quarterly and 97% annually, consistent with the current credit cycle. Thirdly, higher operating expenses, which despite stringent cost control measures, remained under pressure due to increased taxes and labor costs. In addition, it is crucial to highlight the substantial 20.5% annual and 5.7% quarterly appreciation of the peso, leading to a decrease in the volume of loans and the interest income contribution of the dollar portfolio in the consolidated financial statements.

As the loan portfolio experienced continued repricing at elevated interest rates, the cost of risk was recorded at 2.7% for the quarter and 2.8% for the entire year. This reflects the anticipated slowdown in the past-due loan formation compared to the first half of the year, which was a result of the comprehensive measures taken. The efficiency ratio ended the quarter at 49% and 45% for the entire year, indicating that the growth in operating expenses surpassed the growth in income, as previously discussed. The aforementioned factors exerted downward pressure on the return on equity, resulting in a 15.2% ROE for the quarter and a 16.1% for the entire year.

The Total Solvency Ratio experienced a notable increase of 57 basis points during the quarter, ending the year at 13.4%. This positive development was primarily attributed to a significant expansion of 105 basis points in Core Equity Tier 1. Bancolombia's robust organic capital origination capabilities, coupled with a reduction in the risk-weighted assets, were the driving forces behind this achievement. As a positive indicator and a testament of the bank's inherent capabilities, the generation of sound Net Interest Margin has proven sufficient to absorb increased provisions, expenses, and costs, while maintaining Return on Equity. The aggregate of Central American banks and offshore operations made a larger contribution to the overall group results, despite the prevailing economic and political environment in each country.

We maintain our conviction that the recent downward inflationary trends in Colombia will enable the Central Bank to pursue a sustained interest rate reduction strategy. This, in turn, is suspected to stimulate credit demand and improve asset quality in the long term. We anticipate opportunities for credit growth, primarily in housing, renewable energy, and agribusiness sector as the government advances public spending. For a more in-depth analysis of the macro outlook, I will pass over the presentation to our Chief Economist, Laura Clavijo. Laura?

Laura Clavijo (Chief Economist)

Thank you, Juan Carlos. Now, please go to slide 3. The global economic backdrop of tight financial conditions, declining consumer demand, and lower commodity prices, combined with local challenges due to high inflation, low investment, and receding consumer sentiments, carve the path to a significant economic slowdown in Colombia. Overall, 2023 proved to be a very challenging year for the Colombian economy, and resulted in GDP growth of just 0.6% year-over-year, the lowest level in over three decades, excluding the COVID years, and well below market expectations and our own forecast of 1.2%. Despite the lackluster results, the final quarter of 2023 signaled a slight expansion of 0.3%, rebounding from a 0.6% contraction during the third quarter, mainly driven by 6% growth in agriculture and 5% expansion in public administration.

Construction, manufacturing, and retail sales continue to underperform. The biggest culprit to economic stagnation lies with public and private investment, which fell close to 25% during 2023. Total investment as a percentage of GDP has consistently declined since the pandemic, from levels of 20.2% to just 17% last year. This scenario weighs heavily on our GDP outlook for 2024, which stands at 0.9% annual growth. On the more positive side, inflation has continued its downward trend, closing the year at 9.3% and falling further towards the 8.3% mark in early 2024. Receding food prices help explain much of the descent, but core inflation has come down consistently towards 7.9%.

The drought season coming from El Niño has pressured energy prices to some extent, but has proven to be much milder than initially expected. We maintain our 5.9% year-end inflation forecast, considering some upward pressure from potential diesel price hikes and the effects of stubborn prices in services such as housing. Given this macro scenario of falling inflation amidst the economic slowdown, the Central Bank began cutting interest rates in late 2023 and early 2024, accumulating a 50 basis point reduction thus far.

Currently, the intervention rate stands at 12.75%, and we expect it may come down towards the 9% level at year-end. We maintain our view that 2024 will be a year of gradual recovery, especially during the second half of the year, when interest rate cuts will begin to pick up speed. Now, please let me turn the presentation back to Juan Carlos, who will present Bancolombia's quarterly performance.

Juan Carlos Mora (CEO)

Thank you, Laura. Before discussing the quarter's results, I would like to provide an overview of the advancements made in several initiatives that are aligned with our four value-driving pillars. These pillars significantly contribute to our market leadership, operational soundness, and the scalability of our business model. Please go to slide 4. Under our first pillar, which embraces our client-centric approach, we would like to share the developments we have made as a part of our capabilities as a service model. This model is based on the open banking regulations approved in Colombia, making it the third country in Latin America to achieve this significant milestone, following Brazil and Chile. The regulation establishes the foundation for financial and non-financial entities to disclose, coordinate, and utilize data. It complements the Central Bank's immediate payments system framework, introduced in October, and anticipated to be fully operational by 2025.

While there are some potential risks to our strong position in the transactional space, we anticipate numerous opportunities and avenues for growth. Our multi-channel platform is well established. We have made significant progress in developing our ecosystem model, and we have already made a range of APIs available. The two primary sources of growth originate, firstly, from the immediate payment system framework, which will streamline all types of payments, processing through a low-value payment system managed by the Central Bank, with real-time clearing, thereby reducing operational costs and improving user experience. Secondly, it will enable us to further integrate our financial capabilities into new marketplaces, promoting financial inclusion and enhancing the value proposition for our clients.

Notably, we pioneered the launch of a new feature on our app for account aggregation, allowing our clients to manage all their financial data in a centralized location and interact seamlessly through a single app. Furthermore, we are delighted with the positive development and performance of our banking-as-a-platform, as-a-service models, as they have enabled us to innovate and explore novel business models. As of the end of 2023, we had processed close to 50 million transactions, resulting in deposits and fees of COP 7.7 billion. Notably, these models have demonstrated remarkable growth, with compelling compounded annual growth rates of 16% and 14% respectively, over the past five quarters. This indicates the substantial potential for further expansion under our ecosystem approach.

