Grupo Cibest SA (CIB) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Bancolombia's third quarter 2014 earnings conference call. My name is Lorraine and I will be your coordinator for today. (Operator Instructions).

Please note 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, in future filings, in press release or verbally, addresses matters that involve risk and uncertainties.

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

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

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

Thank you. Good morning, and welcome to our third quarter 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'm glad to share with you good news that we knew this past weekend. Our operation in Panama, Banistmo, successfully integrated the core banking systems from the HSBC Mexico servers to our data center. This package of applications includes the loans, current and savings account, time deposits, online banking platforms, and accounting systems.

It was the most complex part of the whole transition. And it's very important milestone because now we have full control of these critical applications for serving our clients in a more efficient way.

Having said this, I want to open this conference elaborating on the most important topics that drove the Bank during the quarter. This past quarter was very rewarding for us because the Bank received three important recognitions.

Three independent studies recognized Bancolombia as a private corporation with best reputation in Colombia both in our commitment and best practices when doing business and helping our clients. Bancolombia was reaffirmed in the Dow Jones Sustainability Index, which reflects our efforts to manage the business for the long run in three main areas; economic, social, and environmental.

As we have shared with you in the past presentations, our strategy for this year and 2015 is focused in four elements that are evident in the numbers that we present to you this quarter.

First, the focus on increasing the [level] of assets while keeping the funding costs as low as possible. This permits to increase the profitability of the lending business. Net interest income marked an historic high record and grew 22% year over year, as a result of higher volumes of loans and better NIMs.

Second, the consistent growth in fees, 23% year over year, as a result of more transactions and efforts to promote the utilization of our channels. This quarter was also an historic high record for fee generation in Bancolombia. We want to continue offering products and services that are not balance sheet intensive, such as our debit and credit cards and insurance business.

Third, as we shared with some of you in the Analyst Day held in September, one of our main focuses is efficiency, and the numbers of this quarter indicate so. The cumulative operating income this year has grown 25%, while the OpEx has grown only 9%.

We maintain our efforts in keeping costs under control and the fact that our OpEx, as a proportion of [assets] has declined consistently from 4.2% one year ago to 3.9% during the quarter.

Finally, the efforts to maintain a high quality of our loan portfolio and a high coverage ratio. The coverage of 90-day past due loans was 268% a level that keep us [safely] because we consider it more than enough to absorb any potential credit loss that we could have.

During the third quarter, the loan portfolio grew 3.3%, slightly above our expectations, due to a stronger credit demand and a higher FX rate. The expansion was mainly driven by commercial and mortgage loans, as well as financial leases, whereas consumer loans grew but at a slower pace. The slower growth in consumer loans was due to our tighter underwriting standards, which aim to maintain a high credit quality.

Coupled with the growth of the loan portfolio, we continued seeing a positive trend in quality. The 30-day past due loans ratio ended at 3.1% and remained stable during the quarter. In line with this trend, the cumulative cost of credit for the [deal] remains below 1.5% and the coverage ratio remained stable at a level of 148%.

Banistmo contributed to improve the credit quality during the year in a significant way. Over the last nine months, our efforts in Banistmo permitted to reduce the stock of 90-day past due loans from 1.9% to 1.5% gross loans, which, in nominal terms, represents a recovery of around $120 million.

In the funding front, we continue our efforts to keep the cost of deposits as low as possible. Although the Colombian Central Bank increased 125 bps its [reference] rate to 4.5%, our total funding cost is 37 bps 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 the main competitive advantage, the ability to [grab the stick] and diversify deposits at the lowest rate in Colombia. In September, we closed a 2016 dollar-denominated senior bond in an effort to reduce the funding cost.

During the quarter, we experienced an increase of 9 bps in the yield of loans, but it was partially offset by a temporary 12 bps increase in funding costs, due basically to the premium that we paid in the anticipated redemption of the 2016 bond. In the next quarter, the NIM should continue its expansion trend on the US dollar business.

In the capital front, we ended September with a Tier 1 of 8.5%, which is within the range defined to operate the Bank in an optimal level. Let me remind you that, under Colombian capital regulation, ongoing earnings of the period are not accounted as a Tier 1 until they are [appropriated] by the shareholders, which, in Bancolombia case, will happen in March of the next year.

