Grupo Cibest SA (CIB) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Bancolombia's first-quarter 2014 earnings conference call. My name is Sylvia 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 and press releases or verbally address matters that involve risk and uncertainty.

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

With us today is Mr. Jaime Valasquez, Chief of Strategy and Financial Officer; Mr. Jose Humberto Acosta, Chief Financial Officer; Mr. Juan Carlos Mora, Chief Operating Officer; Rodrigo Prieto, Chief Risk Officer; and Alejandro Mejia, Investor Relations Manager.

I would now like to turn the presentation over to Mr. Acosta, Chief Financial Officer of Bancolombia. Please proceed, sir.

Thank you. Good morning and welcome to our first-quarter 2014 results conference call. It is a pleasure to be with 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 website.

First of all, I want to open this conference call elaborating on the strategy of the Bank. After completing the capital raise last March and preparing a portion of the earnings generated during 2013, we finished the quarter with a Q1 ratio of 8.9%, in line with our expectations.

As we have expressed in previous occasions when we take in consideration the composition of our assets, which are mainly loans, the treatment of provisions and allowances under Colombian regulations, the prospect of organic growth for the next few years, we came to a target Tier I ratio of 8% to 9%. It is precisely in the high-end of that range where we stand today.

During the quarter, we saw sustained loan demand from corporations and individuals. Corporates remained as our main growth segment as they mainly demanded resources for expansion of their facilities, short-term working capital loans and trade financing. On the other hand, individuals demanded loans but at a slower pace, in line with the seasonal factors.

It is worth mentioning the impact of the 2.2% depreciation of the Colombian peso versus US dollar during the quarter, which caused that the loans denominated in US dollar represent more pesos when converted, causing a faster growth in pesos. We keep our growth target of 10% to 15% in 2014.

In this quarter, we saw a significant reduction in our funding costs, which has been our goal over the last 12 months. With greater liquidity in the Colombian economy and moderate growth in the loan portfolio, we have focused our efforts in reducing the volume of the most expensive funding sources. In this front, Bancolombia presents one of its main competitive advantage, the ability to grab a stake and diversify deposits at the lowest rate in Colombia.

These factors contribute to a slight expansion of the lending NIM. The other component, the investments NIM, also presented a good performance.

In February and March, Colombian government securities performed well as there were international capital inflows that caused their appreciation. Nevertheless, our exposure to these trends is small given the small size of the security portfolio, only 12% of the assets, and the low duration, only 15 months.

Another front where we see a positive trend is the fee generation. The number of transactions through our channels continues increasing, in particular through branches, agents and ATMs. Additionally, the bank assurance business remains dynamic and is a good example of the distribution capacity of Bancolombia, not only of our own products, but also of other company's products that generate fees for us.

Regarding Banistmo, this year and 2015 will be the years of transition in that operation. This quarter was the first quarter to fully reflect the numbers of Banistmo and also to fully reflect the goodwill amortization under Colombian GAAP.

We continue with our efforts to gain efficiency and improve profitability. The expansion of the branch network will be not -- will not be as aggressive as in previous years and we plan to open only seven branches this year. Now we are putting our efforts in low cost channels such as Internet and mobile banking.

Last but not least, I would like to present the results for the first quarter 2014. During the quarter, Bancolombia generated COP508 billion, which represents an annualized return on equity of 15.3%. The performance of the Bank was slightly better than our expectations and lead us to reaffirm our goals for the year. We will elaborate more on each part afterwards.

Having said 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, we will elaborate more on the Bank's results. Juan?

Thank you, Jose Humberto. Now I will ask you to go to slide number 3 in the presentation. As the market and the Central Bank were expecting, the Colombian economy grew 4.3% during 2013. The sectors that lead the growth were construction, agro industry and services, which contributed to a decline in unemployment during the year.

The latest report -- reported unemployment figure was 9.7%. This is good news for us because of the high correlation between lower unemployment and credit quality.

It is also remarkable the fact that 28% of the 2013 GDP was explained by gross capital formation, which indicate that Colombian companies keep investing in productive assets. The Central Bank is expecting a 4.3% expansion during 2014. We share that view and estimate that the second half of the year should be more dynamic as the level of spending of the Colombian government picks up as well as households demand more goods.