On slide five, under our second value driving pillar that focuses on our digital capabilities and multi-channel platform, I would like to elaborate on what we believe is the most compelling evidence of the robust competitive advantage we have built in this area. For over a decade, we have strategically invested in the development of a comprehensive, resilient, multi-channel, and interoperable platform. We recognize the critical role of each channel in our business strategy. As illustrated in the accompanying graphs, the platform has emerged as a powerful instrument for acquiring new customers, particularly those who are unbanked or underbanked, and seek affordable money transfers and cash withdrawal solutions. Consequently, we have achieved exponential growth in transactional volume, increased fee revenue, and significantly enhanced our ability to attract and retain deposits. In response, there has been a substantial raise in highly diversified, low-value, and low-cost sticky deposits.

These deposits have primarily come in through savings accounts, and more recently, through digital time deposits. Notably, digital time deposits have experienced a remarkable compounded annual growth rate of 125% over the past 5 years, aligning with our digital transformation. Certainly, this well-structured strategy serves as a reliable foundation for maintaining a competitive funding cost, thereby enhancing NIM performance and overall profitability. On slide 6, under our third value driving pillar of structural capabilities that provide distinct market advantage, I would like to highlight the credit risk model we have developed for corporates, mid-sized companies, and most SMEs. We consider this model as a key differentiator in assessing credit risk, which significantly contributes to superior performance of our commercial loan portfolio, compared to that of major Colombian banks.

This is evident in the latest report released by the Colombian Financial Superintendency, which measures performance based on the 90-day past due loan ratio. Our model employs an end-to-end credit cycle approach, supported by a comprehensive suite of tools for assessment, rating, follow-up, and collection. Underpinned by extensive research and well-articulated sectoral risk assessments, our model provides an in-depth understanding of each industry and its cycles. This enables us to effectively diversify our portfolio, identify early warning signals, anticipate potential challenges, and support our customers with tailored solutions. The most notable and valuable feature is the advanced analytical model. It draws upon the client's transactional and cash flows insights captured on our multi-channel platform. This provides a unique risk perspective, freeing us from the sole reliance on financial statements. By leveraging our unparalleled insights, we have meticulously crafted a robust risk assessment framework.

This framework has been instrumental in evaluating over 600,000 SMEs and 15,000 corporate clients in Colombia. Currently, we manage approximately COP 120 trillion in commercial loans under this model. Notably, our portfolio has consistently outperformed industry peers. Lastly, on slide 7, regarding our fourth value driving pillar, which is the culture of efficiency and productivity, we would like to present the evolution of our digitalization strategy. In addition to the benefits of attracting more clients and transactional flows discussed earlier, it has also provided substantial efficiency gains and flexibility, enabling us to allocate resources more effectively. Over the past decade, there has been a significant shift in the way monetary and non-monetary transactions are processed. In the early 2010s, nearly 30% of these transactions were conducted through physical channels, such as branches.

However, by the end of 2023, this figure had plummeted to just 8.3%, with branches accounting for a mere 0.3% of all transactions. This strategic shift has involved the closure or transformation of branches into sales points, with the aim of routing transactions through less expensive channels. Consequently, we have successfully reduced our overall fixed costs by replacing physical channels, primarily branches, with digital channels and variable cost-based channels, such as banking agents. This strategic move has enabled us to expand our reach and enhance user experience while maintaining operational efficiency. Furthermore, we are pleased to report continued advancements in the scalability of our business model, which will enable us to capture additional gains in efficiency and productivity. Now, I would like to invite José Humberto Acosta to provide further elaboration on our fourth quarter 2023 results. José Humberto?

José Humberto Acosta (CFO)

Thank you, Juan Carlos. Please go to slide 8 to discuss results of our Central American operation. Despite the lower share of the Central American loan book on a consolidated basis, explained to a large extent by the peso appreciation, almost all banks increased its contribution to net income. However, when broken down by each bank, their performance in the quarter is mixed. Banistmo sustained its NIM, despite a loan contraction, a actually lower provision charge, but delivered a lower return on equity quarter-over-quarter on the back of higher costs. Likewise, Banco Agrícola also posted lower interest income due to a higher interest expenses and below-average provision charges, as the loan portfolio performed better than expected, contributing to a higher return on equity versus the previous quarter, that reached 24.1%.

On the other hand, Banco Agromercantil had low loan book growth after a large commercial loan prepayment and subdued growth in consumer that impact interest income. Provision charges increased on the back of old vintages, consumer loans, and a corporate loan, driving net income to a loss. It is also worth mentioning that despite higher loan deterioration, all 3 banks run with comfortable level of 90-day past due loans coverage, providing balance sheet protection. We remain positive on El Salvador's micro performance, but more cautious about Guatemala, given the most recent political and social unrest, and with Panama, due to the more challenging fiscal outlook as per the lower tax collection. Please go to slide 9. Consistent with the trends seen in the previous quarter, the consolidated loan book contracted 1.5% quarter-over-quarter, and almost 6% year-over-year.

Not surprisingly, this reduction reaffirms the impact of the persisting high interest rates, as this has discouraged credit demand and has provided incentives for prepayments and shorter dated loans that limits the loan book growth. Furthermore, a 20.5% year-over-year peso appreciation reduced the contribution of the loans denominated in US dollars. Net of effects, the loan portfolio will have increased 1.5% on a yearly basis. From a segment perspective, consumer portfolio keep driving the largest contraction, with a 2.6% reduction quarter-over-quarter, and 8.4% year-over-year, as expected. Please go to slide 10. Total deposits increased 1.5% quarter-over-quarter, explained most by a seasonal effect, as the government-related entities in Colombia tend to increase its deposits on year-end.