During the quarter, we continued allocating a greater proportion of assets in our core business, which is lending. As a result, we maintained a reduced size and duration of the securities portfolio and, therefore, the market value at risk, which contributed to an increase in the Tier 1 ratio.

Last, but not least, I would like to present the results for the third quarter of this year. During the quarter, Bancolombia generated COP415 billion. 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 of the Bank's results, Juan Carlos.

Thank you, Jose Humberto. For those of you that are following the slide presentation, please go to slide number 3. Growth of the Colombian economy remains dynamic. In the first half of the year, it grew 5.4%, compared to the first half of 2013.

Construction and services were the sectors that lead the growth. On the other hand, consumption remains dynamic. We estimate that Colombia's GDP should grow close to 5% in 2014, in line with the expectation of the Colombian Central Bank.

On the other hand, the unemployment rate continued dropping and ended September at 8.4%, down from 9% one year ago. This is good news because of the high correlation between loan, employment and credit quality, which remains healthy not only for Bancolombia, but across the financial system.

Inflation for the 12 months ended in October was 3.29% and has been increasing in the recent months. The Colombian Central Bank set an inflation target between 2% and 4% for 2014. This trend in inflation, versus stronger economic activity ,led the Colombian Central Bank to increase their repo rate in the four meetings ending in August at 4.5%. Since then, and after two meetings, the rate has been stable. We forecast the repo rate to end 2014 at 4.5%.

Regarding the FX market, the Colombian peso experienced a depreciation of 7.5% during the third quarter of 2014 and 6% over the last 12 months. The depreciation of the Colombian peso against the US dollar contributes to the faster growth of Bancolombia's balance sheet because the dollar-denominated loans represented more pesos when converted.

Let's remember that Bancolombia's balance sheet is matched in terms of currency, which reduces the impacts of FX variations in shareholders' equity. On the other hand, we have not seen any abnormal performances on vintages, and credit quality across the financial system remains stable. That trend reduces the risk of higher loan deterioration and provision charges.

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

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 was 68%, as we continue focusing in our lending business. The securities proportion was 10%. In nominal terms, the size of the securities portfolio is 9% lower than one year ago and the duration remains low at a level of 20 months.

We continue [originated] loans with strict underwriting standards in order to maintain the high credit quality of the loan portfolio, especially on the consumer segment. The loan growth in Colombian pesos reached 0.8% during the quarter, driven by financial leases and mortgages. Commercial and consumer loans in Colombian pesos remained flat during the quarter.

On the other hand, US dollar-denominated loans grew 1.9% in the quarter, driven by mortgages and commercial loans in our operation in Panama. The 7.5% depreciation of the Colombian peso versus the US dollar during the quarter caused the growth of US dollar loans to be higher when measured in local currency -- in Colombian pesos. Let's remember, the Bancolombia balance sheet is fully matched in terms of currency, which reduce impacts of FX variations in the shareholders' equity.

Today, loans denominated in US dollars represents [33%] of the total loan book. During the last year the loan portfolio, excluding Banistmo, decreased by 1.2%, but when we include Banistmo, it grew 66.8%. 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 23.8% growth is partially explained by the incorporation of Banistmo assets, which contributed with 16.4% and today accounts for 13% of the total loan portfolio. Finally, our guidance is [re-estimating] our growth target for this year at around 10%.

Now, on slide 5, 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%, stable compared to the June ratio. The 30-day coverage ratio also remained very stable at a level of 148%, in line with our forecast. 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 of around 150% in the medium term. We believe that it's more than enough to absorb potential credit losses that the Bank would eventually have. Similarly, past due loans should represent around 3% of the gross loans at the end of the year.

On slide number 6, we compare 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 significant portion of our assets in countries that use that standard, like Panama and Salvador.

90-day past due loans have been very stable over the last two years as a result of our Group credit origination process. It represented a slight increase in September, a product of vintages that deteriorated in the first and second quarters and reached the 90-day threshold. Nevertheless, that [will not mean it] has not a significant impact in provision charges as we have moved in advance and provision a major portion of those loans.

