Grupo Cibest SA (CIB) 2009 Q2 法說會逐字稿

Good morning and welcome, everyone, to Bancolombia's Conference Call. Today's call is being recorded. Please note that this conference call will include forward-looking statements, including the statements related to our future performance, capital provisions, weighted 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 the President and CEO of Bancolombia, Mr. Jorge Londono, the Executive Vice President, Mr. Sergio Restrepo, and the Chief Risk Officer, Mr. Juan Carlos Mora. At this time, I would like to turn the call over to Mr. Londono. Please go ahead, sir.

Thank you, and good morning to everybody. And again, our thanks for attending this conference call in which we are going to present our second quarter results.

I would like first to call to ask Juan Carlos Mora, our Chief Risk Officer, to present briefly our views on the macroeconomic environment of Colombia and El Salvador. Go ahead, Juan Carlos.

Thank you, Mr. Londono, and good morning, everybody. Recent economic data shows that Colombian economy has been able to respond adequately to the difficulties posed by a more challenging economic environment. During the first half of the year, exports, remittances, commodity prices and capital flows decreased as a result of the external shock suffered by the economy. Consequently, there was a deceleration in delivery growth in the first quarter of '09 with economy contracting at a rate of 0.6%

However, those figures for the first quarter of the year came better than expected and significantly better than those for the last quarter of 2008, when the economy contracted 1%. In fact, GDP growth for the first quarter of this year came in slightly better than the GDP growth figure for the last year of 2008 on absolute terms. Recent data shows that exports and investments as a percentage of GDP registers moderate decreases in Colombia, and in other major economies in the region such as Chile, Mexico, and Peru.

Several factors have contributed to the relatively solid position of the Colombian economy, particularly sound economic policies and a federal and patient outlook. On the one hand, the government has maintained -- accessed international sources of grade and capital markets, and by the beginning of the year, we have already secured 100% of external financing needed for 2009. And we started the pre-financing of public debt obligations for 2010.

Additionally, the central bank continues during the second quarter with its contract, countercyclical monetary policy. So far, the reference interface has been reduced by 150 basis points since December, although the borrowed [appearance] of Colombian central bank made more additional costs on its July meeting.

Although these measures have contributed to a strong level of liquidity and the wealth functioning of the country's financial system and capital markets. In fact, new corporate bonds issued in the local market during the first half of 2009 are equal to the total amount issued for the entire 2008.

Difference in last year, there are no inflation pressures to worry about on the short term. As a matter of fact, CPI for June reached 3.8%, well below the 4.5% target range determined by the central bank. Inflation is no longer a concern which has allowed the central bank to move ahead with its countercyclical policy objectives.

Looking ahead, getting in the [tariff's] recent performance, we have shown some improvement in terms of consumer confidence point that Colombian economy will gradually and steadily resume sustained economic growth. Nonetheless, we're prepared to be conservative and work with a slow paced recovery as our basis scenario.

After this quick review of the economy, I will turn to Mr. Londono again, who is going to go over the bank results.

Okay, thank you, Juan Carlos. I would like to start by making a summary of the quarter results that you can see in the illustrations that we have in the slide number 2 in the slide presentation that is being presented in the IR website, that you could refer to through this presentation.

What we would like to say is that even though net income decreased in the second quarter, we believe that we have strong results, we have very good results, and particularly we have a very strong balance sheet behind those results. Our net income totaled COP253 billion for the quarter, which also means that our results for the first half of the year are COP564 billion, or in other words, 18% return on equity so far for the year.

I want to bring to your attention four highlights that are presented in the slide I referred to a minute ago. First, these results were particularly impacted by the constant large decreasing interest rate environment. This decline in interest rates is certainly cautioning to the bank and to the financing system some margin compression. But it's affecting obviously our net income.

Second, we have a positive aspect, which is that after several quarters of consecutive increases in past due loans, we have an improvement in the asset quality indicator. But this month has seen a below 4%. Overall, we had a slower pace of deterioration during the quarter. And we maintained, nevertheless, very strong returns, and we even increased coverage during the quarter as we are still waiting to see if this improvement is already marking a trend.

