Grupo Cibest SA (CIB) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to Bancolombia's second quarter 2014 earnings conference call. My name is Hilden, 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 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 very much. Good morning and welcome to our second quarter 2014 results conference call. It is a pleasure to be with you, who follow so closely our operations and results. Let's start with a brief discussion of the main topics that impacted our business in this period. You can follow the slide presentation available at our Investor Relations website.

First of all, I want to open this conference call elaborating the most important topics that drove the Bank. During the second quarter, the loan portfolio grew 2.5% in line with our expectations, as we were expecting a moderation in the pace of growth. Expansion was mainly driven by commercial loans and financial leases, whereas consumer loans grew at a slower pace.

This trend in consumer loans growth was due to our tight underwriting standards, which aimed to maintain a high credit quality. When analyzing the loan growth, it is necessary to consider the 4.5% appreciation of the Colombia peso against the US dollar during the quarter. This appreciation cost us a dollar denominated loan portfolio, which grew 2.6% during the quarter represented fewer pesos when converted.

Coupled with the growth of the loan portfolio, we experienced a positive trend in quality. The past due loan ratio improved during the quarter and the formation of past due loans was also lower than the fourth Q last year and the first Q this year. As a result of the recoveries, better performance of vintages. In line with this trend, the cost of credit remains below 1.5% and the coverage ratio increased to 148%.

It is remarkable that a significant contribution to the credit quality improvement was explained mainly by Banistmo. Over the last six months, our efforts in Banistmo permitted to reduce the stock of 90 day past due loans from 1.94% to 1.38% of gross loans, which in nominal terms represents a recovery of $120 million.

In the funding front, we continued our efforts to reduce the cost of deposits. The overall funding cost was 10 basis points lower than the first quarter and 67 basis points lower than one year ago. 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 (inaudible) and diversify deposit at the lowest rate in Colombia. As a result of the reduction in the cost of liabilities, the net interest margin expanded 10 basis points during the quarter, mainly driven by the performance of the loans, net of the loans.

Now, in the capital front, we ended June with a tier 1 of 9%, which is at the high end of the range defined to operate the Bank in an optimal level. During the quarter, we continued allocating a greater proportion of assets in our core business which is lending. As a result, we reduced the size and duration of the securities portfolio and therefore the market value at risk, which contributed to increase tier 1 ratio.

Last but not least, I would like to present the results for the second quarter 2014. During the quarter, Bancolombia generate COP467 billion, which represents an annualized return on equity of 12.3%. The performance of the Bank was in line with our expectations and lead us to reaffirm our goals for the year. We will elaborate more on each 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. Afterward we will elaborate more on the Bank's results. Juan Carlos.

Thank you, Jose Humberto. Good morning to everybody. For those of you following the slide presentation, please go to slide number 3. After growing 4.7% in 2013, the Colombia GDP expanded 6.4% during the first quarter of 2014 compared with the same quarter of the previous year. This figure was above the market expectation and our own forecast. This result was driven mainly by construction on both residential and infrastructure projects.

The central bank revised upwards its GDP growth projection for 2014 to 5%. We share that view as the second half of this year should be more dynamic because the level of spending of the government picks up as well as the households demands more goods.

Unemployment rate continue dropping and ended May at 8.8%, down from 9.4% one year ago. This is good news because of the high correlation between low unemployment and credit quality. Inflation for the 12 months ended in June 2014 was 2.8% and has been increasing towards 3%, which is the point target set by the Colombian central bank.

These trends in inflation plus stronger economic activity led the central bank to increase the repo rate in the last four meetings and in July at 4.25%. Although the hiking process has started earlier than expected, we see this action with good eyes, and could allow us to originate loans at a higher yield and eventually expand our NIM. Our expectation is that the repo rate will end 2014 at 4.5%.

Regarding the FX, the Colombian peso experienced an appreciation of 4.5% during the second quarter of 2014 and 2.5% over the last year. This appreciation trend occurred in part because of capital inflows resulting from a higher weight of Colombian sovereign papers in the JP Morgan Global Bond Indexes.

In the micro front, we see that the indebtness level of households remains stable and the debt service burden, as a proportion of disposable income remains at 16%. We have not seen any abnormal performance of vintages and the credit quality across the financial system remains healthy. That trend reduces the risk of higher loan deterioration and provision charges.