Year-over-year, deposits dropped 1.2%, consistent with the weaker credit demand. Nevertheless, there was an interesting change in the funding mix dynamics during the quarter, as time deposits dropped 3%, whereas savings, current accounts, and other deposits increased. Year-over-year, however, time deposits increased its share in the total funding mix to 35%, up from 30%, after the strong growth on the first half of the year. Consistently, on a yearly basis, the pace of growth of time deposits dropped to 13.3%, laying grounds for lower interest expenses ahead. Consequently, the cost of funding fell slightly to 5.8%, an early signal of interest expenses reduction as the rate subsides, a situation for which we continue adjusting our liability structure to provide margin protection.

As a matter of fact, as of year-end, the share of fixed rate time deposits maturing in less than a year was 70%, up from 68% as of September. Please go to slide 11. Total interest income and valuation of financial instruments increased 4% quarter-over-quarter, supported by, first, a 67% growth on interest and valuations on financial instruments as per higher valuations on an enlarged securities portfolio held during the period, coupled with a fall in the rates, and second, by a 1% growth on interest income on loans and financial leases, mainly attributable to the loan portfolio pricing dynamic. On a yearly basis, total interest income and valuation of financial instruments increased 38%, albeit at slower pace than the previous year, and driven mainly by a 42% growth on interest on loans and financial leases.

On the other hand, interest expenses was flat quarter-over-quarter, as interest on deposits remained unchanged, and coupled with a slight reduction on interest on bonds and interbank borrowing. On an annual basis, however, interest expenses grew 97%, driven mainly by a 170% increase on interest expense on deposits as per the larger stake of time deposits and higher interest rates. Nevertheless, the pace of annual growth is subsiding, consistent with the annual drop of deposits. Despite the loan book contraction, NII grew 8% quarter-over-quarter and 11% year-over-year due to an increase in interest income, whilst interest expense remained flat and is mainly attributable to the Colombian operation, as 67% of the loan portfolio is floating, in contrast to a 34% of deposits.

Thus, the NIM in Colombia was receding to subside inflation and short-term reference interest rate, as shown on the bottom hand side graph. Consistently with the above, NIM expanded 47 basis points quarter-over-quarter to 7.28%, driven by the remarkable 354 basis points expansion in the investment NIM as per the securities portfolio's strong performance this year so far, coupled with the 11 basis points growth on the lending NIM. Thus, NIM for the full year was 7%, a 20 basis points expansion year-over-year on the back of a strong 8% annual NIM in Colombia, reaffirming the competitive advantage in funding and its asset sensitive condition. Please go to slide 12. Net fee income increased 7% quarter-over-quarter, mainly attributable to a higher volume of transactions associated to a year-end seasonality.

Payment and collections, banking service, and bancassurance-related fees grew the most on a percentage basis on a quarterly and a yearly basis. However, year-over-year, it grew close to 5%, admittedly below expectations, as fee expenses growth outpaced the fee income growth, coupled with a higher third-party provider cost and processing charges. Fee income ratio for the full year reached almost 19%. Please go to slide 13. As shown in the upper left-hand side chart, the slowdown in the volume of past due loan formation continued during the quarter, consistent with the trend seen since the second quarter of 2023, although admittedly at a slower pace than expected. This, coupled with an uplift in charge-offs quarter-over-quarter, prove our efforts and commitment to preserve a healthy balance sheet.

Despite this positive, albeit still mild, new past due loan evolution, asset quality metrics exhibited a quarterly and annually deterioration, as the 90-day past due loan ratio reached 3.3%, implying a 110 basis points year-over-year increment, explained by the loan portfolio contraction during the last 12 months, rather than by an escalation in the pace of past due loans. On the other hand, given the higher charge-offs in the quarter and the fact that some loans of which provisions had already been charged became due during the period, the 90-day past due loans coverage ratio fell to 184%, although still proving a strong coverage to the balance sheet.

Moreover, net provision expenses for credit losses for the quarter was COP 1.7 trillion, a 7% increase quarter-over-quarter, and equivalent to a cost of risk of 2.7% for the period. When breaking down the provision charge for the quarter into its components, the results were mixed. First, on the SME segment, there was a COP 22 billion decrease quarter-over-quarter, driven by releases related to loans prepayments. Second, on the consumer segment, provision expenses was almost flat quarter-over-quarter, as past-due loan formation is being contained, as we will further elaborate. Third, on the large exposure segment, there was a Colombian pesos, a COP 168 billion charge, explained by additional provisions on a handful of loans related to construction and retail sectors.

Fourth, in the case of mid-sized companies and corporate, there was COP 93 billion released to provide several prepayment of settlement with clients. Year-over-year, net provision charge increased 97%, attributable mainly to deterioration in the consumer segment in Colombia, as we will further elaborate, and to a lesser extent, on SME and a certain corporate loans, consistent with the current economic and credit cycle. From an expected loss perspective, stage one remained flat year-over-year, as deterioration is being contained, whereas stage two decreased and stage three increased as per non-performing loans roll over. However, the combined coverage for stage two and three loans increased 17 basis points to almost 40%.

Going forward, we remain confident that the pace of past-due loan formation will keep its slowdown trend, due to all measures taken and as lower rates release some pressures on debt or cash flows. However, we remain cautious and expect higher delinquencies and SMEs on the back of the weaker economic performance. Moving to the slide number 14, I will further discuss on credit quality in Colombia. In line with the past quarters, personal loans that hold a 52% share of consumer loans, accounted for most of the deterioration during the period, increasing its 90-day past-due loan ratio to 7.4%, reaching a cost of risk of 16.7%, with a 20% of loans in stage two and three.