We continue seeing 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 last year, Banistmo's 90-day past due loans represented 1.9% of total gross loans, but today they represent only 1.5%.

This means that today, Banistmo has the lowest 90-day past due loan ratio among all the operations in the Bancolombia Group. We estimate that a sustainable level of past due loans in Banistmo is at around 1.4%. Overall, the 90-day coverage ratio is 268%, which we believe is more than enough to absorb potential credit losses.

Slide number 7 shows the evolution of provision charges, which was COP384 billion during the quarter. It was 1.6% of average gross loans when annualized. For the first nine months of the year, the cost of credit was 1.5%. 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 COP404 billion reflects higher deterioration compared to the second quarter and the third quarter of last year, which were abnormally good due to the [higher] progress that we experienced in those quarters.

These past due loans formation during this quarter, the 3Q, was mainly explained by a few isolated cases of corporate clients in Colombia and Guatemala that became past due. Nevertheless, it was not a generalized trend and we do not see a reason for concern in that matter.

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

Moving on to slide number 8, we see the evolution of net interest income and funding cost and composition. NII for 3Q was COP1.48 trillion, the highest record in Bancolombia's history and 22% above the same quarter of the previous year. This yearly growth is explained mainly by two factors; first, higher volume of loans during the year; and second, expansion of the [NIM] cost, mainly by the reduction of funding cost.

The evolution of NII is in line with our decision to allocate a greater proportion of our assets to the lending business, and maintain the securities portfolio at around 10% of assets and with a lower level of risk. The ultimate goal is to increase the profitability of the loan book.

Let's remember that in September we called the 2016 dollar-denominated senior bond and paid a premium of COP25 billion for the early redemption. The abnormal funding expense affected temporary the cost of long-term debt on the NIM, but in the next coming quarters, the total funding cost should be normalized in the US dollar business.

On the other hand, we issued about COP1 trillion subordinated bond during the quarter with maturities of 10, 15 and 20 years and linked to inflation. This is issuance has two purposes. First, to enhance the Tier 2 position and the BIS ratio for Bancolombia; and second, obtain the resources to fund long-term loans that we estimate to originate in the next coming years.

During this year, and in the third quarter in particular, we have focused our efforts in not only keeping the funding cost as low as possible, but also in increasing the average time to maturity of the stock of liabilities, in particular CBs and long-term debt.

Of course, the cost of these types of liabilities to go up in price, also in line with higher interest rates from the Colombian Central Bank. But we have positioned the balance sheet in a better shape, from a liquidity standpoint of view, and also for capturing the eventual increase of benchmark rates that we use to price a significant portion of our loans, the DTF in particular.

Regarding the DTF, we are experiencing an abnormal situation in Colombia because these benchmark rates have not fully reflected yet the hikes of the repo rate. While the Central Bank rate in Colombia today is 4.5%, the DTF is 4.2%, but it's gradually converging to the former, which [isn't] good for our NIM. Our expectation is, in the next coming quarters, DTF will hit a level of around 4.6%, 4.7%.

Our goal is to keep funding costs as low as possible in an effort to defend our expanded NIM and grow the NII. We have in our favor the asset sensitive condition of our balance sheet, which is beneficial for the NIMs in a [harsh] environment.

Slide number 9 shows the evolution of the net interest margin. The NIM from loans ended at a level of 6.2%, slightly below the 6.3% of the previous quarter. This decrease was mainly explained, again, by the increase in the funding cost that we explained in the previous slide, and the COP25 billion premium that we paid for the early reserve redemption of the 2016 senior bonds.

Nevertheless, we should see a sustained trend in NIM expansion in the next coming quarters, our lending NIM to be between 6.2% to 6.5% at the end of this year. The securities NIM was 0%, down from 0.2% in the previous quarter. We do not forecast neither big gains nor big losses from this portfolio.

As we mentioned at the beginning of the presentation, the Colombian Central Bank increased the repo rate 125 bps to 4.5% in meetings held this year. We can foresee a positive contribution in our NIM, due to a small increase in our revenues rate, EBITDA.