On the other hand, inflation for the 12 months ended April 2014 was 2.72%. Inflation has been increasing towards 3%, which is the point target set by the Colombian Central Bank. This trend in inflation plus stronger economic activity led the Colombian Central Bank to increase the repo rate in the last session in April to 3.5%. This hike took the market and ourselves by surprise as we were expecting increases to start in the second half of the year.

Nevertheless, we see this action as positive as it signals a reduction in liquidity and that we might be able to originate loans at a higher yield and eventually expand the NIMs.

Regarding the FX market, the Colombian peso experienced depreciation of 2.2% during the first quarter of 2014 and 7.5% over the last year. Nevertheless, in March we saw a trend of appreciation of the Colombian peso versus the dollar and a reversal of the depreciation trend experienced in January and February.

This appreciation trend occurred in part because of capital inflows resulting from a higher weight of Colombian sovereign papers in the JPMorgan Global Bond Index.

In the macro front, we see that indebtedness level of households remain stable. We have not seen any abnormal performance of vintages and the credit quality across the financial system remains strong. That trend reduces the risk of higher loans deterioration and provision charges.

We believe the Colombian economy is in a good shape and this will permit us to continue growing at a nice pace while keeping risk under control.

After this quick review of the economic environment, let me turn the presentation to Jose Humberto, who will discuss the Bank results in detail. Jose?

Thank you, Juan Carlos. On slide 4, we see the evolution of assets and its composition. During the quarter, the proportion of loans as a percentage of the total assets increased to 67% as we deployed more resource to our core business, which is lending.

And the securities proportion increased to 12%. This increase in the securities portfolio was due to the proceeds that we received at the end of March, a product of the stock issuance. Nevertheless, securities represent less than they did one year ago and duration remains low at 15.8 months compared with a duration of 23 months a year ago.

During the quarter, we used the cash that we had at the beginning of the year to reduce the most expensive funding source and to grow our loan portfolio. That's why we experienced a reduction in the Company's other as well in deposits. The goal of this move was to reduce the funding cost and expand the net interest margin, as we will see in the coming slides.

In this quarter, the credit demand evolution confirmed a moderation in the pace of growth, in line with our expectations. We are more cautious in the origination process especially in the consumer segment.

The loan growth in Colombian pesos reached 1.8% during the quarter, driven by corporates, which demanded short-term working capital loans, trade finance facilities and loans for CapEx purposes. Consumer loans in Colombian pesos also grew during the quarter but at a slower pace, in line with seasonal factors.

On the other hand, US-denominated loans grew 0.9% during the quarter, driven by mortgages and corporate loans in Panama. The 2.2% depreciation of the Colombian pesos versus the US dollar during the quarter caused that the growth of US dollar loans was higher when measured in Colombian pesos.

When we analyze the year on year overall growth of the loan portfolio, the 26.7% growth is partially explained by the incorporation of Banistmo assets, which contributed with 16.5% and today accounts for about 13% of the total loan portfolio. Finally, we reaffirm our growth target for this year, that will be between 10% to 15%.

Slide number 5 shows the evolution of provision charges, which was COP308 billion during the quarter. It was 1.36% of average gross loans when analyzed, which is a very low ratio.

In the shaded row of the table at the bottom, we present the amount of loans that became past-due during the quarter. The COP577 billion reflects the seasonal effect that occurs every year in Colombia and Panama when individuals tend to be late in their payments in the first months of the year.

The most important thing regarding loan quality is that vintages originated over the last six months present today a very good performance as a result of strict credit underwriting standards and they should not present abnormal deteriorations in 2014. We feel comfortable with the evolution of the loan portfolio and forecast to have provision charges at around 1.5% of gross loans during 2014.

Now, in slide number 6, we present a snapshot of the credit quality at the end of the quarter. The past-due loans to total loans ended the quarter at 3.2% and slightly above the 2.9% of December last year. As we just explained in the previous slide, these increases originated due to seasonal factors in Colombia and Panama. The coverage ratio ended at 142%, declining against the 156% of December 2013, again due to seasonal effects.

In general terms, we see the portfolio with a healthy quality, well covered by allowances and with past-due loans under control. As we have a greater company to forward our loan portfolio outside Colombia, the 90-day threshold for measuring past-due loans gains more relevance. That's why in the next slide we will analyze the 90-day past-due loans.