Third, we certainly expanded our business during the quarter. We have significant level of activity in peso denominated loans, and in commercial loans, although it's slightly offset by a weak performance of the dollar denominated loans, and the consumer loans. On the other hand, regardless of currencies, our deposits and the liquidity of the bank grew very well, and is strengthening the position of our balance from the point of view of funding.

And in the fourth place, I would like to mention that we had some non-recurring events which affected the balance of the first quarter of last -- second quarter of 2008, and also some non-recurring events that have affected the second quarter of this year, that explain very much of the negative variation of our net income.

And that is that in the second quarter of last year, we had a positive impact of the sale of [New Tier lasses], that represented more than COP40 billion, and during the second quarter of the year, we had a negative impact, but something that we have described to you in previous presentations, that is the adjustment to the new regulation of valuation of derivatives. That it's already finished in the first semester, but that during the second quarter, represented about COP63 billion of lower income during the year. So, all that together explains a very good part of the negative valuation of the net income.

Let's begin our discussion in more detail by taking a look to the bank main revenues that we can take a look at this in the slide number 3. Net interest income totaled COP926 billion, which is 6% down over the quarter, driven certainly by lower margins. Net interest margin for the second quarter was at 6.7%, which is a reduction from the 7.1% that we had in the first quarter, and even further from the 7.5% that we had in the second quarter of 2008.

In particular, we have to keep in mind that a considerable part of our loans, a majority of our loans, are indexed to what we call in Colombia the DTF, which is the weighted average of internal rate for 90 days CD based in the Colombian financial system. The DTF indicator has followed very closely the reductions of the central bank. And during this quarter, the DTF went down 250 basis points.

Looking ahead, we believe that there could be a still margin compression to the near future. But certainly, our balance is structured, we have the conclusion that we could expect also some reduction in the cost of our funding, because some of our liability are going to be re-priced during the second half of the year, and additionally lower cost of trade means better prospects for loan growth and better prospects for asset quality in the midterm.

Revenue different from mixed interest had mixed results during the quarter. First, operating income -- our operating income totaled only COP20 billion, which is considerably lower than the COP126 billion presented last quarter, and even lower than the COP196 billion. That line of our income is mainly affected by this reduction -- this negative impact of the adjustment in valuation methodology that we had referred a minute ago, and that we explained in previous conference calls.

But on the other hand, we have a very positive outcome in our other income in the quarter, which is the fees and income from services, that continued a very positive performance, reaching a record figure of COP380 billion, up 27% if we compare it with the second quarter of 2008. These results, which we don't have any doubt to call it exceptional, was driven by solid credit and debit card related fees, and also by our great second quarter of our fiduciary and pro services.

During the second quarter of this year, we maintained our focus on cost increase contention. For the second consecutive quarter, operating expenses have decreased. Net debt, OpEx totaled COP681 billion, which is 5% below what we have in the first quarter of this year. Although as stated, our obviously still above what we had in 2008.

And as you'll probably remember, we are in a process of modernization in connection with our software infrastructure, that we are in a process of upgrading the software infrastructure, which undertake an underhauling of all our core systems. The way that we look at it is that we are going to face a high level of operating expenses for that, but we are going to become parents to this modernization process, more efficient, and more productive in the mid term.

Obviously, the tradeoff is that our cost containment efforts are going to be limited while this process of modernization lasts. Personnel expenses also have small declines, which is mainly related with the lower accountancy of the bonus plan for Bancolombia.

In terms of efficiency, what we have to say in this obviously could be very well understood by looking at two ways of measuring efficiency. First, if we measure efficiency against the income -- cost to income ratio, we obviously have seen some deterioration which is explained by the reduction in the interest margin that we have already explained earlier in the presentation.

But if we see the efficiency measured in relation to total assets, we see an improvement that shows the benefit of these reductions in expenditures that we are showing. We have moved from 4.6% presented at the end of the second quarter last year to 4.4% to total assets at the end of the second quarter of this year.

But I would like to present to you some detail in matter of asset quality and provision charges. If we look at the slide number 5, we have some information that explains what we have been doing in this area. We continue to endure a high level of net provision charges which totals COP345 billion for the second quarter, or what means 3.1% in annualized [savings] of average loans.