In summary, Colombia's economy is in good shape and this will allow our business to continue expanding while keeping risk under control. After this quick review of the economic environment, let me turn the presentation again to Jose Humberto, who will discuss the Bank results in detail. Jose Humberto?

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 69% as we deployed more resource to our core business, which is lending.

The securities proportion decreased to 9%. In nominal terms the size of the securities portfolio is 16% lower than one year ago. And the duration remains at a low level at approximately 17 months.

During the quarter, we continued using cash on proceeds from securities to reduce the most expensive funding source and to grow our loan portfolio. The goal of this move was to reduce the funding cost and expand the net interest margin, as we will see in the next coming slides. This is one of the most and relevant point to highlight during this conference call.

In this quarter, the credit demand reacted positively after the election process of the first months of this year concluded. Nevertheless, the growth was partially offset by depreciation of the Colombian peso versus the US dollar during the quarter. We continue originating loans with strict underwriting standards in order to maintain the high credit quality of the loan portfolio, especially in the consumer segment.

The loan growth in Colombian pesos reached 4.6% during the quarter, driven by corporates, which demanded working capital loans, trade finance facilities, and loans for CapEx purposes. Consumer loans in Colombian peso also grew during the quarter but at a slower pace, 3.1%, in line with seasonal factors.

On the other hand, US dollar denominated loans grew 2.6% during the quarter, driven by financial leases and mortgages in Panama. The 4.5% appreciation of the Colombian peso versus the US dollar during the quarter caused that the growth of US dollar be lower when measured in pesos.

Today loans denominated in dollars represents 30% of the total loan book. During the last year, the loan portfolio, excluding Banistmo, decreased by 3.1% but when we include Banistmo it grew 62.1%.

At the right hand side column we show the contribution of Banistmo to the overall growth of the loan portfolio in dollars over the last 12 months.

When we analyze the year-on-year overall growth of the gross loan portfolio, the 23.5% growth is partially explained by the incorporation of Banistmo assets, which contributed with 14.9% and today accounts for 12% of the total loan portfolio. At the right hand side of the table you can see the year-on-year contribution of Banistmo to growth. Finally, we reaffirm our growth target for this year, that could be 10% to 15% and that will be around the middle part of that range. That will be 13% expecting for this year, the whole Group.

Slide number 5 shows the evolution of provision charges, which was COP235 billion (sic - see slide 5 "COP335 billion") during the quarter. It was 1.45% of the average gross loans when analyzed, which is a very low ratio. For the six months of this year the cost of credit was 1.4%.

In the shaded row of the table at the bottom we present the amount of loans that became 30-day past due during the quarter. The COP173 billion reflects an improvement in the trend after the seasonal effect that occurs at the beginning of each year in Colombia and Panama (inaudible) delayed in their payments.

In the quarter, we experienced recoveries of loans, deteriorated in the first quarter of this year. The most important thing regarding loan quantity is that vintages originated over the last six months present today a very good performance. As a result of a strict credit underwriting standards, and they should not present abnormal deteriorations in the rest of the 2014.

We feel comfortable with the evolution of the loan portfolio and forecast to have provision charges of -- at around 1.5% of gross loans during this year.

Now on slide 6, we present a snapshot of the credit quality at the end of the quarter. The 30-day past due loans to total loans ended the quarter at 3.1%, below the 3.2% of March. As we just explained in the previous slide, this decrease was originated by lower past due loans formation in Colombia and Panama. The 30-day coverage ratio ended at 148%, increasing against the 142% of March due to higher probation charges and lower past due loans formation.

In general terms, we see the portfolio with a healthy quality, well covered by allowances and with past due loans under control. We forecast to have a 30-day coverage ratio at 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 the year.

As we have graded component of 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.

In slide number 7, we compare the evolution of 30-day past due loans, which is the Colombian standard and the 90-day past due loan which is a separate indicator of credit quality as we have a greater portion of our assets in countries that use that standards. 90-day past due loans have been very stable over the last two years as a results of a good credit origination process. It presented a slight increase in June, as a result of vintages that deteriorated in the previous quarter and reached the 90-day threshold.

We start to see a positive performance of the credit quality of Banistmo, product of a more proactive and disciplined maintenance and collection process, which we put in place in the first months of the acquisition.

