Grupo Cibest SA (CIB) 2013 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to Bancolombia's Second Quarter 2013 Earnings Conference Call. My name is Richard and I will be your coordinator for today. At this time all participants are in a listen-only mode. Following the prepared remarks there will be a question and answer session.

(Operator Instructions).

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 uncertainties.

Consequently there are factors that could cause actual results to differ materially from those indicated in such statements including changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy and various other factors that we describe in our reports filed with the SEC.

With us today is Mr. Carlos Raul Yepes, Chief Executive Officer, Mr. Sergio Restrepo, Vice President of Capital Markets, Mr. Jose Humberto Acosta, Vice President of Finance and Mr. Juan Carlos Mora, Vice President of Corporate Services.

I would now like to turn the presentation over to Mr. Yepes, Chief Executive Officer of Bancolombia.

Please proceed, sir.

Thank you very much. Good morning and welcome to our second quarter 2013 results conference call. It is a great pleasure to be with all of you who follow so closely our operations and results.

Let us start with a brief discussion of the main topics that impacted our business in this period. You can follow the slide presentation available in our investor relations website.

First, I would like to frame the numbers that we will present today in the current environment. In particular, I would like to recall the recent trend of depreciation of fixed income instruments across the globe.

Colombian bonds were not the exception and [our] portfolio of debt securities reflected these losses. Other than that, our business plan continues as expected.

The balance sheet remains strong and the capital adequacy is in good shape to allow the local growth that we forecast and to comply with the commitment to acquire the banks in Guatemala and Panama.

Bancolombia is in trend of an important growth of the business that implied efforts investments and expenses, we are committed to take the optimum decisions regarding CapEx, brand expansion, IT investments, and personnel hiring.

Sustainability implied seasonally and a key component of our strategy is to be sustainable from an economic, social and environmental standpoint. We are very optimistic about the future of our regional expansion in Central America.

Banco Agricola, our operation in El Salvador, is a very efficient bank with a solid balance sheet. BAM in Guatemala which is also doing well and we are advancing in the process of regulatory approval and the integration especially in the commercial front.

In Panama, the process of integration and regulatory approval for the acquisition of HSBC, Panama operations as (inaudible).

Our forecast is to have the deal closed and running under our responsibility within the second half of 2013.

As we have mentioned in previous conference calls, the network we are creating in Central America and Colombia will provide a unique platform of our customers.

After saying this, we would like to continue with a brief discussion about the economic environment.

Let me turn the presentation to Juan Carlos Mora who will share our views on this matter. After that, Sergio Restrepo will elaborate more on the bank's results.

Juan?

Thank you, Carlos Raul.

For those who are following the slide presentation, I ask you to move to slide number three.

Inflation for the 12 months ended July 2013 was 2.22%. At the low end of the central bank range of 2% to 4%.

The Colombian central bank's repo rate is currently at 3.25%. After a period of rate cuts that started in July 2012, the central bank decided to pause in March. They have kept the rate unchanged waiting for the impact of the Colombian government's plans to spend more on infrastructure and the impacts on the economy of the stimulus on housing construction which should drive up economic activities.

We expect the repo rate to end 2013 around 3.5% and inflation to be within the mentioned range of 2% to 4%. Regarding GDP growth, the central bank is expecting a 4% expansion for 2013. We expect that the second half of the year should be more dynamic as the level of spending of the government should increase.

A positive trend that we are seeing in the economy is the levering of households and the improvement of the credit quality across the financial system. The trend reduces the risk of higher loan deterioration and provision charges.

Consumption remains healthy and unemployment rate remains below 10% as of June. As a matter of fact, June unemployment rate was 9.2%, the lowest for the month in 13 years.

During the quarter, the Colombian peso depreciated 5.3% against the dollar.

To recap, the economy remains strong. The indebtedness of households has been declining over the last three quarters and the strength of the financial system remains.

After this quick review of the economic environment, let me turn the presentation to Sergio Restrepo who will discuss the bank's results.

Sergio?

Thank you, Juan.