This level of provisions were similar to the ones that we presented in the first quarter of this year, although they are still very high from what we can call normal levels. In fact, we have been provisioning around 3% in annual terms of average loans for some quarters right now, but that has doubled the provision [bonus] that we had on average for the last eight years in Bancolombia.

On the positive, we have a slight improvement in asset quality indicators. Past due loan finished in the second quarter were presented 3.38% of loans, and improved from the 4% of loans that we had in the previous call. I must emphasize that in the Colombian regulation, a past due loan is considered overdue when it has more than 30 days, and that the total amount of the overdue loans is considered in the calculation, including everything, even mortgages.

If we were to recalculate it with a more typical international standard, which will be 90 days for every category except mortgages -- but I usually consider past due at 120 days -- then that calculation and on that standard, our past due loans will come to a half, to 1.95%. So, that will be an indicator that we consider that better compared Bancolombia International.

Allow me to use the figures that we present in slide number 5 in the lower left hand side to explain what we have been doing in the matter of deterioration of our loan portfolio. And as we can see, considering everything, from the movement in the total amount of past due loans plus charge-offs -- in other words, the total figure of deterioration of our portfolio during the quarter, we have come to a much lower figure.

Charge-offs plus deterioration come in the second quarter to COP238 billion, while in the first quarter of this year it was COP389 billion. We identify this as a very positive sign. But nevertheless, we believe that some additional positive start-up will be operated in order to confirm that it is a turning point in the deterioration of assets in Colombia.

In terms of balance sheet explained, we ended the second quarter with allowances for loan losses up COP2.3 billion, which means that coverage of 5.2% of the total loan book portfolio, which is a figure 1% higher than what we had at the end of the first quarter of the year. And demonstrates that we still maintained our total concentration in preserving the strength of our balance sheet.

On the other hand, the coverage measured by the ratio of allowances to loans [secured] interest losses to our measure of thirty days, averaged 137%, which is above the 132% that we had at the end of the first quarter. Net debt, notwithstanding the more challenging environment, we have a stronger balance sheet in terms of returns and in terms of coverage.

Looking ahead at the rest of 2009, we are well positioned due to our solidly assessed and also to our earnings power to endure high grade costs that we believe is likely to be present in the second half of the year. Also, our scenario of major deterioration has started to gain some ground, given what seems to be a more stable second half of the year in the economic activity as could be well deducted from the presentation of Juan Carlos at the beginning of this conference call.

So now, I will move out of asset quality and take a look at our balance sheet. Bancolombia total assets totaled COP63.3 billion, which is an increase of 17% when we compare with the figures that we had a year ago. But we can see a decrease if we compare them with the figures of the first quarter of this year.

But this decrease is explained entirely by the appreciation of the Colombian peso, which was an appreciation of 16% during the second quarter. And since we have 27% of our assets in foreign denominated currencies, and particularly almost all of them is in dollar-denominated assets, we were affected by that movement in the devaluation of the peso.

Last quarter was dynamic in lending activity for loans denominated in Colombian pesos, which were about 75% of our total loans. Peso denominated loans increased 5%, and 17% if we compare them with the second quarter last year. The higher activities in this area was mainly in loans to the oil and gas infrastructure, to commercial electricity generation, and to telecommunications, very much in line with what we said that we were expecting, that there were going to be big businesses in matters of infrastructures.

Commercially, consumer lending remains slow, given the still weak labor market in which -- in the countries that we are operating in. As a result of this dynamic, corporate loans kept increasing the share of loan growth, reaching about 51%, whereas last year, we were seeing that corporate loans represented only about 47% of our loans. In all harm, retail and a small and medium [surpurchases] loans represented almost no loan growth in the last year, which has fluctuated into a lower share of that line of business into our loan books.

Mortgage loans appear to have no significant growth in the second quarter of the year. But we have to take into consideration that COP260 billion was securitized during the quarter. However, we expect a dynamic performance of the line and a pickup of the activity of mortgages, dealing in particular by the policy of the government of giving a subsidy, a temporary subsidy to the interest rate in the acquisition of houses. That is in effect since stated and is definitely having an impact in the demand for housing, and is the total volume of mortgages that the bank has issued.