At the beginning of the year Banistmo 90-day past due loans represented 1.94% of total gross loans. But today they represent only 1.38%. This means that today Banistmo has the lowest 90-day past due loan ratio among all the operations of Bancolombia. We estimate that a sustainable level of past due loans in Banistmo could be at around 1.4%. Overall, the 90-day coverage ratio is 284%, 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 second quarter of this year was COP1.48 trillion, 2% above the previous quarter and 43% above the same quarter of the previous year.

This growth is explained by two main factors. The first one is the higher volume of loans during this year and the second reason is the expansion of the NIM caused mainly by the reduction of funding cost that we explained in the previous slide.

The key element of the net interest income increase in the quarter is that it grew base in the lending business. And the contribution of the investment securities was just marginal, COP8 billion, as we reduced the size of the securities portfolio and keep the duration in low records. The duration of the securities portfolio ended at 17.3 months and the yield to maturity ended at 4.3%

The reduction of the funding cost, 10 basis points during the quarter and 67 during the 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 of loans, we were able to maintain a stable stock of deposits and therefore reduce the cost of funding of the Bank.

The proceeds of the stock issuance and the cash that we had at the beginning of this year contributed to this effort. Our goal is to keep funding cost as low as possible in an effort to maintain or expand the net interest in NIM. We have in our favor the asset sensitive condition of our balance sheet, which is positive for NIMs and hawkish environment.

In slide number 9, we show the evolution of the net interest margin. The net interest margin from loans ended at 6.3% in the second quarter of this year above the 6.1% in the first quarter. 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 6.2% to 6.5% at the end of 2014.

The securities NIM was 0.2% down from 1.8% in the previous quarter. Remember that in February and March, securities gained value due to the appreciation of the Colombian government bonds after the increase of their weight in the JP Morgan bond indexes. In the second quarter, we did not have such gains and the securities NIM was more in line with the spread between the yield to maturity and the cost of funding of the Bank.

As we mentioned at the beginning of this presentation, the Colombian central bank increased the repo rate 100 bps more to 4.25% in the meetings held this year. We can foresee a positive contribution in our NIM due to a small increase in our reference rate, which is DTF as our balance sheet is asset sensitive.

Fees are presented in slide number 10. This line remained stable during the quarter at around COP542 billion. We continue experience more credit and debit card transactions during this quarter. As a result, our efforts to promote the use of plastic to pay in stores and increase the number of credit plus cards in new segments.

Additionally, we saw a sustained level of insurance distribution fees which generate about COP75 billion during the quarter. We also have to take in consideration fees from Banistmo operation this year.

Finally, we saw a good performance of our asset management business, a product of graded volumes of assets under management. Since we have a very good performance of fees during the first half of this year we believe they should remain stable or even increasing a little bit the next coming quarters we raise our forecast for fee growth in 2014 to 12% for the whole year. Originally, we were expecting to grow only 8%.

In slide 11, we present evolution of expenses, which increased 7% during the quarter. This quarterly growth is totally explained by the 15% increase in administrative expenses, which reflected higher charges as we move in -- on in the year. On the other hand labor expenses declined 0.9%. A key point with analyzing OpEx, and I want to make a special emphasis on this, I think that we have started to move towards IFRS regarding the treatment of expenses.

Under this standard, we affect the income statement only when we actually incur in expenses whereas under former Colombian GAAP standard, we projected total expenses for this year and we impacted the income statement on (inaudible) monthly basis. That's why in the coming quarters we may see some expenses that were not incurred at the first two quarters of 2014. The expenses reflected in 2014, include integration cost of Banistmo.

Our guidance for this year is an increase of expenses of around 13% to 15% taking in consideration that we are having 12 months of Banistmo expenses. Excluding the Banistmo expenses, the Bancolombia Group will increase at around 8.5% year-by-year total expenses.

The cost to income ratio using the same methodology hat we have used over the recent years was 57% during the quarter. This metric is calculated dividing the operating expenses plus goodwill amortization into operating income before provision charges.

Now, if we exclude items that are not exactly administrative expenses like; first, goodwill amortization; second, deposit insurance cost; and third, depreciations from the calculation; the cost to income will be 47%. This is a new element on the graph that we have decided to show you just to reflect the real efficiency level of the Bank, adjusting those three elements that we are removing from the cost of the Bank.

On the bottom-right hand side we see how OpEx to total assets increased during the quarter as a result of higher expenses. Our efforts, right now, are now focused on improving the efficiency of the Bank. Revenue should grow faster than expenses, and the main drivers for cost growth, headcount and branch network expansion are very stable. Our goal is to perform a graded number of transactions through electronic and low cost channels such as mobile and agents.