And good morning to all of you.

I will follow the presentation and I will go straight to slide number four where we have total assets and known growth.

To highlight in this slide, I would like to point that the loan growth for the quarter was 5.2%. That was helped also by devaluation of the peso; with a constant peso, the growth would have been around 4% over the quarter and year-over-year, the total growth of the portfolio is 22%.

To highlight here, the commercial loans grew 6.7%, 21.5% over the last 12 months. The same with the mortgages, 6.2% over the quarter and 36%, almost 37% over the last 12 months.

In the US dollar denominated portfolio, it showed a decrease of 1% over the quarter but 17.4% over the last 12 months.

We expect to have loan growth between 15% to 20%. It is probably slightly faster than what we saw at the beginning of the year but certainly it's in line with what is happening in the economy and then the loan portfolio for the banking system locally is growing slightly higher than 15% as of today.

Segments, basically we see the growth on corporate and on mortgages, with the same trend that we have the beginning of the year.

In US dollars, we expect that by year end, the growth will be between 5% and 10%.

We do not see any strong dynamic basically on availability of funds of US dollars locally for the second half of the year.

If we move to slide number five, asset quality, I would like to highlight on the last column, in the upper part of the graph and we split the bar basically to explain that there is 47% of the provisions account for real loan deterioration and the 53% of the provisions account for loan growth.

This is a countercyclical provision that we have to have every single month or every single loan and just to give you an idea, that's been the case over the other quarters, but in this case, the total credit cost based on pure deterioration is below 1%. It's just 0.9%. If we move to the lower part of the slide, we're going to see in the last column the new past due loans. We have an excellent behavior of the new past due loans.

We've moved from COP524 billion deterioration last quarter to just COP143 billion. We mentioned that the conference call before that we expect that this COP524 billion was not a trend and secondly what we've found is this quarter was a significant improvement in that behavior as I said.

We expect a trend similar to what happened in 2012 where we were improving this behavior over the year and we believe that the bad vintages of 2011 and 2012 are over and about to be fully reserved.

We still expect a cost of credit over the year of 1.5% to 1.7%. As I said, including the provision due to loan portfolio growth.

If we move to slide number six regarding again, asset quality, the ratio of past due loans to total loans went back to 2.8%. Basically we had charge-offs that helped that and secondly, as I said before, the new past due loans were lower therefore the number 2.8% is one of the lowest over the last year.

The coverage allowances to past due loans again, we came back to 107%.

To highlight in the graph again on the lower part of the slide and in the second to the last column, overdue second quarter 2013, 30 days which is how we measure it, if you look at each of the lines, the commercial, 1.5% is the best over last year. Consumer, 4.9%, is almost -- is not exactly the best, but it's really in the lower range.

Actually, the only one that shows a slight increase is financial leases. That has to do with a specific transaction that came past due at the end of the quarter but it's already current.

Therefore, we feel that as Carlos Raul said at the beginning that we have a pretty healthy asset quality and loan portfolio quality.

If we move to slide number seven, where we have the net interest income, I would like to call your attention because probably this graph on the upper left-hand side is probably the most important one that we have in this presentation.

As you can see, in the second column we split the net interest income between what is the loan portfolio income and what is the securities portfolio income.

Last quarter was COP235 billion net interest income coming from investments and COP1,169 billion coming from loans.

Whereas in the last quarter, where we have these mark to market adjustments, the one that you are already aware of where we have this a significant decrease in the final net profit is basically based on this one.

We had basically the mark to market situation, we have COP167 billion losses on the net interest income whereas the same income based on the loans grew 2.9% over the quarter.

So again, this graph really shows you how was the significant shift between, I would say, very generous earnings in the first quarter and really difficult losses in the second quarter.

The point here is that we just adjusted all the portfolio mark to market so right now, we are running currently; we don't have anything hidden. We don't have anything available for sale or at maturity. So that was part of the decisions that we took that we prefer to have this big buffer instead of hiding something on our books.