On the flip side, credit cards, auto loans, and payroll loans all perform better, reducing their cost of risk and their share of loans in stage two and three, signaling better asset quality conditions ahead. Moreover, when it comes to evolution of past-due loan formation, as shown on the upper right-hand side graph, despite the low new past-due loan level in the quarter, the ratio of deterioration increased due to a high level of charge-offs. Notwithstanding the above, past-due loan formation in the second half of the year certainly grown below the average of the first half. And most importantly, new businesses in Colombia continuing performing well, and thus we foresee an improvement in all metrics going forward.

As a matter of fact, after falling for 3 consecutive quarters, the volume of new consumer loans slightly increased during the fourth quarter, leveraged on the new origination standards and the portfolio better performance. As the sector-wide metrics, we continue performing with the lowest 90-day past-due loan ratio for the Colombian financial system as on October 2023, driven by our superior risk framework and capabilities that allow us to better assess credit behavior and mitigate deterioration. Please go to slide number 15. The cost to income ratio for the period was 48.6%, as operating expenses grew 6.6% quarter-over-quarter, attributable to IT investments and general expenses. On the other hand, personnel-related expenses were flat quarter-over-quarter. On a yearly basis, operating expenses grew almost 19%, driven by the high annual wage increase.

Other taxes introduced to the tax reform of 2022 and IT-related investments, devoted mainly to the journey to the cloud and business transformation. However, it is worth mentioning that the pace of OpEx growth receded during the second half of the year, given the reinforcement of cost control measures. Moreover, if we were to deduct taxes, actuarial valuations on certain employees' benefits, and FX variations, the annual growth of operating expenses would have been 14% in tandem with inflation. The Efficiency Ratio for the full year was 45.3%, a slight increase compared to 2022, given the overall higher cost and taxes environment. Please go to slide 16.

Net income for the quarter was COP 1.4 trillion, equivalent to a 3% drop quarter-over-quarter, and COP 6.1 trillion for the full year, equivalent to a 10% drop year-over-year, driven by lower income generation as per the loan book contraction and the FX appreciation, in tandem with higher credit and operating expenses. In turn, return on equity receded to 15.2% on the quarter and 16.1% in the full year, which adjusted for goodwill, results in a return on tangible equity of 21%. That shows the profitability of the operation isolated of goodwill-related costs.... And finally, on slide 17, I will present the evolution of capital generation.

Shareholders’ Equity grew 1.5% quarter-over-quarter and contracted 2.6% year-over-year in tandem with assets, reflecting the bank’s capital generation capacity that preserves a sound balance sheet structure. Basel III total capital and equity ratio reached 13.4%, increasing 57 basis points over the quarter and 6 basis points year-over-year on the back of a strong Tier I expansion, with a 105 basis points year-over-year increase, attaining 11.4% for year end. This positive expansion is a result of net income generation, lower risk-weighted assets, and FX appreciation during the year. With this, I will hand over the presentation back to Juan Carlos for some final remarks. Juan?

Juan Carlos Mora (CEO)

Thank you, José Humberto. Please proceed to slide 18 for some remarks concerning our sustainability strategy. As of the conclusion of the year 2023, we have successfully exceeded the COP 140 trillion milestone in the total disbursements under our Business with Purpose strategy, which was initiated in 2020. Notably, approximately COP 38 trillion worth of new loans were granted during the preceding year. These loans have been instrumental in providing financial support for various initiatives, including small-scale agribusiness ventures, green building projects, and gender-related endeavors, among others. With regard to environmental matters, we are pleased to inform you that we successfully completed our first set of disclosure information in accordance with SASB standards for the commercial mortgage, investment banking, and asset management units last year.

Additionally, for the third consecutive year, we have released our TCFD report as mandated by local regulations, thereby enhancing the understanding of our commitments and accomplishments. In terms of economics, the Dow Jones Global Sustainability Index recently evaluated us one more, and we received a score of 78 out of 100 points. This accomplishment is a testament of the strength, influence, and openness of our ESG framework. Finally, on the social front, 12 of the financial education programs we designed to provide financial well-being to our customers were certified by the Superintendency under its standards, making us the leaders in this important area in Colombia. Lastly, on slide 19, I will share our guidance for the end of 2024, based on the current data and our macroeconomic forecast.

By the end of 2024, we anticipate a loan growth of approximately 3% in peso-denominated loans and 5.1% in dollar-denominated loans. We project a net interest margin of around 6.8% based on the expected lower average reference rate set by the Central Bank. The cost of risk is anticipated to decline to 2.6%, driven by lower interest rates and inflation. The efficiency ratio is expected to be approximately 49%, influenced by reduced interest income and ongoing investments in business transformation. Consequently, we forecast a return on equity in the range of 14% and a Common Equity Tier 1 ratio of around 11%. In closing, I would like to inform you that we recently announced the proposed dividend, which will be discussed at the annual shareholders meeting on March 15th.

The dividend paid out will be 62%, equivalent to COP 3.4 trillion, and will be paid in four quarterly installments of 3,535 COP per share throughout the year. With that, we conclude our remarks on the fourth quarter 2023 results. We are now ready to address any questions you may have.

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you have a question, please press star one on your touchtone phone. If you wish to be removed from the queue, please press star two. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touchtone phone. One moment while we poll for questions. Our first question comes from Tito Labarta with Goldman Sachs. Please proceed with your question.

Tito Labarta (VP)

Hi, good morning. Thank you for the call and taking my question. My question on the efficiency guidance that you gave. Understand, you know, some pressure on margins from lower rates, but what kind of expectations do you have there for expense growth and fee income growth? And, you know, how long do you think you'll continue to invest sort of from a digital perspective? When could you see some benefits from that? And, you know, where should we think of the efficiency ratio, sort of longer term as things normalize a bit? Thank you.