Reflecting a lower demand for cranes in the bank's offshore subsidiaries, and a lower economic environment in El Salvador, lending activity denominated in dollars has been weak. US dollars denominated loans amounted to $5.2 billion by the end of the second quarter of 2009, which is a reduction of 5%, compared with the total amount in dollars that we had at the end of the second quarter of 2008.

It is important to remember that the dollar lending is very much correlated for us with the international trade flows. And that is why the performance of this kind of lending also has been weak. And it doesn't come as a surprise to us during the recent quarter.

Overall, Bancolombia maintained its position as a leader in all of our markets in the Colombian and in the Salvadorian market. According to ASOBANCARIA, the Colombian Banker's Association, Bancolombia's gross loans market share in the Colombian financial system by June 2009 was 21.8%, almost 22%, which compared very favorable to the 21.2% that we had last year.

Likewise, according to ABANSA which is the Bankers Association of El Salvador, Banco Agricola, which is our subsidiary in that country, had a market share of 30.2% in total loans which in tern positively increased from the 28.5% that we had at the same date last year.

Let me now bring to your attention the positive performance also not only of loans but of deposits. Regardless of currency, the bank has maintained a very solid liquidity position, in particularly deposits totaled almost COP43 trillion, which has had an increase of 24% when we compare them with the same date of 2008.

Peso denominated deposits, which are 71% of our whole of deposits, increased 22% in the year. And also, dollar-denominated deposits continued its positive performance, increasing 10% measured in US dollars when we compare it to the end of the first quarter of this year. At the bank, offshore banking continued to benefit from the underlying growth, particularly from increasing [giant] funds and also good performance of deposit growth in El Salvador.

At the same time, the ratio of net loans to deposits, including borrowings from development months remained at 92% at the end of the second quarter of this year, which is much better than the 99% that we had a year ago. So, we had a very good structure, a dynamic structure in loans, and a very dynamic structure in deposits.

Overall, the result of the good performance of the core deposits of the bank liability structure has changed in the last year in favor of the costs. As of June, deposits represented 75% of total liabilities, what used to be 70% at the end of the second quarter of last year. Bancolombia funding remains as one of the cheapest in those countries where we are based, explained by the sizeable amount of demand deposits in our funding mix. The average weighted cost of deposits decreased to 4.9% from 5.4%.

Looking ahead in funding costs, I will just make one point in this effect, is that we do expect some further decline in the average weighted costs as we will be able the second half of the year, as I mentioned earlier, to re-price onwards a good volume of our CDs that were put in the book last year.

Our competitive position looks solid in deposits as well. During the last year, the bank increased its market share of deposits in Colombia banking system from 18.5% to 19.5%, and from 29.8% to 31.1% in El Salvador. So overall, one positive key driver in future performance is that regardless of the type of currency, we maintain a very solid liquidity position and very cheap funding of the institution.

Let us now go to slide number five where we have our chart that summarizes some indicators of our capital position. As a matter of fact, we finished the second quarter with COP6.2 trillion in our shareholders equity, which is a 17% increase compared with the figure of a year ago.

The bank capital adequacy have presented a slight increase Tier 1, which is 10%, and Tier 2 ratio finished together in 12.9%, up from 12.7% at the end of the first quarter. Also, favorably compared with the 11.8% of capital ratios that we had at 2008, and also favorable with the regulation Colombia that as you know is 9%.

In general, we are adequately capitalized. And the capital ratio is 394 -- almost 400 points of what is minimum required in Colombia. Having that in mind, I would like to make a couple of comments about the decision that we took in our extraordinary shareholders meeting of July 8th, when the Board of Directors got an authorization to determine the specific terms of appropriation potential issuance of up to 80 million preferred shares, including applicable timing for the offering or offerings of such preferred shares.