If we move to the same graph but in the lower left-hand side, funding costs, certainly this is part -- we are working here as a significant contribution under NIM contention. We are going to see some deterioration on the NIM, but certainly we're putting enormous efforts in containing the funding costs.

As you can see, most of the lines show a significant decrease in prices.

And the funding composition on the lower right-hand side, you can see how it is split between checking, savings, time deposits and others and the point here is that we still have 76% of those funding our core deposits; checking, savings, and time deposits.

If we move to slide number eight, where we have the NIMs and margins. The first category we will call your attention to is 5.1% negative. That's the biggest drop in investments NIM over the last four years that we have graphed here.

And probably, the only time we can recall about something like this one was in 2006.

That certainly dragged down total NIM from 6.8% to 4.7% as you can see and finally, the 6.4% which is the loan interest margin, certainly competition and excessive liquidity in the market have driven down the prices. We have a NIM compression in spite of the efforts bringing down the costs as we saw in the last slide.

Even though we maintain our expected NIM for the year at 6%, we will continue to fight to bring the NIM up to what we had in the former quarters.

If we move again to slide number nine, when we have the non-interest income particularly fees and income from services, we show here healthy growth. Fees grew 13% over the quarter and 12% over the last 12 months. In terms of our credit and debit card, as you can see, in the year-over-year there is a decrease of 1.5% this is certainly the reflection of some of the reductions that we have had in terms of fees.

We have discussed this one over the last one to two years that we have to bear some of the costs and specifically on that product in order to avoid regulation as we have seen in different places over the world.

So part of the not that healthy growth is coming from the credit and debit card, but on the other side, banking and other services are growing very healthy.

What we have here is basically traditional services and bank insurance and investment banking activity really growing healthy.

We expect to maintain a 10% growth on this topic for the remainder of the year.

If we move to the next slide on the OpEx and efficiency ratios, we grew 9% over the year the OpEx and 2.5% over the quarter. We split that in the next graph, the upper right-hand side. We grew personnel expenses, 2.3% over the quarter and 2.6% the traditional OpEx and administrative expenses.

So we think we are doing as Carlos Raul said in the introduction, we are doing significant efforts to contain some of the costs. Some of them certainly are fixed costs and costs that you cannot really have an impact on them, amortizations, depreciations, taxes. There are some expenses that you have no control at all of them, but on those that we have control, we certainly are doing as I said, significant efforts.

In the lower part of the graph, what we have here is the efficiency ratio and you see a number, I would say that the number does not really reflect the long-term trend due to the security losses that we showed in the former slides.

We were expecting an efficiency ratio of 54% for the year and we continue that we will be able to achieve something like that.

What is important is when you compare the OpEx to total assets, we certainly can show a positive trend. Although it's a long journey ahead, we think that we are finally on trend to achieve a better operating -- better efficiency ratios and certainly going to this sustainability for the long-term.

In terms of our expected OpEx growth, we are thinking around 10% as we saw when we have been running at 9%, but we consider that 10% will be a reasonable number for the year.

Next slide number 11, we have the loan to deposit ratio. We would like to show that we have been able to maintain this 97%, 98%, basically, the same number that we have had over the last three quarters. The message here is there is no pressure on deposits at all. We have been able to grab funds from the market.

And in fact, we would like to just mention that with these sudden changes in the local prices, we, at the end we end up being kind of a safe harbor for funds and we have a significantly high increase in terms of checking accounts and savings deposits, funds flowing from different other sources basically looking for, as I said, as kind of a flight quality on that particular quarter.

If we see the capital adequacy, 17.2% right now, it's clear in the 11.7% tier 1. We believe that with this capital adequacy we will have enough capital to absorb the Basel III implementation and the acquisition of HSBC and BAM over the -- as we mentioned during the second half of the year. And be able to have the general shareholders meeting in February and go back again to something like 10% to 11%.

We are expecting to have kind of a year-end capital equity of around 10% but again, once we have the general meeting, the shareholders meeting, we can increase around 100 basis points basically because of the appropriation of repaying earnings.