Juan Carlos Mora (CEO)

Thank you, Tito. Our guidance regarding efficiency for 2024, it's 49%, and let me explain why. We ended 2023 in around 45% figure on efficiency. What we think will happen during 2024 is that we will have some decrease on the margins. Volume even though we expect some loan growth, and we expect that loan growth to be around 8%, but the combination of not big growth on volume and a slight pressure on margins will affect the income. On the expenses side, we expect the total expenses to grow at around 9%.

That, if you do the math, that implies or that the result is that 49% Efficiency Ratio that I'm mentioning. We have. So it's from the income side, and also, we are moving to control expenses and to be close to inflation, to grow expenses closer to inflation. Regarding fees, we expect fees to grow at around 10%, based on the services that we are providing, bancassurance, cards, and the different services that we are providing. And that's for 2024. Regarding the years, well, the 2025 and 2026, we think that efficiency should move or should be around that figure of 50, moving probably between 48% and 52%.

Tito Labarta (VP)

Okay, thanks, Juan Carlos, that's helpful. So do you think by 2025 and 2026, the expense growth will be closer to inflation? Or when do you expect the expense growth to be closer to inflation?

Juan Carlos Mora (CEO)

Yeah. We will move closer to inflation, but I want to address one part of your first question, and it's when are we going to stop investing on digital? And I think, Tito, with the dynamics of the sector, competition, new technologies, it's very difficult on the banking sector to stop investing in technology. We will be moving towards or will be on cloud probably full in 2026, and that will help very a lot on expenses, and we can be more agile. But expenses on technology will be important in the coming years, Tito.

Tito Labarta (VP)

Great. No, thanks. That’s helpful, Juan Carlos. Sorry, if I can, just one follow-up, I guess, from that perspective.

Juan Carlos Mora (CEO)

Sure.

Tito Labarta (VP)

How do you see-

Juan Carlos Mora (CEO)

Sure, go ahead.

Tito Labarta (VP)

Just sort of the competition from, you know, fintechs, other competitors becoming more digital, you know, do you see that as a significant threat? Do you think you're well positioned for that? And, I mean, do you see long-term benefits from that, you know, better efficiency?

Juan Carlos Mora (CEO)

Yeah. Competition is increasing. There are new players in the market, and that's good because that force us to be also better. We keep growing on number of customers, on number of transactions, on our relevance on the Colombian market. So we compete with peers, with banks like us, but also newcomers. As you know, Nubank announced that they now have the authorization of the Financial Superintendency to be a bank or a commercial financial entity, as we call it in Colombia. So they will now offer savings accounts, and that they will be definitely a player.

But we think we are very well positioned, the number of clients that we have, the scale, and mainly, our main advantage is our network of channels and how they are integrated and the coverage that we have around the country. It is worth to remember that still in Colombia and in many other Latin American countries, cash is important. So how cash in and cash out from in on the digital environment is very important. It is as important as the digital environment that you have. And we have both. We have the channels and the digital environment. So competition, of course, always you have to take into account what they do, and they are good, definitely. But I think at the end, we will benefit all the market and as a place in this environment, Tito.

Tito Labarta (VP)

Okay, that's great. Thank you, Juan Carlos.

Juan Carlos Mora (CEO)

Thank you.

Operator (participant)

Our next question is from Yuri Fernandes with JP Morgan. Please proceed with your question.

Yuri Fernandes (Executive Director of Equity Research)

Hey, hey, guys. Thank you. I have two quick ones. One is regarding your tax rate. I know it really depends on ex-Colombia operations and also your securities in the country, usually you have some tax-exempt instruments, but 25 has been a bit on the low end, I would say. So just a guidance on effective tax rate, how much you believe the tax rate should evolve in 2024, 2025? If you see the 25% effective tax rate level as sustainable, or if this should be higher? That's the first one. A second one regarding Tuya. We saw an impairment this quarter. I think this, you know, was a headwind for your results, about COP 100 billion pesos.

So just checking, if you can explain a little bit what happened, if we should see this, you know, on a yearly basis or no, it's more non-recurring. That would be my second one. And a third one, if I may, regarding FTSE. If you have an estimate on the potential outflow impact from the removal from FTSE, that would be my final one. Thank you very much.

Juan Carlos Mora (CEO)

Thank you, Yuri. I am going to address your first two question, and I'm going to ask José Humberto to help me with your third one regarding the FTSE situation. Tax rate. I want to be clear regarding the tax rate. We have statutory tax rate in Colombia and also in the different countries, but when we combine the tax rates, the statutory and effective tax rates in the different geographies and in Colombia, and our situation, our fiscal situation in Colombia regarding taxes, that 25% effective tax rate that we had in 2023, we think that is sustainable around 26% effective tax rate for the coming 2 and 3 or 3 years.

So regarding your question and our guidance is our effective tax rate for the coming years should be around 26%, with the current rules that we have, Yuri. So, it is because we have, as I mentioned, a corporate structure that allow us to be efficient, regarding taxes in the coming three years. Your second question, Tuya. Tuya is a financial commercial institution. They take deposits or mainly the way they fund is through time deposits. And during 2023, there were periods in which the liquidity in the Colombian market was difficult, was tight. And in that situation, small institutions had to go to a market, and they had to pay high interest rates for their funds.

Not just Tuya, many others. And on the other side, the income was affected because the maximum rate that institutions could charge in Colombia went down because of the Superintendency changed the way the formula to calculate it. Closer to 45%, that's the cap rate that we had in 2022, at some point, and came down to 35%, even 33%. So that squeezed the margins. If you have the liquidity issue and then you have to pay more for funds, and the income was going down because of what happened with the maximum rate, so the margin was lower. And on top of that, there were more risks.