The first consideration is that this is an authorization, and is not an issuant offering itself. Essentially what it does is that it gives us more flexibility. It gives more flexibility, particularly to the Board of Directors, to decide when, where, and how to issue preferred shares. There is no timeframe attached to it. And second, we believe that in our long term strategy of growth, capital is always going to be an important element. And is why we are always assessing our capital position in the long term basis.

Thank you very much again for listening to this presentation in which we have shown you that we have a good quarter in which we have presented a bank which is dynamic, that is growing, and particularly that we are building a very solid balance sheet that is very well protected to whatever can happen in this period. But nevertheless, we see with optimism that our second half of the year that could have better performance of the economy, and therefore could have also the possibility of better growth and better results for the bank.

Thank you for your attention, and I will be glad to take your questions or comments.

(Operator Instructions).

And your first question comes from the line of Andres Jimenez with Interbolsa.

Yes, good morning, gentlemen. I want to actually ask the question related more on the fee side. I'm actually quite surprised that activity in the bank has been increasing during the last couple of months in which you actually go to a branch and they offer you now a lot of different types of insurance, from education, from mortgage, and unemployment, which has been quite considerable.

And I'd like to actually know here in Colombia what's the universe that you guys are actually covering on those cross-sellings? And can we actually expect that that increase in fees is going to continue because of this trend in which you're doing these cross sellings?

I'm surprised because before, a year ago, as a person that actually holds a card in the bank, actually no insurance was actually offered to me. Now, as I say, a lot are offered. That would be my first question. And if you guys can actually continue, my second question is more related on the provision side. I see that your expansion in loans is actually due to corporate loans.

And at the same time, you have to keep on actually fulfilling the requirements of provisions, provisions that I would assume that going forward we could actually start seeing some actual return of those provisions, because corporate loans, I would have probably assumed that are not that risky. As an example, the loans that you've been doing for [Copotore]. Could that be a trend? And to what more or less in capacity, would we expect that those provisions would be reversed, in what potential? Thank you.

Okay, thank you, Andres. When we are optimistic with the state -- the performance of the state income of the bank and we are very glad of what we have presented during this second quarter. As a matter of fact, I mentioned the performance of the second quarter was mainly based on field area activities and the income from current costs.

The aspect that you mentioned is true. We have become by far the leader in bank assurance in Colombia, particularly in life insurance for middle and low income individuals, in which we are leveraging the capacity of the bank through our franchise to distribute insurances at very low cost of distribution. And we do that very effectively in El Salvador and in Colombia.

Right now, we are in the process of some diversification of these insurance. And we are very optimistic that we are going to show important growth in the near period. We are trying new thoughts, trying new services, and are trying to renew the means of distributions in which we are going to leverage our very important franchise.

But in general, we see that fee income will benefit from what we have done in the past, with a significant bank characterization increasing the volume of our clients that right now we can take the advantage of increasing the number of core sales of those towards increased client base.

Now, on the provision area, I tend to agree with your view that there are perspectives of improving of the Colombian economy. We show how in this semester the total charge of deterioration of our portfolio was lowered. And we believe that the new growth in the very high corporate area tends to be of also very high quality.

We believe that the main element of this is that the Colombian economy achieved a reduction in unemployment and fixed up in the process in the indicators of growth. We are optimistic of that and certainly, we believe that we could look at the end of the year, that if this trend maintain and this trend has improvement of our asset quality maintained, we will certainly could feel comfortable with a slightly lower level of provision than what we are showing at the end of the second quarter.

And a follow-up on my first question, ballpark, with the right of being wrong, more or less of how much of that universe of 5.4 million kinds on the bank have you actually crossing the insurance with currently?

I will have to come back to you. But I think that we have about 550,000 life policies in the market. And I wouldn't -- I don't know if my colleagues could help me with this total income that that generates. But I don't have the precise figures. We like the bank assurance business. We see that that is a business in which we can grow very quickly. And we have grown in the past. And we have about -- close to 50% of the total bank assurance business of Colombia. And about the same in El Salvador.

Wow, great. Thank you very much -- appreciate it. Have a good day.

Thank you, Andres.

Your next question comes from the line of Jason Mollin with Goldman Sachs.