We forecast to have 30-day coverage ratio of around 150% in the medium term. We believe that it's more than enough to absorb potential credit losses that the Bank will eventually have. Similarly, past-due loans should represent between 2.5% and 3% of gross loans at the end of this year.

Moving to slide number 7, we confirm the evolution of 30-day past-due loans, which is the Colombian standard, and the 90-day past-due loans, which is a better indicator of credit quality as we have a greater portion of our assets in countries that use that standard. 90 days past-due loans have been very stable over the last year as a result of our good credit origination process. At the same time, the 90 days coverage ratio is 296%, which we believe is more than enough to absorb credit losses.

Moving on to slide number 8, we see the evolution of the net interest income and funding cost and composition. Net interest income for the first quarter was COP1.46 trillion, 18% above the previous quarter. This growth is explained basically for three main factors; first, higher volumes of loans during the quarter; second, the contribution of the three months of Banistmo results; and third, the expansion of the NIM caused mainly by the reduction of their funding cost.

The key element of the net interest income increase in the quarter is that it grew based in the lending business and was only marginal in the investment securities performance. Securities net interest income during the first quarter was 25% of the net interest income generated one year ago.

The securities portfolio reached a positive net interest income contribution of COP58 billion during the quarter, capturing the benefits of the appreciation of the Colombian government securities during the quarter. The duration of the securities portfolio ended at 15.8 months and the yield to maturity ended at 4%.

The reduction of the funding cost, which was 19 basis points during the quarter and 91 basis points during this last year, is the result of a strategy that aims to decrease the most expensive funding sources. With more liquidity in the market and moderate pace of growth on loans, we were able to actually reduce the stock of deposits and therefore the cost of funding for the Bank.

The proceeds on the stock issuance and the cash that we had at the beginning of this year contributed to this effort. Our goal is to reduce the funding cost in an effort to expand the net interest margin and improve the net interest income.

Slide number 9 shows the evolution of the net interest margin. The NIM from loans ended at 6.1% in the first quarter, slightly above the 6% at the end of the year. This increase is mainly explained by the reduction in the funding cost that we explained in the previous slide.

We forecast the lending NIM to be between 6% to 6.2% in 2014. The securities NIM was 1.8%, up from 0.1% in the previous quarter, as it captured the benefit of depreciation of the Colombian government securities during the quarter and a lower funding cost.

As we mentioned at the beginning of this presentation, the Colombian Central Bank increased the repo rate 25 bps points to 3.5% in the last meeting in April. This measure took us by surprise and as of today we can foresee a positive contribution in our NIM due to a small increase in reference rate DTF, as our balance sheet is asset sensitive.

Fees are presented in slide number 10. This line grew 3% during the quarter to COP542 billion as a result of more volumes of transactions and products that generate noninterest income. In particular, we experienced monetization of credit and debit cards during this quarter, a product of our effort to promote the use of plastic to paying stores and increase the number of credit cards in new segments.

We continue growing our insurance distribution fees, which generate about COP70 billion during the quarter. Also, we have to take in consideration fees from Banistmo. And finally we saw a good performance of our asset management business, a product of their greater assets under management volumes. For the year, we remain with our estimation of growing fees around 8%.

On slide 11 we present the evolution of expenses, which declined 3% during the quarter. This quarterly growth is totally explained by the 19% increase in labor expenses, which tend to impact the first quarter sharply. The three months of Banistmo labor expenses also contributed to this growth. As in 4Q 2013, we had only two months.

On the other hand, administrative expenses declined 90% because some of the expenses that were usually reflected in the first months of the year have not occurred yet, and therefore we will post them in the next coming quarters.

Our guidance for 2014 is an increase of expenses at around 17%, taking into consideration that we are having 12 months of Banistmo expenses.

The cost to income ratio was 54% during the quarter. This metric is calculated dividing the operating expenses and goodwill amortization into operating income before provision charges. If we exclude goodwill amortization from the calculation, the cost to income will be 52%.

On the bottom right-hand side, we see how OpEx to total assets came down during the quarter. Bancolombia has been able to grow assets faster than expenses. Our efforts right now are focused on improving the efficiency of the Bank. Revenues should grow faster than expenses and the main drivers of cost growth, headcount and branch network expansion are very stable.