Moving to slide 11, we see evolution of the net loans to deposit ratio which increased to 101% during the quarter as a result of loan growth. During the quarter, we used the liquidity and cash from sale of securities in the portfolio to reduce the most expensive deposit on bank borrowings. During this year, this loan to deposit ratio should be around 100%.

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 a level of 9%, higher than the 8.9% at the end of March. The increase was the result of a reduction of the market risk of assets.

The 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 the return of shareholders.

Slide number 13, shows the return on assets and return on equity of the Bank. Return on assets ended the quarter at 1.4% and return on equity declined to 12.3%, product of a lower leverage of the balance sheet due to the capital increase in March. Considering the capital raised and our net income forecast for 2014, we are expecting a return on equity of 13.5% to 14% for this year.

After presenting these slides with the first quarter numbers to you, I would like just to highlight where we stand today and our plans for the near future. In our balance sheet we have been able to focus on lending business reaching a high level of 69% of total assets. We have been able to maintain the loan to deposit ratio at around 100%. We maintained a high level of quality of loan portfolio, maintain a stable level of past due loans. We have been able also to maintain an optimum level of liquidity.

In terms of results, we want to highlight the improvement in the loan portfolio of NIM. Basically this first half of the year were focused on reduce the funding costs. And the second half of the year will be focused on the appreciation of the assets because of the asset sensitivity.

Also we have better than expected fee income due to high level of transactions that we expect to sustain during the second half of the year. Also we have been -- we want to maintain an optimal funding cost during the second half of this year. And we will be able to maintain provisions under control.

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

We will now begin the question-and-answer session. (Operator Instructions). Carlos Macedo, Goldman Sachs.

Congratulations on a strong operating result. I had one question on what wasn't really operational and hurt a little bit of your top line which was investment, the margin on investments. Here looking at the slide that you very graciously provided number, slide number 9, you can see that for a very long time there was at least some consistency on the net investment margin and then starting 2013 it was very volatile because of the volatility and the underlying securities. You mentioned that with the higher rates we should expect this to improve a little bit going forward.

What would be a typical run rate for this now that you have reduced your securities portfolio and that you are taking a little bit more conservative stance? What should we expect assuming it's not going to be the 4% in the past, but is it going to be closer to 0, 1%, 2%? What level should we think about this going forward?

Yes. Thank you. We expect regarding the interest rates are coming in the country for the next coming quarters, probably a NIM of security portfolio between 0 to 1.5%, 2%. We are not expecting a huge net interest margin in the securities portfolio. This third and fourth quarter could be at around 1%. Obviously, we will see impacted mostly on the loan portfolio because the appreciation of our assets, because we are asset sensitive. So, we are expecting an increase of the NIM of portfolio maybe an extra 20 bps during the second half of this year.

But again, on securities portfolio, we are expecting 1% in the second half of this year.

Perfect. But looking further out, we shouldn't expect a return to the levels of 4% of the past, it should be more between that 1% and 2% that you mentioned before, correct?

Yes. Correct.

Okay. Okay, perfect. Second question on loan growth. We did see a lot of loan growth from you on the corporate side but still very limited growth or weaker growth, put it that way, on consumer lending sequentially and still year-over-year only about 8% in Colombia. What is the backdrop for lending on the consumer side? Now that asset quality has improved, should we expect with growth coming that you will be more aggressive in consumer lending going forward?

Yes. We are expecting a loan growth in consumer loans at around 10%, which is in line with the financial sector and in line with the whole economy because in consumer we are at the end of the cycle, so we are not expecting a huge increase in consumer loans in Colombia. So, our guidance for consumer is that will be an increase of 10% during the year.

But it would be reasonable to say that in 2015, there should be a pick up there as well, right?

Probably. Probably depends on the interest rate and inflation but it's fair to say that this year could be at around 10% and next year we are expecting 10% to 12% to 13%.

Okay, perfect. Thank you so much.

Thank you, Carlos.

Frederic de Mariz, UBS.

A couple of questions on my side. A follow-up first on the loan growth in the quarter. Excluding Banistmo you had a growth of 8.6%. I understand that the FX impact that you mentioned in your presentation, but you also mentioned in your guidance of 10% to 15%. So, I apologize to insist but where should we see the acceleration in the second half of this year? Is it mostly corporate, does it relate to the infrastructure theme in Colombia? Just getting a bit of color on this one.