Finally, if we move to the ratios on return equity and return assets, the two ratios right now were absolutely jeopardized by the results in the securities portfolio. Certainly, those are not numbers that we are expecting for year end and those are not trend numbers. We expect the returns to be more towards 14% by year end 2013 and returning to something like 17%, 18% over the next two years.

As a final recall, I want to go back again to the -- to information that the loan portfolio remains very healthy. The asset quality improved in the second quarter and we believe that that will be the trend to maintain a very healthy asset quality.

Capital, we just discussed it and certainly we will be able to cross the year without anything that will surprise us in the mean time. And finally, HSBC acquisition and BAM acquisition are running as scheduled.

With that presentation, I now would like to open the floor for questions and I appreciate your attention to the conference. Thanks.

Thank you. We will now begin the question and answer session. (Operator Instructions).

Our first question on line comes from Mr. Thiago Batista from Itau BBA. Please go ahead.

Hi guys, good morning and thanks for the opportunity. I have two questions. The first one on asset quality. We saw that you posted some improvement in [EBITDA] ratio, but your loan loss provision expenses is still at very high --- at high levels.

Now that you already reviewed its coverage ratio could you expect some decline in the level of loan loss provision expenses going forward? This is the first question.

The second question regarding the loan margins. Bancolombia's loan NIM declined 20 bps this quarter and according to slide eight, it is in the lowest level since second quarter of 2009. Do you believe this reduction in the loan margins was caused by the contraction in the central banking interest rate or is a kind of increasing the competition in the segment in Colombia?

Thiago, thank you for your two questions.

The first one about asset quality, we certainly believe that with improvement of the new [passive] loans that will have a positive effect in the oncoming quarters as less and less loan portfolio is entering to the deterioration point, we expect that it will have lower and lower impact in terms of provisions.

As I mentioned in the presentation, one of the points that really kind of make us not really showing good numbers on that point exactly is our growth that we are having on the portfolio. So half of the charges, half of the expenses that we are sending to the P&L as provisions, half of them are based on the growth, half of them are based on credit quality.

But again, based on the new past due loans, we certainly believe that the numbers should go down over the quarters.

And on the second question about the loan margins, the NIMs, 20 basis points certainly it's lower. We would like to go back again to something like 6% as an overall NIM going back to like a 6.6%, 6.8% in the loan portfolio.

There were basically two things. One of them was that over the last year, US dollar denominated loans were very dynamic, as you saw, 17%. The same with corporate loans. Both of them were very dynamic over the last year.

So that dragged down the real NIM, but we've been discussing that extensively on the gap committee, the asset committee, asset and liability committee and we are finding them to bring it back to the number as I mentioned.

So we expect that this 6.4% will be just a temporary situation based on the mix that we saw recently.

Our next question on line comes from Marcelo Telles from Credit Suisse.

Please go ahead.

Hi. Good morning, everyone. Thanks for the opportunity. I have a question regarding asset quality and actually, the countercyclical provisions in the quarter.

Look at it, you know, given that you have like 53% of the provision in the quarter are considered countercyclical, that would mean probably like roughly 5% of the new loans originated in the quarter, which looks a little bit high compared -- versus your current NPL ratio or even if you compare to the current NPL formation rates.

So my question to you is what should we expect for that line? Do you think this countercyclical provision still reflecting maybe past losses that are higher and over time they should decline? I know you already mentioned you were expecting provisions, average loans to be around 1.5%, 1.7%, but if you can elaborate a little bit more on that, I would appreciate. Thank you.

Thank you, Marcelo. The point and probably I will also ask help from Juan Carlos Mora but basically what we have in these countercyclical provisions is a couple of different matrices. And what we have to do is basically make a provision based on the expected losses, based on the quality or classification of the new debtor.

And it's supposed to be a time of formation in terms of provisions and it's supposed to be a time of a reduction on the provisions.

The point is whenever you arrive to the reduction cycle, usually the regulator don't want to have that. So that's basically a reason why we have this 160%, 170% coverage and basically, what we are probably going to see is kind of a slowdown on that, but we do not see a significant reduction in terms of provisions.