Our goal is to perform a greater number of transactions through electronic and low-cost channels such as our mobile banking and agents. As a guidance, we expect cost to income ratio at the end of the year at a level of around 53% to 54%.

Moving to slide 11 (sic - "slide 12"), we see the evolution of the net loans to deposit ratio, which increased during the quarter as a result of the reduction of the stock of deposits and the growth of loans. During the quarter, we used the liquidity and cash that we had at the beginning of the year to reduce the most expensive deposits and bank borrowings. This explains the sharp decline in the stock of deposits.

During 2014, this loans to deposit ratio should be between 90% to 100%. This quarter we ended at the high end of the range due to the strategy to reduce deposits and take advantage of the proceeds on the stock issuance of March.

Regarding capital on the bottom right-hand side, we present the capital adequacy ratio at the end of the quarter. The Tier 1 ended at 8.9%, higher than the 5.8% at the end of 2013. The increase was the result of the stock issuance and the appropriation of a portion of 2013 earnings.

The 8.9% is well above the minimum required to operate in Colombia, which is 4.5%, and put us in a comfortable situation of equilibrium between strength of the balance sheet and return for shareholders.

Finally, on slide number 13, shows the return on equity and return on assets of the Bank. Return on assets remained stable during the quarter at 1.6% and return on equity declined to 15.3%, product of a lower leverage of the balance sheet due to the capital increase of March. Considering the capital situation, our forecast for 2014, we are expecting a return on equity of 14% for the whole year.

After presenting these slides with the first quarter numbers to you, I will just like to highlight where we stand today and our plans for the near future. First, our balance sheet reflects the moderation of growth of the loan portfolio. Second, the increase of the net interest margin reflects our focus on profitability based on reduction of funding cost.

Third, the performance of the past-due loans and our level of provisions in the first quarter reflects a slight deterioration because of seasonality, but in the long-term remains at a healthy level. Four, the securities portfolio in comparison with one year ago has a lower sensitivity and shorter duration. And fifth, the cost structure remain under control.

Having said this, we are happy to take any questions that you might have. Thank you.

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

Thiago Batista, Itau BBA.

I have actually two questions. The first one is regarding the mortgage market. Could you give to us your view about the mortgage market in Colombia and also in Central America regarding the expansion, the margin evolution and asset quality? So this is the first question.

And the second one is regarding your coverage ratio. When I compare the coverage ratio of the Colombian banks and yours in Colombia also with the other Latin American banks, it's easy to note that you have a really high level of coverage ratio especially if you look to the 90 days. Are you expecting to reduce the level of the coverage in the future and maybe this will help -- this will happen with the implementation of the IFRS during next year. This is possible -- it's possible to see this contraction in your coverage ratio. Thanks.

Thank you, Thiago. Let me start with your second question, regarding the coverage we are not expecting to change or modify the coverage of the ratio basically because we are mostly a corporate bank. So we believe then this is a natural cushion that we want to have and this is a kind of buffer that we want to maintain. So we are not expecting to change that. And if you check our numbers in the last five years, we always try to maintain the number of that level.

Regarding the first question, let me divide it into two different markets. First, in Colombia, obviously the mortgage market in Colombia is still very strong. It's growing at a pace above 20%. We are expected to maintain in trend and the same line of the market. We are not expected to gain market share. We don't see a decreasing of interest rates of the mortgage products. We believe that this year interest rates of mortgage will remain at the levels that we are seeing right now, which is between 11% to 12%.

In terms of margins of this product for us, our margin is at around 5%. So one of the main change of our balance sheet is because the incorporation of Banistmo. Previous to the incorporation of Banistmo, mortgage to our total loans were 8%. Today it's 11.5%. And we are not expecting to increase this proportion of mortgage into our loan portfolio.

Regarding Panama, in Panama our book it's different in terms of the proportion of mortgage to total loans. In that case, it's at around 28% to 30% and we don't expect again to increase the proportion of those mortgage loans into the Panama operation.

Thanks.

Tito Labarta, Deutsche Bank.

A couple of questions, I guess the first question in terms of -- could you give any color in terms of how much Banistmo contributed in the quarter now that you have it on your financials for a full quarter? I just want to get a sense what the contribution from that was like.