And then my second question is on the NPLs. We saw a very small increase in the NPL for consumer and also for corporate. Just wanted to get a bit of color, I know it's a small, it's a low ratio and one of the strong ones in LatAm, but just wanted to get a bit of color on the trend if there is any segment that you are particularly concerned with? Thank you.

Yes. As you said Frederic, thank you, loan growth we are expecting obviously in the second half of this year would be mostly focused on corporate. And we expect again and we reaffirm the fact that we expect to close this year 13% at loan growth. And in terms of NPLs, we don't expect a specific deterioration, maybe in consumer loans, and that's the reason why we tightened our credit standards, but we don't foresee, at least for the next two or three quarters, a specific deterioration in any specific segment. And again, the second half of the year usually the loan growth is explained mainly by corporate instead of consumer loans.

That's great. Thank you.

Appreciate it, Frederic.

Tito Labarta, Deutsche Bank.

A question just trying to understand your kind of long-term outlook for profitability. I know you gave some guidance for this year of 13.5% to 14%. But if we think a little bit longer term, you mentioned in the past getting back to 17% ROE. So, I'm just struggling to see how to get to those numbers given your loan growth guidance around 10% to 15% seems a little low given the economy in Colombia is doing really well and asset quality is under control with -- and particularly not growing much on the consumer side maybe difficult to see some margin expansion even though you do benefit from higher rates because you are asset sensitive. So, I just want to -- should we expect this 14% ROE kind of in the longer-term or if you do expect it to get back to 17% which you mentioned in the past? How do you think you can get there, I mean, is it going to come from stronger loan growth, more margin expansion, which seems difficult if you're not growing much in the consumer. So, just wanted to get a better sense of your long-term outlook for profitability? Thank you.

Thank you, Tito. Yes, our guidance for medium-term in terms of return on equity is to go back to the level of 16% and the main drivers to get that level for the next two or three years will be first, try to maintain the cost under control and to get our efficiency level at around 15%; that would be the key element to go back to the level of 16%.

Second, the Banistmo operation will begin to give us more level of profits in the next coming years that will support better return on equity. So, those are the two main elements. It is hard to say then we will increase the net interest margin because the competition landscape is, it's very tough. We did our best this half of the year reducing funding costs, but the challenge right now is to maintain this funding cost. And try to take advantage of more volumes in the loan portfolio and better interest rates because of the appreciation of the DTA. But, Tito mainly is for the efficiency side and Banistmo operation.

Great. Thank you, Jose. Maybe just a quick follow up on that because you did just kind of increase your guidance for expenses this year, and I guess approximately related to Banistmo, but do you have some color just the total impact from Banistmo maybe in the quarter or what's the ROE of Banistmo today and how much you could expect that to improve?

Remember that our expenses, which will grow 15% this year, 8% of that are explained mostly by Banistmo because this year we will have 12 months of Banistmo and last year we only had 2 months. So, the key message here is the banking is growing 8% in terms of expenses, which is a very positive and operative to compare to grow in the long with 10% to 15%, and that explains that.

Right. But I guess do you expect that then to improve, this is like a one time given you are incorporating Banistmo this year and then kind of it slows down in the future years?

Yes, of course. We are expecting to grow the expenses for the next coming two or three years in line with 6% to 8% because we are serially internally into the Bank taking the right measures to maintain the cost under control. You see for example a very specific item, which is the labor cost that remains very under control, the number is almost flat. Behind that, there is another expense and now we are seeing a very good performance.

Great. Thank you very much. That's very helpful.

Saul Martinez, JPMorgan Securities Inc.

I have one question, and it's regarding your ROE guidance of 13.5% to 14%. Correct me if I'm wrong, but that implies earnings of roughly COP2 trillion in 2014, and given that in the first half you are a little bit below COP1 trillion, you really have to be doing about COP500 trillion (sic - "billion") per quarter. I'm struggling with how to get there to be frank given your guidance for expenses, which implies a very big sequential acceleration in cost growth, 13% to 15%. I understand the full year looks fine, I understand the accounting changes and the move to IFRS creates greater seasonality, but just mathematically that implies high single digit Q-on-Q growth in third quarter and fourth quarter. Your fees, you mentioned, are flat to slightly up and your NIMs are not really moving up much according to your guidance.