So at the end, what happened is a smaller margin to cover higher risk. That, that's explains. And that happened to other institutions that, or entities, financial entities, that are focused on, on, cards, mainly on credit cards. So it's not something that happened just to Tuya, it was a, a general issue in, in, in, in the market. We are taking the measures to reverse that situation, moving to different products, taking less risk. Our risk appetite now is lower, so we expect that, that situation, even though we could have some, still some pressures in 2024, 2025 will be, will be different and Tuya will be profitable again, Yuri. And, and I'm going to pass your third question to José Humberto.

José Humberto Acosta (CFO)

Yuri, good morning. Yes, the consequences of being removed from the index, it will have three different moments yesterday, Monday and Tuesday, as you probably checked, the price of the ordinary shares dropped at around 5%. We believe that the next coming 2 weeks, there will be a stabilization of the price of the share, but then on March 15, the date in which the new calculation will take effect, we are going to see another drop in the price of the ordinary shares.

The second element that I have to highlight is the level of floating of the ordinary shares is very low, at around 10% of the ordinary shares, so the numbers will change in this floating. The third element is, remember that the ADR, plus the preferred shares, those are the shares with a high level of liquidity, and we don't foresee any particular concern regarding those shares. Summarizing, the selloff based on some calculations that we received from some analysts, there will be a potential selloff of, at around $70, 70 million in the next coming days.

Yuri Fernandes (Executive Director of Equity Research)

No, that's super clear, José Humberto, super clear. And regarding Tuya, I totally get it. My point is that if not for Tuya, your results, they would be, you know, even, even better, this quarter. So I get it's a tough situation in Colombia, but try to see the glass half full, you know, and maybe the underlying results of the bank per se were better. But thank you for the clarification, everyone. Thank you, and good luck in 2024.

Juan Carlos Mora (CEO)

Thank you very much, Yuri, for your comments.

Operator (participant)

Our next question comes from Andres Soto with Santander Mexico. Please proceed with your question.

Andres Soto (Executive Director of LatAm Equity Research)

Good morning to all, and thank you for the presentation, the opportunity to ask questions. My first question is related to your outlook for NIM, but not in 2024, but rather once interest rates normalize in Colombia. What is the level for normalized interest rates? That will be the first question, and based on that, what is your expectation for NIM? My question basically is, in the past, when Colombia used to operate at a NIM of 5.5%, something like that, so you are still 130 basis points above that level in 2024. I'm curious about the ROE guidance of 14%, and what will be the outlook once interest rates fully normalize?

Juan Carlos Mora (CEO)

Thank you, Andres. NIM, as you mentioned, improved because of what happened with the interest rates in the markets where we operate, but also because we changed the mix in our balance sheet between commercial and consumer loans. So there are two effects. When the normalization of the interest rates we will have pressure on the NIM, of course. What we expect, and you mentioned 2024, what we expect for 2024, is that the NIM to be around 6.8, and that normalization process should keep happening, and we expect that margin to be around 6.3-6.5 moving on in the coming years. And that's explained mainly for the mix that we have in our balance sheet.

We have more SMEs and medium enterprises, and we could charge higher interest rates to those entities, but also we have a bigger mix of consumer loans. So that's why we expect that our NIM should be not... It's not going to what was our NIM around 6.8- 5.9, sorry, that we had in the past. And with that, I'll, I will, I, I could affirm that our ROE in the midterm should be around 14%. I don't know if José Humberto wants to complement me with something in this answer.

José Humberto Acosta (CFO)

Yes, Juan Carlos, thank you. On the funding side, Andres, we have a structural change, which is you see that CASA represents 50% of the funding, and the correlation with the interest rate is it's lower than the correlation that we are having with time deposits. So for the next cycle, as Juan mentioned, that the interest rate will come down, we have a, if I may say, natural protection because of the CASA funding. And remember that most of our time deposits are short-term, more than 60%, so that is why our guidance or our forecasting for NIM is to remain at the level that Juan mentioned, which is at around 6.5%.

Andres Soto (Executive Director of LatAm Equity Research)

Thank you, Carlos and Humberto, and based on this, can you please provide a sensitivity, in terms of points versus the policy rate?

José Humberto Acosta (CFO)

Yes. We have been managing our sensitivity because our floating is around on the asset side, on the loan side is 60%-70% of the loan portfolio, but on the other side, the floating on the liability side, it's at around 40%, plus savings accounts, that which accounts also as a floating as well. So the number is 30 basis points for every 100 in change of interest rate of the Central Bank.

Andres Soto (Executive Director of LatAm Equity Research)

And also, thank you, José Humberto. My, my second question is related to cost of risk. I was checking my notes from the previous call. In the previous call, you mentioned your expectation for 2024 was for the cost of risk to be in between 2.3%-2.5%, so around 2.4%, let's say. And now you are saying 2.6%. So I would like to understand what happened, what changed over the past three months for you to have a more cautious view on cost of risk?

Juan Carlos Mora (CEO)

Yes, Andres, we, we changed or we increased a little bit our view on cost of risk because we had the results of the GDP growth of 2023, that was disappointed. It was 0.6%. The market was expected something around 1.2. There were even some analysts expecting 1.5. The most pessimistic analysts were expecting 1, and the figure ended being 0.6%. So that made us more cautious regarding 2024.

But even though we feel that in terms of how are we handling, how are we originating consumer loans, how are we doing or working with our or on the commercial side of the portfolio, still we think that we will have an improvement on the cost of risk, but we are more cautious, and we will be updating this figure as the year moves on. I think we will have a clearer view around mid-year of how things are evolving. I think first quarter will be key to determine or to see the evolution of the Colombian economy.