Hello, everyone. Just a general question just on the group's outlook for the economy in Colombia and in El Salvador, particularly on the side of unemployment. As you mentioned, we've seen weak consumer demand for loans, particularly probably due to the difficult labor environment. If you can give us your views on the labor environment, unemployment, and if you think that those are -- will get bit better in the second half as well.

And then secondly, more specifically, if you could comment on the sensitivity of the group's income statement to interest rates. You talked about how the margin compressed because the recent decline in rates. But maybe if you could be more specific, give us some sense of -- let's say if rates moved 100 basis points up or down, what does that do to your net interest income and net interest margin? Thank you.

Okay, on the first point, right now we have a high level of unemployment. We have seen that the housing activity, as I mentioned, is improving. And that has a very important set of externality for the economy. Colombia has proven that in the past very efficiently. So, we could expect that some effect will come from that side.

The development of infrastructure and development of public utilities and things like that will have probably not such an immediate effect, but we will an effect let's say from the end of this year on employment. What we have seen, nevertheless, the second quarter, is that the measure of the expectations of consumers are improving significantly. And that is being measured by [Teresa Royo] in a new indicator that they have started to publish about a year ago, but those finalists have considered that that is a very good quality indicator.

We -- most of the reduction on the demand for consumer credit came not directly by the unemployment, obviously, but it came from the decline in the expectations of the consumer, as you know better than I do. And that is improving. So, we already receive indications from our sales force that the demand in the consumer side is improving slightly.

We have to wait and see, but those two elements, the expectation of improvement in employment, and the observation in the improvement of the indicator of expectations of the consumer, allow us to be a little bit more optimistic in the matter of unemployment.

I -- it's a little more difficult for me to the sensitivity, but maybe Juan Carlos could help us to explain what is the impact of this reduction in margins to our net income?

As was mentioned by Mr. Londono, we have seen some reduction on interest rates. What we are expecting is that that reduction is going to slow down and the effect on the second semester of the new year is not going to be as strong as it was in the first semester. But because our income interest is taking the reduction faster than our core deposit costs, that's a good question about how -- try to estimate 100 point reduction on interest -- on our margin is going to affect.

I don't have an exact figure on this at this point. But what I can tell you is that we don't expect higher or bigger reduction on interest rates -- on interest margin, on net interest margin in the second semester. We have had an interest -- net interest margin around 7% -- last year about 7.4%. This year it's around 6.7%. We probably will see some slight reduction by not much in the second semester. And we expect that that is going to continue probably next year.

Yes, very well, as Juan Carlos mentioned, most of the reduction in the interest rate has already taken place. We are going to have some margin reductions because our slightly -- a slight increase in corporate sales. But also, we will see better quality of loans. So, we have balancing effect.

First of all, we had improved in our funding mix. Second, we were going to have a translation of the reduction of interest with higher speed in the second semester, because we are going to be able to re-price some of our liability. And third, we are going to benefit from higher demand and from better asset quality as determined by the lower costs. So, sensitivity as you like to calculate it is a little bit difficult for us to predict. But on the overall, we have balancing elements on this.

Let me ask -- as a follow-up, just where do -- I mean, so if rates, the cutting cycle is nearly complete, what are your expectations in terms of economic growth and when perhaps rates could actually increase and help your margins?

It's very difficult to guess on that, Jason. I believe that central bank in the -- at the end of the June meeting made an announcement that they have almost like [freely adjust]. However, you know how things are. So, right now, inflation is coming down. Yesterday, the central bank said that they probably we are going to end this year with an inflation below 4%. That is something unheard of, that is something from -- far from the better hopes that the central bank had on inflation at the beginning of the year.

So, it might lead them to make additional adjustments. But it's difficult to bet on that. If it happens, what we will say is that they will be marginal adjustments, not something as we have experienced and endured since the middle of last year, that the central bank was rapidly adjusting the rates from the level that they had set to the current levels. So, if we have more adjustment, it will be very marginal. And then, it might be offset by higher demand, and also by the possibility of again, starting to grow in consumer loans.

Thank you very much for your insights, gentlemen.

Thank you, Jason.