And then second question in terms of ROE. I know you said you expect 14% for the whole year. But just wondering maybe thinking longer term and once Banistmo is fully integrated, how do you see your profitably evolving in 2015 and beyond? Do you think it can increase some more as you maybe get some synergies or some benefits from the integration of Banistmo once it's completed? Thank you.

Thank you, Tito. Regarding Panamanian operation, Banistmo operation, we are expecting that as the total year during the 2014 that will give us a net profit of around $90 million to $100 million.

Obviously, this first part of the year you will see an increasing of expenses because of the implementation of the different systems that we are implementing right now. But the final number for the whole year will be again $90 million to $100 million. But obviously in the next coming years, which is 2015 and 2016, we expect to increase the level of profit from this operation in Panama.

Regarding the return on equity, because of that, because the operation in Banistmo, we are expecting to go back to the level of 16% in the next coming two to three years based on several considerations, competition landscape here in Colombia and Panama, interest rates remain stable on the asset side. So the profitability will be focused on reducing funding cost and operating -- and reducing the level of expenses.

Thank you. That's helpful. And then just one clarification, you said you expect expenses to grow 17% this year, that's one-seven, because of the integration of Banistmo. Does that mean expenses should increase a bit significantly compared to the first quarter?

Yes, right. If you only account the Bancolombia operation, not including Banistmo this year, our expenses will grow at around 8% to 9%. But again because we have to include 12 months of Banistmo operation against only two months of the Banistmo operation last year, the number will grow to 17%.

Thank you. That's very helpful.

Thank you, Tito.

Saul Martinez, JPMorgan.

I wanted to explore the NIM a little bit more and you gave good color, Jose Humberto, but what -- in your prepared remarks. But can you give us a sense of what you think a more normalized run rate for securities income or securities NIM is?

You obviously mentioned that there was a positive -- the positive valuation benefits because of the strength of the bond market, JPMorgan EMBI Index increasing the weighting. That should continue to help.

How do you see -- it was a little bit higher than I had anticipated and a little bit higher than what you've had in recent quarters. But how should we be thinking about your securities NIM going forward or your securities interest income going forward just to get a little bit more color?

On your lending NIM, a similar question. On your lending NIM, you gave guidance of 6% to 6.2%. Does that factor in the higher rates? What is that factoring in in terms of interest rate assumptions and as we head into 2015 do you anticipate that that lending net interest margin should increase further than that?

Thank you, Saul. Regarding the question of the NIM of the security portfolio, in March obviously because of depreciation of the debt sovereign, the pace, our NIM for only March was around 5% to 6%. Remember that we were talking that in this year our expectations of NIM because of the security portfolio will be between 1% to 2%.

If you check the number of the first quarter, today it's currently 1.8%. So we are expecting this NIM for the next coming quarters -- I mean in between 1% to 2%. We have been doing several measures regarding the security portfolio, [reducing] the volumes. Actually, we received a lot of money because of the issuance of equity, but we used that money in order to reduce the funding cost. So our portfolio right now it's almost a similar size than we had a year ago.

But we reduced the volatility of that portfolio and we reduced the duration. Right now our duration is on the short part of the curve. So we don't expect for the next coming quarters neither big profits, neither big losses, [smarter], because again it's a portfolio, if I may say, under control. So the guidance will be again 1% to 2% in terms of NIM for security portfolio.

Second, in terms of the loan portfolio, in terms of the loan portfolio the big effort that we will do for the next coming quarters is try to reduce the funding cost. We are not expecting an increase of interest rate. Maybe we are expecting a new value of the DTF because of the interest rates that the government and the Central Bank is expecting to reach the level of 4% at the end of this year. So we will gain some NIM because of the combination of better DTF and lower funding cost.

So does that mean your securities -- I mean your lending income was right smack dab in the middle -- your lending NIM was right smack dab in the middle of 1Q of your guidance range. But your guidance range for the full year, doesn't really change in spite of the expectation for a higher DTF, lower funding cost. Is this guidance conservative? Should we be thinking that that will gradually move up during the course of the year and maybe even be higher than that in 2015?

It is conservative, Saul, that's true. But you know that the pace of appreciation of the interest rates in the asset side take time.

Yes.