So can you help me understand how you're going to be doing COP500 billion, how your earnings are going to improve meaningfully off of the 2Q base given the very fast sequential acceleration in cost growth that you see? How do you get to COP2 trillion of earnings, how do you get to COP500 billion plus in the third and fourth quarter to get to your guidance?

Good morning Saul, and thank you. Yes, let's begin to talk about fees. Again fees, we really believe that we are right now able to get 12%, 13% in increase of fees because we really are seeing an increasing of volume of transactions. zaSs a result of that you see, debit cards and credit cards and bank assurance growing up, that will help us a lot in the second half of the year.

And going back to the first point, the next two quarters we will have more loan portfolio and we will have a different interest rate because of the asset [sensitivity]. If you've made the calculation we'll probably -- we will grow more than 9% our net interest income the second half of the year. So that we try to support the increase of expenses that you mentioned at the beginning of your question. So the answer is mostly that will explain because of the net interest income because the balance sheet and the loan portfolio will be stronger and with a better interest rate.

Okay, so just -- when you say 9% in the second half of the year NII what do you mean by that, that NII will be 9% higher in the second half than in the first half is that --?

Exactly. That is correct.

Okay. So you are seeing a nice pick up in NII and that's basically going to offset, more offset the higher sequential growth in cost and allow you to get to your number. But am I right, Jose Humberto, in saying that dh just to clarify that 13.5% to 14% really is when you back into the numbers close to CPO2 trillion of earnings?

Yes.

Okay. Great. All right, thank you so much. That's helpful.

Thank you, Saul.

Jose Barria, Bank of America.

Just want to go back to asset quality and look at the new PDL information that you saw in the quarter which was very good at CPO173 billion much lower than the first quarter. There seems to be some seasonality in the second quarter when I look at 2013, there was also a big move down. I just want -- would like to understand, is this level of new NPL information is actually something that we could expect going forward or if the second quarter was particularly low for because of some seasonal factor. And then on the back of that what is your forecast for NPL ratio for this year and next if you have it. Thank you.

We had during the second quarter recoveries of the bad loans that we had during the last year and we have a trend during the last three or four months that in the consumer portfolio that has maintained the level of our quality. So we expect that during the next semester we are going to have the same trend. We don't know if the recoveries comes because those weren't specific in some credits but the trend in consumer portfolio in its quality we are expecting the same that we had.

Remember then to understand right now what happened with passive loans in the balance sheet in Bancolombia is in Panama 90 days is considering not past dues, so we have to do our next viable in terms of provisions that implies that we will have some kind of volatility in terms of provisions for the first 90 days on consolidated basis and under Colombian GAAP.

So that's the measures that the team of risk, it's doing right now in Panama trying to reduce that volatility of (inaudible) between 0 to 90 days.

I see. So I guess going back to the question, the level of new PDLs that you see here in the quarter which was COP173 billion, is that a normal run rate that you should expect for the second half of the year or you're not sure because of the recoveries.

I think that we are not sure of our -- the recoveries but we think that or we expect that in Banistmo we are going to have better, better recoveries in the range that Jose just said to you.

So we expect -- I don't if know the recoveries of the bad loans that we had before but we are sure that we are going to have better recoveries in the range between 30 and 90 days.

Okay. I see. And then I guess finally the NPL ratio forecast that you're working with in the budget what is it for this year?

3%, at around 3% on the coverage and around 150%, Group.

Got it, Thank you.

Thank you, Jose.

[Jose Restrepo, Sarfinkle].

Congratulations on the results. I have one question regarding guidance, which is the loan growth you are expecting in the coming year, in 2015, and you can give us the long-term ROE expectation that you have.

Thank you, Jose. As I mentioned on the previous question for the long term our return on equity expectation is to go back to the level of 16%, again based on consideration time improve the efficiency level. And loan growth, I believe it's a factor of the growth of the economy, and the financial institutions we are growing 2, 2.5 times the GDP growth. So we are expecting for next year almost the same level that we are expecting for this year, which is 10% to 15% annual basis.

Okay, thank you.

Thank you, Jose.

Diego Batista, Itau.

I have just one question basically about the infrastructure projects, could you comment on how much those projects can impact the Bank's operations in terms of loan growth and also in the Bank's margins.

Thanks, Diego. Yes. We talked about it in the previous quarter conference call. Obviously, the infrastructure projects, we will materialize those projects in our books maybe at the end of next year 2015, or fully at the beginning of 2016 because that kind of projects will take time. (Inaudible) our position as the bank number one in Colombia, we will be ready to participate in those projects but again we are still not have clear the tenure, we still not have clear, how we will design the lending structure with the government and with the constructors.