Your next question comes from the line of Jorge Kuri from Morgan Stanley.

Hi, good morning. My question has to do with guidance for 2009 in terms of loan spreads and asset quality. How are you seeing things for the remainder of the year, and how 2009 looks now?

Okay, as we mentioned, we had a good second quarter. And that leads us to be particularly careful when observing the indicators to see if that becomes a trend. If, as I mentioned before, the unemployment figure improves, probably that is going to become a trend. But right now, what we will prefer to do is to maintain our conservative position. And if you look at our figures during this quarter, in which the performance of past due loans already improved, we kept increasing our coverage.

So, we are still far from an explosion of optimism and we will remain conservative. Normally, not (inaudible) of our coverage, but maintaining it for the time being until we are certain that that is a trend. I would very much like to be able to tell to you that this is a trend and that we expect that the past due loans are going to be probably -- inflation below 4% at the end of the year. But that still remains that we wait and see and analyze very well during the evolution of the economy.

And in terms of loan growth and spreads?

Okay, in terms of loan growth, Jorge, we maintain the expectation that 10% will be a reasonable loan growth. Let me thoroughly explain for a minute in that question because it's important. We have seen a dynamic corporate demand. But we have also seen an extraordinarily dynamic market capital environment nationally and internationally.

And that is a good thing for the economy. That is a good thing for the Colombian economy, because it means that local investor and international investors are recognizing in Colombia good prospects. But it represents a competition for our growth of our loan portfolio.

We benefit from our fees in investment banking. We have had some of our clients go into the market and have participated on that business. But certainly, it's something that comes out of our great demand. So, we don't want to be more bullish than that 10% of positive growth of loans that we have mentioned since the end of the first quarter.

Okay. Thank you very much.

Thank you, Jorge.

Your next question comes from the line of Tito Labarta with Deutsche Bank.

Yes. Hi, good morning. Just had a follow-up a little bit on the asset quality. I mean, you mentioned that the targets were pretty high in the quarter. And do you expect the target levels to normalize for the rest of the year to make historical levels? And then given that, then what would be like your expectations for asset quality?

Would we then see some improvements, or do you think it would just kind of remain stable for the rest of the year? And then, also following up in terms of the loan growth, what do you think for 2010, like what kind of economic growth, GDP growth next year? And what kind of loan growth do you think you could see in 2010? Thanks.

Okay, we -- percentage of this conference call that we are about at the level of our traditional or long term average of provisions per quarter at 3.1% on an annualized basis. But we will see that us stable in the near future will reconsider that a conservative view will be to view that as a stable for the rest of the year. And certainly, what I will say is that the probability or deterioration are certainly much lower than the probability of a slight improvement in asset quality.

But we say in short from predicting that we are going to be able to improve the level of provisioning during the rest of the year. We still have to wait and see if what happened in the second quarter becomes a trend. And then, we certainly will start to reduce our coverage.

And on long goals, long goals for the next year, most of the analysts are more bullish. People have started to predict growth around 3% for the next year. If that happens, certainly the growth of the -- created in 2010 may be again in the figures close to 15% because there will be the appearance of pent up demand, particularly consumer credit.

I want to say that even though as some are saying the growth of the consumer lending came as a matter of -- for occupation for the authorities, it is not possible to say that in Colombia, the consumers are over in debt. Total amount of debt is still very conservative. We see that there could be net grow in that in the mid term. And that will start to produce some impact if the performance of the economy stabilizes. If we start to grow by more than 3%, that is not in extraordinary to Colombia, the total growth of the financial sector will benefit greatly.

Okay, thank you very much. And if I could just get one more question actually. You mentioned that cost containment will be difficult just given in terms of improvements infrastructure that you're doing. What kind of growth do you see in expenses?

We believe that we can maintain the growth of the expenses in the lines that we have achieved during the first semester, in other words basically stable in real terms. So -- but what we say is that we cannot achieve a reduction in figures compared to 2008 because the effort in this modernization is costing us a lot. So, we are gaining reduction in our let's say core index expenses, the normal expenses. But those are more than over weighted by the increased expenses in modernization.

Okay, thank you very much.