And the pace of reduction of costs also takes time. So that's the reason why we are not expecting a big increase of the NIM at least this year. Obviously, maybe at the first half of next year you will see a slight increase of the NIM, because of that, because you have a new structure of liabilities with a lower cost.

Okay. Once assets and liabilities are repriced, can you give us -- can you once again give us the sensitivity of your NIM to 100 basis points?

It is around 7 bps for every 100 bps that change the Central Bank interest rate.

Okay. And what is your expectation for year-end rate?

4%.

4%?

Yes.

Okay, great. Thank you.

Thank you, Saul.

Jose Restrepo, Serfinco.

Good morning and congratulations on the results. I have one question regarding the financing of all this infrastructure projects that are going on in Colombia right now. As I have seen in the local media, the banking lending is not that appropriate for these projects. Can you give us a color about the position of Bancolombia about this infrastructural financing?

Yes, we are in the middle of conversation of course with the project -- with the regulators, and we believe that if something happens it will be materialized in our loan portfolio the [4G] infrastructure projects just at the end of 2015. And that will be fully reflected in 2016.

But during this phase, we are just having conversations trying to design the better infrastructure for lending business. It's conversations that we are having right now, so we don't expect a clear answer on this conference call because again you are seeing different pressures for different stakeholders on this matter.

And can you give us like the impact that you are expecting on your loan portfolio of this infrastructural projects?

With the potential participation of 4Gs, that will be at around 10% of our total assets during the next three years in terms of 4G projects. But that will be in three, four years because you know that it will take time to (inaudible) these kinds of projects.

And obviously you'll see an increase of the loan portfolio, but then you'll see convert into the bond market. So you will see the 4G projects in the balance sheet of the banks in a different way; first as a bridge, then as a long-term loans and finally as a debt capital market.

Okay, thank you.

Fred de Mariz, UBS.

A couple of questions on my side. The first one on the PDL and the asset quality, you mentioned seasonality as a key driver of the increase of the past-due loan over 30 days, which was 2.2%. So you had a little bump in this number in the quarter. Does it mean that in the second quarter this number will already normalize, so it will get back to a level maybe closer to 2.9%? Is it that fast or is it something that takes longer to normalize?

And then the second question is on the efficiency side, you mentioned that there was some administrative expense that was not booked in the first quarter, which maybe surprised you, and it's going to be booked in the second quarter. I was just trying to get a bit more color on this expense. What exactly happened that was not booked and what kind of efficiency are you looking for this year, but also going forward? I would be interested in hearing you on the cost to income that's at three to five years down the road for the Bank. Thank you.

Okay, with nonperforming loans, we expect that the next quarter is going to be like the same that we had the last year. If we compare the last year in the first quarter and the first quarter through -- of 2014, it's almost the same.

We experienced problems with two clients, but it was not a credit risk. The risk is really good. They experienced problems with operation. Some of them were implementing SAP. So that's why we had an increase in the nonperforming loans under the 30-day basis.

So we expect that return to the normal years that we have seen in the other quarters that are not the [person]. I want to turn to Jose Humberto to the second question.

Okay.

Thank you, Rodrigo. Regarding the expenses, Fred, you're right. How we did in the past under Colombian GAAP standard, we project the total expenses for the year and we impacted the income statement on an aggregate monthly basis. But because we are right now we are preparing going forward IFRS, right now we are doing affecting the real expenses on every month.

So at the end of the day, you'll see an increases, again, of expenses at around 17% at the end of the year, but you'll see maybe a volatility of those on this line of expenses because of that. Because regarding IFRS we want to maintain the same utilization. And our guidance for efficiency at the end of the year will be at around 54%. But that was the explanation of the volatility, right now, of expenses. We are registering the real expenses that we are doing every month.

Okay, that makes sense. And if I may ask you for a follow-up then, what was this expense that didn't happen in the first quarter? Was it a big one, I don't know, market thing or was it just a lot of smaller ones that are pushed back to April or May?

There are some contracts that only will be paid at the second quarter of the year. That's the reason why we have a deviation of the expenses regarding the planning that we had at the beginning of the year.

Okay, that's great. And so you mentioned 54% for the full year. Going forward what is a good target level that you could reach in terms of cost to income?

Yes, thank you. For medium term, which means the next coming three Qs, our level -- our goal is to reach the 50% of efficiency ratio.