So again, you don't see this reaction in our books at least this year or at this second half of the next year.

Okay. Thank you.

The point is infrastructure will not have key relevant item in our loan portfolio at least the new 12 months.

So the guidance of 10% to 15% is not incorporating any big impact of those projects.

No, only corporate loans some of them maybe we are seeing a couple of projects and we are analyzing but that would not be a trend because this kind of projects you know very well that they will begin to ask for lending only after 6 or 12 months of being assigned to a different constructor.

We have a delay, if we compare with the expectations that we had for this year and the coming years, but we expect some growth in infrastructure portfolio at the second half of the next year, but we are going to have a little bit in the first half. I think that's the answer for the question.

Okay. Thank you.

Thank you, Diego.

Marcelo Telles, Credit Suisse.

Congrats on the good results. Most of my questions have been answered but I have just two follow-up questions. Can you just remind me what your expectation for cost of risk is for the year and where you think you could maintain going forward?

And the second question is regarding your NII growth expectation for the second half, there is a very, very strong growth embedded there so I believe that the driver from what you talked about would probably be also like a higher margin on the securities portfolio. But my question here is also if you look at the available for sale portfolio, there seem to be a sale of the securities and you seem to have realized some losses in the P&L, right, from this available for sale. So I was wondering if that would also help your NII in the second half of the year because probably now you are going to be able to reinvest at a higher rate. I know you shortened the duration but you think there is any positive impact arising from that sale because you are going to be able to invest at a high interest rate versus what it was originally recorded.

Thank you, Marcelo. Cost of risk, we are expecting to maintain under control and the cost of risk at the end of this year will be 1.5% maintaining almost a similar that we had the previous year that was 1.6%. In terms of NII again, the NII performance of the second half would be mainly originated because of the loan portfolio. We are not expecting from the securities portfolio because as you probably remember, the second half of last year we decided to take several measures to reduce the volatility, the duration, and the size of the security portfolio. So the first question remember was, what was the potential name of the security portfolio, we are not expecting nothing between 0 to 1%.

So we are not aggressive in this business line, we are maintaining the liquidity for the Bank and to attain our clients. So the NII, the main characteristic would be because of the lending business, we are not expecting a huge support because of the security portfolio, again, could be 0 to 1%.

Okay. Yes, I asked that because if you look at the, as you mentioned earlier the (inaudible) maturity of your securities portfolio, I think you said was like 4.3%, correct in the second quarter?

Yes.

But if you look at where the DTF is today, I mean it seems low compared to the repo rate, right, that is at 4.25, I know shorten the duration, so most likely this is also expected to increase I believe.

Yes, that is true, that probably would increase but our expectations is regarding DTF, an increase on DTF. We don't want to take in consideration any other particular gains because of the interest rate of the securities portfolio.

Okay, great. Thank you very much.

Thank you, Marcelo.

Boris Molina, Santander Investment.

Just one reminder, what is your budget for integration expenses at Banistmo for this and next year, and how much did you spend in the second quarter? I remember there wasn't much of an impact in the first quarter, so I just wanted to get an idea of how much was the impact this quarter and what do you expect for the full year this year and next year?

Regarding Banistmo operation, we are contemplated -- I will say it the other way around, we are contemplated that the profits for the operations in Banistmo this year could be around $80 million, and that includes the integration operating that we will expand there in Panama. So remember that we have a contract to -- during 18 months to implement some of our systems so this time of expenses that will be reflected also as a major value of [pieces of] software. So that would be OpEx.

So we don't expect at least more than $15 million to $20 million in expenses regarding the projects of IT in Panama.

And this figure is expected to come down significantly next year or is it -- should be a similar number?

Could be a similar number because the integration process will take one year and a half, so we do expect these two years to have same level of CapEx.

Okay. Thank you.

Cristian Hernandez, Ultrabursatiles.

Congratulations on your results. I was wondering I have got two questions. First question is related to the cost of funding, how much do you guys expect it could go down eventually in the mid-term according to your strategy? And the second question is related to the efficiency ratio. What should I expect with the efficiency ratio at the end of the year and how low it could get by the next year? Thanks.