So, 10% would be -- will be a reasonable to expect in quarterly cost increase.

And your next question comes from the line of [Tio Walls] with [Correlation Fund Management].

Good morning, gentlemen. Your cost containment was very good overall. The line item salaries though shows an increase of 4% in the second quarter. Could you give me an idea what portion of that was increase in headcount, and what portion was actual salary increases? Thank you.

Salary increases took place on the -- in the fourth quarter of last year. So, they already had an impact -- a full impact in the third quarter of 2009. I would say that headcount very marginally impacted the increasing cost. Most of that 4% that we have presented in increase from 2008 in salary increases was in headcount. Because headcount is a -- it's almost [faded].

Thank you very much.

You're welcome.

And your next question comes from the line of Jose Restrepo with Interbolsa.

Good morning, everybody. I have one question. Is the change in the opinion of the bank about the internationalization related with the preferred share issuance? In the shareholder meeting you said, Mr. Londono, that if the purpose of this issuance will be an acquisition, you really will take that, exactly that you need money for an acquisition.

But a week ago in an interview on Bloomberg, you said that that money could be used for acquisition in Central America. I want to know is there something in the pipeline that you can tell us? Are you seeing like a little change in the -- especially the bank -- related with that internationalization process?

Well, you know that it is quite difficult sometimes to communicate with the media about this, because the media certainly likes the news of potential acquisitions and things like that. But I would like to strengthen what I said in the shareholders meeting, and what I have been trying to explain to the media. Actually, the measure of getting this authorization from the shareholders meeting is a measure of gaining flexibility for what might happen. And there are three elements that we mentioned in the shareholders meeting.

First, there might be some revisions in the capital regulation internationally. We already have seen some new decisions from the basis committee in the matter of [secularizations]. So, we have to be very observative of that element and see what could happen. And it's important to have the flexibility if we have to respond to new rules and regulations.

Second, the Colombian economy's growth is certainly growing faster than most of the people was expecting it to grow at the end of last year. Nothing extraordinary is going to happen. But that could have some impact if by any chance capital markets decline in the receptivity for private debt. There it's going to be a bigger space for the financial system to play and we will to play.

And third, we have made no secret of our expansion strategy. We have always shared with you that we keep looking. We believe that our responsibility is to evaluate the opportunities that could present to the bank for expansion. But secondly, we don't have nothing in our hands at the moment. And we still are very careful that if anything comes to us, we will select it if we are convinced that we are going to be able to do it applicably.

So, that is why we are not now in the process of an issuance because none of those three factors is at this time require our particular attention and the increase of capital allocation. The current levels allow us to manage what we have in the market at the moment.

Okay. And an additional question will be related with the second part to that you mentioned. This corporate loan growth, do you have an estimate in terms of -- percent of GDP? How big will be the demand for corporate loans, and corporate needs for sourcing? How big it is?

What happened, Jose, is that we see at the very AAA, high demand, very good clients, first level clients, important demand. It's not so easy to see how much of them could be attended from bonds and from the capital market, and how much will be attended from financial sectors. We have been very active on that. No matter how good the capital market is, we believe that we will have some growth there to support what we are mentioning as the expectation of 10% growth for this year. But to be more specific is -- it's impossible. We have to see how the year proceeds.

Okay, thank you very much.

If you'll allow me, I have made a very bad estimate of our total insurance policies. It is not 200,000. It is 600,000. And the total income in bank assurance is about COP34 billion annually. That, for Andres, that was asking about it, just to confirm that we are optimistic in that business. It's an important business, and a business in which we believe that still significant growth could be achieved by this process of diversification of our bank assurance portfolio that hopefully is going to allow us to keep in growing in that.

Okay, thank you very much.

You're welcome.

(Operator Instructions). And there are no questions at this time.

Okay. Thank you to everybody again for being present on today's conference call. And as usual, if you have any other matters that you would like to discuss, the people in our IR office will be more than happy to attend your questions and to provide you further information or any one of us whose names and telephone numbers appear in the press release will be very happy to attend your questions.

Thank you very much and goodbye.

This concludes today's conference call. You may now disconnect.