Yes, basically what the regulator applies in Colombia, it's like two matrixes. One for good economic times, and that's the one that it's applying now which we are forming provisions for as Sergio mentioned, for times in which the economy is not performing well and we can use that provision that we are forming at this moment.

So that first matrix that I mentioned, it's higher on provision charges and that's why we are ending having enough coverage that we have now.

And since the portfolio is growing at the rate of 22%, that puts pressure on provisions. If the loan portfolio grows at a lower rate, the pressure on provisions due to that application of that matrix is going to be lower and the provisions due to deterioration is going to be the one that is going to be the main driver of provisions.

And as Sergio mentioned, we are expecting for the second semester a better behavior of the loan portfolio and probably we will see a lower increase in loan portfolio. So that's why we are expecting lower provision charges for the rest of the year.

And finally, just a point I would like to highlight is those, the fact that you make the provision doesn't mean that you lost the money. The good point here is this is like a capital buffer.

The capital buffer before going through taxes. So we prefer to have as compared to what is Basel III and what is the regulation nowadays in Europe or even in US. You have to create these capital buffers after-tax. You have to increase your capital. Here is a way of increasing the capital for bad times before taxes. It's a very efficient way of having extra reserves for difficult times.

Thank you. Our next question on line comes from Tito Labarta from Deutsche Bank.

Please go ahead.

Hi. Good morning. Thanks for the call and taking our questions. A question just in terms of your loan growth, you mentioned you expect probably to grow a little bit faster than before on 15% to 20%.

So I wanted to maybe get a little bit more color on that if you think you'll be probably closer to the 20% given the strong growth you saw this quarter? And also if you can give us some more color just in terms of the different segments.

I guess specifically since you are looking to increase your margin, does that mean you're going to be growing more on consumer loans and SMEs? If you could maybe give a bit of a breakdown in terms of loan growth by segments. Thank you.

Morning, Tito. Thank you for your question.

Basically, what we see over the quarter was -- over the first half of the year was a more dynamic than expected corporate loans. By year end last year, we were expecting companies to be more cautious in terms of new loans but it seems that they are demanding credit and things are moving ahead in terms of the demand from as I said, from companies, from corporations.

On the other side, consumer lending even though it was growing fast over the year, we consider that based on the fact that the economy is not growing at the same pace that we were expecting by year-end, by the beginning of the year, we kind of start tying the [discurrents] adjusting a little bit to what we consider could be it's not a more difficult time -- we consider it could be different time from what we saw before because interest rates are higher than what we saw in the beginning of the year.

So even though I said mortgages were very dynamic, they will maintain the trend, but probably the availability for funds will be the same as we saw. You probably remember that we were even lending -- in an agreement with the government, lending mortgages at 7% fixed. Right now, the commitment with the government just ended and we cannot provide funds at that price anymore even though they put 200 basis points on the price.

So mortgages probably we will see in slowdown growth. Commercial, based on the increase in the rates that we saw recently probably they will reduce the expected demand of credit and as I said, US dollar denominated loans last quarter we -- didn't grow, were just 1% negative. So when you put all that together, we were growing at 22% over the last 12 months. Probably we will go down to something between 15% to 20% based on the factors in the economies really demand.

As we go to enter into an election year next year, we do not expect a very dynamic year end, but again, who knows. I have to confess that for the first half of the year, I cannot misread what some of the actors were expecting. I was certainly -- truly was expecting a much lower growth in terms of loans.

But again, as I said, if we deduct the depreciation of the peso over the quarter, we grew like 4% over the quarter. So we maintained the same trend but on a 12 month range, it would be something like 16%. So that's basically what we are seeing right now. But that's the maximum color I can really read from the market right now, Tito.

Thank you. Once again, we ask that you limit all questions to one per participant.

Our next question on line comes from Ms. Maria Santiago from HSBC. Please go ahead.

Hi. Thank you for taking my question. My question is on tax. We saw this quarter that you had a tax credit. What is the rationale behind this and how should we see these lines going forward and what's the effective tax rate that we should expect for 2013?