We expect the government to start implementing some countercyclical measures regarding housing, infrastructure, so that we think will have a positive effect, even though our view for the year, as you know, is that the GDP growth for 2024 should be around 0.9%, which is low for Colombia. Better than 2023, but that's why, Andres, we are cautious about regarding the cost of risk. José Humberto, want to complement something? Yes.

José Humberto Acosta (CFO)

Thank you, Juan Carlos. The other element is the change in our view of inflation and interest rates. Three months ago, six months ago, we believed that the interest rate and inflation will drop beginning February and March, but you see that we are an outlier in terms of inflation and interest rates. So that's the other reason why we believe the first half of the year we have also an increase in cost of risk.

Andres Soto (Executive Director of LatAm Equity Research)

That, that's very clear. You guys mentioned at the beginning of the presentation that one of the areas where you need to do monitoring is the SME segment, right? So far, most of the deterioration in your loan book has come from the consumer, now you are looking into the SME. Looking at your corporate book, is there any, any sector in the economy that you think may be, may be suffering with this environment in 2024, with high interest rates and still high inflation?

Juan Carlos Mora (CEO)

Andres, we are monitoring very closely SMEs, as you mentioned, but we haven't seen so far a deterioration outside our forecast. Sectors in particular, construction, particularly housing construction, is something that we are monitoring and working with our clients in restructuring some of their loans. So particularly, construction, housing construction, and another sector that even though our exposure it's very, very low or is low, it's the health sector. Health sector concerns us, and we think that there will be... there could be some deterioration in, in on health, on the health sector or the participants on the health sector, Andres.

Andres Soto (Executive Director of LatAm Equity Research)

Understood. Thank you very much, Juan Carlos and José Humberto.

Juan Carlos Mora (CEO)

No, thank you.

Operator (participant)

Our next question is from Carlos Gomez with HSBC. Please proceed with your question.

Carlos Gomez (Head of LatAm Financial Institutions)

Morning, and thank you for taking my question. It is about your foreign subsidiaries. What we see is that you have reported a very high number in El Salvador, but we understand it has to do with reversals of provisions. Do you have a in Panama? Could you tell us what you expect your normal profitability to be in each of the markets in which you operate in Guatemala and in Panama? And second, going back to expenses, I mean, you mentioned earlier that without taxes, growth will be 14%, but inflation, I believe, is 9, so that is still significantly above inflation. Could you explain that a bit further? Thank you.

Juan Carlos Mora (CEO)

Carlos, we had some difficulties with the line. I just want to be sure that we understood your question. Your first question is regarding the profitability of our operations in Central America. Is that correct?

Carlos Gomez (Head of LatAm Financial Institutions)

That's correct, and apologies for that.

Juan Carlos Mora (CEO)

Yeah, and the second one is regarding expenses, and the explanation we gave around the expense, the operating expenses growing 9%, and that compares with the 40% tax rate, was your-

Carlos Gomez (Head of LatAm Financial Institutions)

No, no, no. You mentioned, you mentioned that without extraordinary items your growth was about 14% last year, but again, inflation was lower than that, so we wonder if, you know, you will continue to have high expense growth.

Juan Carlos Mora (CEO)

Understood. Thank you, Carlos.

José Humberto Acosta (CFO)

Carlos, yes. Regarding Salvador, historically, Salvador has—well, it is one of our operation with the lowest cost of risk. In this case, what happened is we change and update the models with new data, and that's the reason why the level of provision is coming down. And this is one of our most profitable operation, with more than 20% return on equity and a very stable cost of risk. If you double check the last three years, we have been on the area of 1%. Regarding operating expenses, what happened this year, the 9% that we are forecasting, remember that beginning of the year, we have been with the high inflation that came from 2023, so most of the prices are adjusted because of CPI.

And the other element is the minimum wage in Colombia was 12%. So both elements implies that we began with a high level of expenses, but 9% is, is a number doable for the year, and we believe that at the end of the year, as Juan mentioned at the beginning, we are going to reach an efficiency level below 50%. That will be at around 49%. But the main reason why it's 9% is because of the CPI of 2023, and, basically, this is the main reason.

Carlos Gomez (Head of LatAm Financial Institutions)

On the foreign subsidiaries, I wondered what your normal ROE would be for each of them. In the case of El Salvador, I mean, it was over 20% because of this reversal. Do you expect more than 20%?

José Humberto Acosta (CFO)

Carlos, we are expecting to maintain that level, assuming this cost of risk that I mentioned before, assuming that we will be able to sustain the NIM of around 6.5%-7%. The operation there, the efficiency also is below 50%. We are forecasting for Salvador, that level at around 20% area, at least for the next two years. They have a very positive structural funding, as well as Bancolombia, based on CASA deposits. In the case of Banistmo, we are expecting to maintain a level of around 10% in the next coming at least for 2024, and increase to 12% next year.

In the case of Guatemala, Banco Agromercantil in Guatemala, you see that the numbers this year are very low because of high level of provisions, but we expect to sustain a return on equity in between 10%-12%, 2024 and 2025.

Carlos Gomez (Head of LatAm Financial Institutions)

Thank you so much. Very clear.

José Humberto Acosta (CFO)

Mm-hmm.

Juan Carlos Mora (CEO)

Thank you, Carlos.

Operator (participant)

Our next question comes from Alonso Aramburu with BTG. Please proceed with your question.

Alonso Aramburu (Associate Partner)

Yes. Hi, good morning. Thank you for the call. I wanted to ask about Nequi. Can you give us an update on when the spin-off is going to happen? And just some color about the path to profitability and the monetization drivers of Nequi. How do you see the platform evolving over the next few quarters? Thank you.