Okay, thank you Cristian. First of all I would say that we took the advantage in the last 12 months and you saw huge reduction of almost 70 bps in the funding cost. For the next coming two years we don't expect to reduce more of the funding cost or the other way around. We feel pressure to improve the funding cost because interest rate is going up but the counter party would be the asset side that will help us to offset that increase of the funding cost. So again, cost of funding -- they are better in terms of reduction happen in the last 18 months.

In terms of efficiency, we will try to get the level of 53% at the end of the year, and we are trying to realize that in 2016 we get the level of 15% of efficiency ratio in the next coming two, three years. And the best way to understand that is if you check the number comparing expenses versus growth of assets, right now we are below 4% which reflects that we have been able to grow faster the assets than the expenses.

Low as you can get, right?

Right.

Okay. Thank you.

Alonso Aramburu, BTG Pactual.

Just a follow-up on your investment portfolio, just wondering if you feel like you have more space to reduce the investment portfolio as a percentage of your asset mix in coming quarters similarly to what you did this quarter. And also on your investment margin, you mentioned comments regarding some of the measures that you took at the end of last year. I believe that included some hedging on the portfolio, it used to be the case that when you had a quarter with normal rates or (inaudible) rates you had like 1% or 2% investment spread but it seems like these days it is close to flat. So my question is, is that what we should expect going forward that if we have a quarter in which rates don't move that much? You are supposed to be close to zero?

Thank you, Alonso. Regarding the size of a security portfolio, we don't expect to reduce that level of security portfolio because one of the pillars of this Bank is liquidity. So we want to maintain the level that we are having right now, so we don't want to reduce more the -- the reduce that we did were mostly to reallocate to the lending business which was a very good strategy because that was reflected in the net interest income.

Regarding the NII for the securities portfolio again, we do prefer to not count with rally of rates in Colombia and again, we believe that the NII or the name from security portfolio will be located 0 to 1%, we are not expecting more than that.

Okay. Thank you.

I am going -- to your first question, that would be the size of the securities portfolio that we want to have mostly because of the liquidity.

Right. Thank you.

Thank you, Alonso.

[Angela Riccardi, Allianza Valorie].

I would appreciate if you could please provide some color on target loans to assets if you would expect to maintain the 69% reach for the second quarter of -- or you if you expect to keep increasing it?

Thank you, Angela. We want to contain this -- the 69% is (inaudible) optimal design of the asset side. So we don't want to increase dh we will maintain the 69%, 70% of loan book, and we will maintain the 9% or 10% in security portfolio. We don't want to change that mix again, because we have to have liquidity and because the 69% is comfortable to that. And the growth that we are expecting which is 10% to 15%, we can sustain that mix.

Okay. Thank you very much.

Philip Finch, UBS.

Thank you very much for the presentation just now. Couple of questions. One is a follow up really, you were talking about cost growth and NII growth of 9% in the second half. Can you just repeat what is your targeted efficiency ratio, cost income ratio by the end of this year and whether you have any targets for next year?

And my second question is to do with your effective tax rate which fell down 70 basis points. Any reason why it was a bit lower this quarter and going forward what should be a sustainable level that we should be working on? Thank you.

Thank you, Philip. Regarding cost of growth -- regarding efficiency ratio, again we are expecting to close this year at a level of 53%, remember that two years ago we were at a level of 59% so we are doing our job regarding efficiency ratio. And the guidance for the next three years, again, will go to the level of 50%. Post growth, and we try to explain that is this year we are registering the real expenses that we are doing in the Bank because of the IFRS.

In the past we made our calculation for the projected expenses every month, so that's a reason why the first quarter you saw a very low level of expenses because January had only two weeks of cost, of expenses of different stakeholders and work with us. So the second half would be important and the increase of cost for the whole year will be 15%; the first half only is 7%.

Regarding the taxation, we are expecting a taxation rate of 28% during the whole 2014.

Okay, that is very clear. Jose, can I just go back, so with the early adoption of IFRS this year, surely next year the quarterly performance in terms of costs should be a lot more smoother, is that an assumption we can make?

Absolutely, that is correct, Philip.

Right. Thank you, Jose.

With this we have reached to the conclusion of our Q&A portion. I will like to turn the meeting over to Mr. Acosta for any final remarks.

Okay. Thank you for participating in our conference call and for your questions. Hope to see you in the next conference call that will take place in November. Thank you very much.

Thank you, ladies and gentlemen, this concludes today's conference. We thank you for your participation. You may now disconnect.