And I have another question. And it's on -- just a follow-up on provision expenses. So you -- I just want to confirm. Your guidance was 1.5% and between 1.5% and 1.7% of average loans for the whole year. Is that correct?

Okay. Thank you, Maria. This is Jose Humberto (technical difficulty)

Pardon me. This is the conference operator. If your line is on mute, could you please unmute it?

You are now reconnected to conference. Please continue.

Maria, the tax for this year, we expected something between 25% and 26%.

And regarding -- if Maria is still on the line -- regarding the guidance for the provisions, it would be between 1.5% and 1.7% over the year. That's the number we are aiming to.

Our next question on line comes from Mr. Saul Martinez from JPMorgan.

Please go ahead.

Good morning, everybody. I guess we are limited to one question so I will ask about your net interest income from securities. I just want to make sure I understand the slide seven. The negative COP167 billion, that, I presume is your net investment income from securities, net of funding costs.

But what I'm hoping to try to get a better sense of is what the actual mark to market valuation loss is on your investment security that flowed through that line item and more importantly, I suppose how we should think about that line item, the NII from securities going forward.

What a more normalized level is without any impact from mark to market. Losses are mark to market gains which presumably have positively affected recent quarters.

Good morning, Saul. Thank you for your question.

We have in our books COP7 trillion in securities, mark to market. The duration of them, some of them, but we have part of a structural portfolio will have a small proportion of them which is a trading portfolio.

The trading portfolio was about 2 billion pesos -- COP2 trillion, rather, and the point is at the very beginning, the sensitivity ratio was that for 1 basis point change we will have an impact of COP1.500 billion, roughly $1 million for each basis point.

When prices change, as sudden as they did, at that specific moment two months ago we tried to download our precision as fast as we could and we tried to do the swaps and the coverage for the position in order to protect any potential losses, but the market was very, very shallow.

We, as the market makers, we couldn't unload our position in the short-term exactly the same with all the other different participants in the market only we were the most active. And we managed to unload our position and change -- unload like COP2 trillion over the months of May and June and as we saw in the market, most of the other players, they didn't. They remained with their positions.

Some of them just decided to move from market to available for sale. And when you move to available to sale, the thing is instead of sending the impacts of the mark to market to the P&L using that impact directly to the equity, to the shareholders equity therefore you don't see it on the P&L but you are going to see the impact on the equity side. That was in our case. We preferred to have our hit directly.

On that specific point we have COP280 billion as a negative impact on the portfolio, but right now, the sensitivity that we have on that one is like COP60 million per bp. As one of the guys on the treasury said, it's like an old widow's portfolio. It's pretty fixed.

So if there is a change right now on that, we won't see volatility. That's the part that we discussed with the Board of Directors. So we reduced substantially the volatility.

That will happen. If for any reason interest rates go down, we won't be able to make a significant gain on that as we had on the first quarter of the year as you saw we have a significant gain on that part of the year.

But right now, based on the volatility we are seeing global wide, we prefer to have a stance certainly much more conservative as the one we are having right now.

I don't know if that answers your question on that, but it's something that --- my point is I really want to show that we, as I said, we really prefer to have this big buffer instead of having something deferred over the quarters.

Thank you. (Operator Instructions)

Our next question on line comes from Mr. Jose Barria from Bank of America. Please go ahead.

Hi. Good morning, gentlemen. Just very briefly, given that loan growth is pacing at a faster rate than you expected, does this have any impact on your plans or expectations for capital in the short term? I know you gave some numbers in terms of tier 1 at the end of the year and at the end of the first quarter, but if we continue to see loans running at roughly 20%, does this increase the likelihood that you might need capital sooner than later?

And then just very quickly, what is your target for ROE in 2013 and 2014? Thank you.

Thank you, Jose.

With this -- as you said, with this capital growth, the numbers we are running as we mentioned before, we do not see any capital issuance from the short-term. We will cross the year with a capital adequacy of roughly 10% after all the impacts that we have. And if we continue to grow at 20%, certainly we will need capital.