Juan Carlos Mora (CEO)

Thank you, Alonso. We ended 2023 with more than 18 million customers, users in our platform, of which around 13% are active users. So definitely we have the network effect happening in Nequi, and transactions are going on there. We expect that the growth will continue, and probably we will reach around 21 million customers, which, if we put in on perspective, Colombia has around 50 million inhabitants, so it's a very significant number. Yeah, and that allow us to, with that network effect and platform effect also, move forward on our profitability strategy that will be based on offering those customers different services, including insurance, some investment opportunities, but mainly credit, loans.

We have to be careful, and we need to be aware of where we are on the economic cycle. We think that this is not a year in which we can push very hard on offering credit in a platform like Nequi. This is to say that we have the elements, we have the clients, we have the products, we will continue evolving on the products, but our path to profitability will depend on where we are on the economic cycle and how much we can push credit. With this, our current situation and our expectations on how the economy is going to behave in the coming two years, we expect that we could be profitable in 2026.

That's regarding how we see the evolution of or our path to profitability. Regarding the spinoff, we are ready to spin off Nequi. Now, what is happening in the coming weeks is that the Superintendency should evaluate our readiness. They will give us some recommendations, and after we implement them, we will spin off Nequi. That will come, and depends on the recommendations that we will receive from the supervisor, we will be ready to spin off Nequi in the coming months, maybe two months, but it depends on, as I said, on what they see and how they, or the results of the assessment and in which we are ready.As a matter of fact, we'll start that assessment. The Superintendency will start that assessment next week.

Alonso Aramburu (Associate Partner)

Great! Thank you very much.

Juan Carlos Mora (CEO)

Thank you.

Operator (participant)

Our next question comes from Julián Ausique with Davivienda Corredores. Please proceed with your question.

Julián Ausique (Senior Equity Research Analyst)

Hi, everyone, and thank you for having me. My question, my first question is regarding the ordinary shares. I know you already mentioned something about that, but I didn't get it. But my question is related the plans that the company has related the liquidity of the share due to the recently elimination of the share from the FTSE Index. And in my calculation, I saw that Bancolombia ordinary share is not meeting the liquidity requirements that the MSCI LATAM is required for some shares to maintain in the index. And my second question is something related to something you already mentioned about the spin-off of Nequi. Are you expecting some inflows in terms of cash to Bancolombia? And if there is some inflows, where are what will be the uses of that cash?

Just to catch up in terms of cost of risk, I heard that you are expecting some deterioration with the housing and construction sectors. Like, I don't know if you have, like, a down scenario in terms of cost of risks if you saw a really weak deterioration in those sectors. Thank you.

Juan Carlos Mora (CEO)

Thank you, Julián. Let me, let me have, I have some comments on your first question. I will answer your second question regarding the spin-off of Nequi and a comment on the cost of risk. And I am going to start with your second question, then your third. I will do the comment on the FTSE Index and MSCI, and then I will ask José Humberto to complement me. Regarding the spin-off, this is not; it's not going to generate any cash for Bancolombia. What we are doing is a spin-off, in which we move assets and liability to a different entity, which is Nequi, in this case.

Nequi will be a fully owned entity, Bancolombia's fully owned entity, and we just spin off assets and liabilities, and Nequi will operate as a separate entity, legal entity, but 100% owned by Bancolombia. So in what happened on the consolidated basis is that Nequi is going to consolidate on the numbers that we present for Grupo Bancolombia. Regarding the cost of risk, 2024 is a year that it has complexities in how you read it, but we are with the 2.6, we are more on a conservative side. It could be some upside potential if we manage as we are, how we are managing so far, the risk that we are, or our risk appetite.

So to be concrete, the 2.6 is our expectation. It's more on the conservative side, and it depends on how the year evolves, as I mentioned. But it could have some potential of upside if the year evolves better than expected. And moving to your first question, I want to highlight that what happened is more because of the size and the liquidity of the Colombian market. It's not something that is particularly regarding or related to Bancolombia. At the end, Bancolombia is the most liquid share in the Colombian market, but it's a very, very small market. And that's why...

When the different index companies like FTSE evaluates liquidity, the market is very low, but Bancolombia is the most liquid and a very liquid market. Just so I want to make that comment. And José, could you supplement me on that?

José Humberto Acosta (CFO)

Yes, thank you, Juan Carlos. Julián, on practical terms, the change of FTSE means a sell-off of $70 million in the next coming weeks on ordinary shares. Probably, the consequence will be the price will come down, and again, as Juan mentioned, we have the preferred at the ADRs with the high level of liquidity. The second element is, there is a very important element here right now for all players, and we are listed in the local stock market, which is to have a market maker. This is relevant in our case, we hiring a market maker two months ago, and the consequences was very clear in both ordinary and preferred. In terms of the ordinary, the bid offer spread reduces more than 50%, and in preferred, more than 45%.

And this is very important because at the end of the day, it's a, it's a way of democratization of the, of the shares on individuals. So we are using platforms as Trii, for example, trying to offer them the opportunity to, to have possibility to buy. So the, the market maker to date is relevant because of that, because helps the individuals to have an opportunity to buy our shares, no matter if it is ordinary or preferred.

Juan Carlos Mora (CEO)

Okay. Thank you, Julián.

Operator (participant)

We have reached the end of the question and answer session. I would now like to turn the call back over to Mr. Juan Carlos Mora for closing comments.

Juan Carlos Mora (CEO)

Thank you all for your interest on these conference call results. Next, this first quarter of 2024, I think it will be key to understand what will-- how will evolve the year. So, when we report the results of the first quarter, we will see how things are going. And I also want to mention again that we will have our shareholders meeting, general shareholders meeting, March fifteenth, which is where we will present our or the board of directors proposal, proposed dividend. So, we are very thankful for your interest, and we expect to have you in our conference call for the first quarter of 2024. Thank you very much, and have a good day.

Operator (participant)

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.