Great, 60%. Thank you very much.

My pleasure, Fred.

Carolina Yoshimoto, Goldman Sachs.

I have a couple of questions. The first one is a follow-up on the Panama operations. I was wondering if you could provide us with some more color on what's going on on the ground and what was the ROE in the first quarter?

And my second question is on cost control. You've mentioned that the Bank has been having a very strong focus on that and so I was wondering if you could outline some of the efforts that you've been doing in addition to contain the growth in headcount and branches? Thanks.

Okay, Carolina. Regarding the Panamanian operation, you know that we are having a contract with HSBC in which during 18 months we will replace our systems -- their systems and plus ours. The schedule is right on time. We are projecting to grow 10% this year in terms of assets. And that will be more oriented in corporate loans and we are expecting to grow at around 50% this year. And in consumer loans we are projected to increase 5% this year.

What we expect in terms of return on equity for HSBC -- for the Banistmo operation, that will be between 5% to 10% return on equity. You will take in consideration that we are right now making adjustments. We are doing a lot of expenses regarding the IT platform and also we are putting in place some procedures that we have to do it directly in the Panamanian operation. Give me one sec.

And can you repeat please the second question?

Yes, of course. So the second question is on cost control, about the push you've been doing in that front and if you could outline some of the efforts you have done to contain expenses in addition to control headcount and branches? Thanks.

Okay, Carolina. Yes. In terms of cost control, we -- again the guidance is to reach the level of 50% in the next coming three years. How we are doing that? We have a special team in Bancolombia focused on (inaudible) to reduce some cost. And we -- right now our distribution channel is oriented in different channels, as we mentioned during the presentation. And the best example of that is we are increasing only seven branches this year and we used to do at least 60 branches per year.

We maintain the same labor cost because we are not growing in terms of people. We are growing in terms of transactions and volumes. So that's -- the combination of maintain the same infrastructure but continuing growth in terms of transactions and clients. That's the idea with efficiency level and that's how we are facing that. And the results are very clear. If you check with -- if you compare our expenses to the total loan or the total asset type, it is right now below 4%.

Also, we are beginning a pricing project, in which we are right now analyzing every single product in terms of pricing. This is a trend in the banking industry in LATAM. So right now we are facing this project, trying to increase our level of income regarding the clients and the transactions.

Okay, thank you.

Thank you, Carolina.

Boris Molina, Santander.

I had a question regarding your IT and integration cost budget for Banistmo. Do you have a figure for the full-year expenses that you plan to incur in the integration and how much integration expenses were in the first quarter of the year?

Thank you. As you know, we are in the process of integrating Banistmo and we have undergoing around 14 fronts of integration. Some are repatriation of some systems from HSBC and others are new systems that we are implementing in Banistmo.

The impact in the first quarter is not significant since we are at the beginning of the project. So we are expecting that those projects has impact during the next quarters. We are in the process of quantifying the final effects during this year. But we think that it's going to be around $30 million to $40 million the final effect of these integration projects on a consolidated basis, because some of the investments are going to be in Bancolombia or in Colombia since we are going to operate some of the systems from Colombia.

But at the end of the year -- at the end of the day, when we say that Banistmo will reflect a net profit of $90 million this year, that is including the expenses regarding the integration. And remember, then, when we spend in integration costs that will increase on the asset because of the software. That's the idea. So again $90 million reflect also including the level of expenses of the project.

Okay, wonderful. Thank you so much.

Okay.

[Maria Ridebow], Wells Fargo.

My question is related to Banistmo. At fiscal year end the past-due loans coverage was very low -- I mean it was around 70%, I believe. Do you have plans to increase this coverage or why is it below 100%?

Thank you, Maria. If you see the numbers in Colombia under Colombian GAAP, we have been including the provisions for the operation in Panama. Remember that in Panama provisions accounts -- past-due loans means only 90 days. That's the reason why we increased our level of past-due loans under Colombian regulation, because right now we have a high level of volatility of such loans.

But what we are doing in order to reduce or maintain under control the past-due loans in Panama, we are implementing a collections department in Panama and we are right now collecting and calling our clients beginning the 30-day. They used to call the client after the day 90. So we are expecting for the next coming quarters to reduce the level of past-due loans regarding 30 day past-due loans.