Those I mean over the next year, over the next two years. There's no doubt. When you have a return equity growing at the same rate or even at a lower rate than the loan growth, certainly you will have to issue capital but right now, as I said in the short-term or next six months or a year, we probably won't see any capital.

And regarding the return on equity, we are expecting to end 2013 in 14% and returning to something like 17%, 18% over the next two years in 2014, 2015.

Our next question on line comes from Diego Usme from Ultrabursatiles. Please go ahead.

Good morning. Thanks for the call. Just could you repeat me your expectation with respect to the return on capital growth for this year? And the other question was answered earlier. Thank you.

Okay. Thank you, Diego. (Technical difficulty).

Hello? Have we lost the connection or we're still in?

We are still connected.

Okay. Do we have more questions?

Yes, we have a question online from Mr. David Santos from Compass Group.

Please go ahead.

Yes, my question was already answered, it was about the capital adequacy. But it was already answered. Thank you very much.

Our next question comes from Boris Molina from Santander.

Good morning. Thank you for taking my questions. I wanted to see if you could give us a little bit of color on this transition in terms of ROE from 14% to 17%, 18%. How much it would attribute to obviously a nonrecurring trading result this year, but going forward, what could we expect in terms of efficiency or margins?

What would be the bigger driver for this recovery? And if we could expect to see additional cost containment following the slower growth in cost this year relative to the last couple of years and where we could expect to see improvement in efficiencies from the end of your [IP] renewal plan.

Good morning, Boris. And thank you for your questions.

We believe that the recovery on the return equity first has to do secondly with the income ratio of HSBC and BAM. One thing that is happening right now is that we have COP2 billion in cash ready to pay for the acquisition and the return on that as you probably know is only a few basis points.

We do not want to risk that money on long-term papers therefore, basically what we've got is overnight rates. Once we have the HSBC returned to net profits on our books, that will be on top of what we are having right now. So this is one point. It's exactly the same with BAM. So on these two specific points, we will have a positive impact once we have those numbers on our books.

And regarding the cost contention, certainly this is something that is going forward. That is something that is on the agenda of every single Board of Directors meeting and we are basically doing every single effort we can do before having a headcount.

And we mentioned that because we are growing at the rate that we are growing. We have to be careful of laying off people because usually it is expensive to do it and the thing you don't want to do is to layoff someone and rehire the individual one or two years down the road because the market won't do on that particular case.

So we are trying to grow our net income, grow our portfolio at a faster pace than our payroll and again, the controlled OpEx which we are currently doing efforts on that side.

So with these two things together, those are the points that we really put as levers for the 17%, 18% return on equity over the next two years.

Our next question comes from Guillermo Alarcon from Davivienda.

Please go ahead.

Thank you. My questions have been already answered. Maybe just to ask if you are going to consolidate the financial statements of the Central American operations in the second semester.

Thank you, Guillermo. Basically, once we get approval from the local authorities that specific moment we will consolidate. Before, we can't.

Our next question online comes from Carolina Yoshimoto from Goldman Sachs.

Hi. Good morning. Thank you for the opportunity. My question is on tax rate. So the effective tax rate in the quarter was positive. So I was just wondering if this is because of the mark to market losses and also what the expectations are for the year? Thanks.

This is the expectation for forward year. Again we are expecting to close the year between 25% to 27% based on the calculations that we made in January.

Thank you. Our next question online comes from Mr. Philip Finch from UBS.

Please go ahead.

Good morning, everyone. Thank you for your presentation and for taking her questions.

My first question is regarding your funding costs which showed a nice improvement coming down over the quarter versus last year. Could you explain the drivers of this and how sustainable it is going forward?

And secondly, going back to the question on your cash position, you said in the presentation that by the end of this year you should be at 10%. What would that figure be in terms of Basel III, Tier 1 ratio? Thank you.

Thank you, Philip. Funding costs, certainly this is a day-to-day effort. We have to manage how to reduce rates and not losing deposits and this is something that the [ALT] committee does on a weekly basis.