But again under Colombian regulation we have to keep the coverage the level of past-due loans in Panama. Remember that in December we had to have an increase of $100 million in provisions and that is reflected in our book in the Bancolombia operation under Colombian GAAP.

Okay, thank you. So what is the provisions, the loan loss reserve coverage as of the end of the first quarter for Panama? Do you have the data?

It is 142 on consolidated basis, I mean in Colombia, because for us the most important coverage takes place in Colombia under Colombian GAAP.

Okay.

If your question is under Panamanian GAAP, we have been complying with the coverage there, which is at around 50% to 60% based on the standards of the Panamanian regulation. But the most important thing is when we consolidate Banistmo, we are having an extra provisions to maintain our tight regulations under Colombian law.

Okay. And it's -- and thank you very much.

My pleasure, Maria.

We have almost at the end of the quarter 60% of the coverage under Panamanian regulation. Under Colombian regulation we have almost 90% on the consolidated basis. We have to know that each portfolio has a history and we have to model each portfolio under its history. So that's why we have each model for each country. That's why we have that coverage on the Panamanian portfolio.

One of the main characteristics of the operation in Banistmo is almost 30% of the loan portfolio is mortgage. That has a different treatment in terms of provisions. That's the reason why it's reflected in the level of provisions on the consolidated basis.

Laura Mesa, Credicorp.

Thanks. My question on efficiency was already answered.

Thank you, Laura.

Carlos Gomez, HSBC.

I have two questions. The first one refers to your page 10 on fee income. On banking services and other services you have a 54% increase. I wanted to understand if that is mostly because of the integration of Banistmo that it had a very high level of fees in this regard or there is something anomalous or extraordinary in these figures?

And the second question is regarding page 12, on capitalization. You mentioned that you had already incorporated both the offerings, and if I understand correctly, also on the accrued earnings from last year. Is there anything else that you need to add to your capital? Should we expect higher capital ratios in the coming quarters or this should be the highest for the year? Thank you.

Okay, thank you, Carlos. Regarding your second question, we are expecting to maintain the level of Tier 1 between 8% to 9%, and based in our calculations for the next two, three years, we will maintain that.

Remember then our level of dividend payout that will be one-third of our profit. So we are not expecting to go below the level of 8% and neither we are expecting to go up to the level of 9%. So (inaudible), we will maintain the same level of equity.

Regarding the question of the fees, there are four different reasons or there are four things that explains an increase of fees. The first one is, again, credit card shows a very important performance because we are offering right now different credit cards to different buckets of the population and that is reflecting in terms of fees.

The second one reason is the debit card. We are promoting the utilization of debit card in different channels. For example, we are the number one with 70% of utilization in gas stations. That give us a lot of fees and that will increase our level of fees.

The third one is bank assurance. As we mentioned at the beginning, it's a very profitable business. We have been growing at a pace of 30%-35% of the transaction point of view, which help us a lot.

And the fourth factor, as you mentioned, Carlos, is the fees that comes from the Banistmo operation. That also is important because they are -- we have almost half million clients with debit and credit cards as well.

Okay. Then to clarify this answer, so the second line, this banking services, which grows 54%, again that should be a normal level? This COP165 billion, COP172 billion should be a normal level of income for this line?

This is bank assurance mostly. And this again --

Bank assurance, okay.

Yes, right.

Okay, thank you. And on the capital just -- again, my question was whether you need to add anything else, if anything needs to come in after the first quarter. The answer I should understand is no?

No, we only generate that because of the profits. Correct.

Okay. Okay, thank you very much.

Thank you, Carlos.

Nicolas Norena, Serfinco.

My question regards Factoring Bancolombia and its announcement to transfer assets and liabilities to Bancolombia's operation. I understand this would actually help efficiency, but my question is regarding Leasing Bancolombia. Is there an intention to merge Leasing Bancolombia to the Bank's -- to the main banking unit as well?

The new reason why we are integrating the business of factoring is because of funding. That would be a very more efficient going from our Bank and from our book. With leasing operation, we are not contemplating an integration of the operation.

Okay, thank you.

My pleasure.

And we have no further questions at this time. I would turn the call back to you, Mr. Mejia.

Thank you again for your time. Hope to see you in the next coming quarter. Thank you again all of you. Bye.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.