How sustainable it is, as I said before, we had a very positive funding for fusion coming from these flight qualities that we saw in the last two months based on the change of the prices on the portfolios of some of the funds we saw a significant reduction in the funds and a quality flow into deposits and checking accounts.

That's what our day to day tasks, how sustainable and how far can we go -- probably I think the bottom will loop be near the central bank rate. The rate right now is 3.25%. So probably we could do something a little bit further down than where we are right now, but certainly, it has a bottom run and we do not believe there will be significant the lower than we do have right now.

It will be lower, but probably not significantly. Even with the fact that the rates, global wide are going up. That's the only point that is important. And the other one, the year end, we will close the year with 10%. Probably the mix will be something like 6% tier 1 and 4% Tier 2.

Roughly, that will be the numbers. It depends of course of the behavior of the loan portfolio, the behavior of the net profits over the next two quarters, but basically, that will be what is expected.

Thank you. Our next question online comes from Mr. Andres Jimenez from Serfinco.

Please go ahead.

Yes, good morning, gentlemen. Basically I have one question which was actually piggybacking on Boris and Marlene's question on the actual acquisitions of HSBC and how you actually are expecting to increase the ROE during the next couple of years. Could we have a little bit more color how you are actually going to achieve those 300 or 400 basis points on that actual and the strategies to actually achieve that? Thank you.

Thank you, Andres. No, basically it's kind of a straightforward point. When you have a bank like HSBC and if you just draft numbers on how much we pay the bank and how much the return equity on the bank, you end up having something like 7% approximate return on the amounts paid for the bank.

When you compare that to what we are having on returns and the money that we have on the books right now, which is 25 basis points, 20 basis points, we will have a positive impact on that. So it's kind of 7% over $2 billion. It will have a positive impact on the income and therefore will have the positive income of the return equity.

It's kind of the same with the BAM position. So these two things are the ones that we consider will be important for the return equity as outliers in terms of these points.

The other ones of course will be improving the efficiency ratio, growing the (inaudible) income, net interest income at a higher pace than the costs and this is something that we are doing right now. So when you add all of these points, you certainly will achieve this return equity that we are aiming for right now.

Our final question online comes from Mr. Alonso Aramburu from BTG Pactual.

Please go ahead.

Yes. Good morning. I have one question on competition. You had mentioned previously that mortgage rates coming down to 7% although that's no longer the case. Can you talk a little bit about some of the other segments whether you are seeing some pressure also on some of the other yields on consumer mainly?

Unidentified Company Representative. Thank you, Alonzo. Certainly, there is competition in mortgages as you said, in fact are very encouraged by the government. The second one that I could recall could be the [payroll] lending. There has been competition on that specific segment.

Several banks understand that this kind of lending is quite safe in terms of the behavior. I think that these two on the consumer side are basically the most negatively impacted in terms of the NIMs and certainly the corporate loans based again on the liquidity market, I would say those are open market competition and our colleagues specifically the big ones have exactly the same amount of liquidity that we have, therefore, it's a matter of a pure competition -- who gets the contract and who doesn't.

I would see at least for the remaining part of the year, I will see competition on that specific side too.

We have no further questions at this time.

Please go ahead with any final remarks.

Well, basically we appreciate your participation on the conference. Again, we understand that the numbers weren't as good as other quarters, but certainly, again we will like to highlight that the loan portfolio remains very healthy. The asset quality remains, again, very healthy and improving. Capital adequacy, we have no problems at all. We will be able to pass the year without any capital issuances.

The expansion in Central America and Panama are basically on schedule. Whatever we had over the last quarter based on mark to market on securities, certainly we will have a positive trend in the future and we do not have any thing remaining on our books that we have to amortize over the next quarters.

Everything was done at the specific moment, therefore we are really optimistic about the next two quarters and year-end 2013.

Thank you very much and we hope to see you on the next conference call.

Thank you, ladies and gentlemen. This concludes today's conference.

Thank you for participating. You may now disconnect.