Fees are presented on slide number 10. This line grew 4% during the quarter and 23% compared to the third quarter of last year. Again, the fees of this quarter were at historic high records. We're continuing experiencing more credit and debit card transactions during this quarter, a product of our efforts to promote the use of plastic to pay in stores and increase the number of credit cards in new segments; in particular, online purchases and more cards outstanding contributed to the quarterly growth.

Additionally, we saw a sustained level of insurance distribution fees, which generated about around COP170 billion during the first nine months of this year.

Finally, we saw a good performance of our asset management business and investment banking business, product of greater volumes of assets under management and more deals during the quarter. Since we have a very good performance of fees during the first nine months of this year and we believe they should remain stable, or even increasing a bit in 4Q, we keep our forecast for fee growth this year 12% to 15% for the whole year.

On slide 11, we present the evolution of expenses, which decreased 1% during the quarter. This quarterly performance reflects the initiatives to keep costs as low as possible and growing below revenues. The headcount remains stable, and we are being very selective with the projects that we execute and the evolution of administrative expenses.

Our guidance for this year is an increase of expenses at around 12%, taking into consideration we will have 12 months of Banistmo expenses and last year we had incorporated only two months, November and December.

The cost-to-income ratio, using the same methodology that we have used over the recent years, was 55% 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 not exactly are administrative expenses, like goodwill amortization, deposit insurance costs, and depreciation from the calculation, the cost-to-income ratio is 46%.

On the bottom right-hand side we see how OpEx to total assets decreased during the quarter, as a result of a lower expenses and growth in assets.

Our efforts right now are focused on improving the efficiency of the Bank. Revenues 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 our greatest number of transactions through electronic and low-cost channels such as our mobile banking and agents.

Moving to slide 12, we see the evolution of the net loans-to-deposit ratio, which represents to 102% during the quarter, as a result of the loan growth.

We want to keep this loan-to-deposit ratio at around 100%. This quarter we ended slightly above that number, due to the strategic reviews in most expensive deposits, and used the proceeds from the stock issuance of February, and the subordinated bond issuance of September.

Regarding capital, on the bottom right-hand side, representing capital adequacy ratio at the end of the quarter. The reported Tier 1 ended at 8.5%, lower than the 9% at the end of the June. The decrease was the result of growth of assets.

It is necessary, again, to highlight the three main [operating] earnings under the new Colombian capital regulation. The earnings of the year are not considering Tier 1 and the shareholders' [equity and become retained] earnings. As a result, the COP1.4 trillion earning generated during the first nine months are not included in the Tier 1 calculation.

Regarding Tier 2, because we went to the market and increased our level of subordinated debt, we increased almost 90 bps the Tier 2 ratio, going from 4.5% to 5.5%.

Let's remember that the minimum required to operate in Colombia in Tier 1 is 4.5%, and the level that we have today put us in a comfortable situation of the equilibrium between strength of balance sheet and return to shareholders.

Slide number 13 shows the return on assets and return on equity of the Bank. Return on assets ended the quarter at the level of 1.3%, and return on equity declined to 10.6%, product of a lower leverage of the balance sheet, due to the capital increase in March. Considering the capital rates and our net income forecast of 2014, we are expecting a return on equity of 13% this year.

After presenting these slides with the third quarter numbers to you, I would just like to highlight where we stand today, and our plans for the near future.

First, our balance sheet reflects a moderation of growth of the loan portfolio. The focus today for Bancolombia is to increase the profitability of our assets.

Second, the trends in NIM reflects our focus on profitability, based on the optimization of funding cost.

Third, the performance of the past due loans on our level of provisions in this quarter reflects a healthy loan portfolio.

Four, the efforts of fee generation are impacting the overall results in a very positive way.

And finally, the operating income is growing much faster than the operating expenses, which is [espousing] the Bank to be more efficient.

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

(Operator Instructions). Tito Labarta, Deutsche Bank.

My question is, if you look at the gross in net interest income, just want to understand the dynamics there a little bit better. You mention you're asset sensitive, and I know in the quarter you said you had some impacts from this redemption of these bonds. So if you exclude that, what kind of net interest margin would you have had?

And then also, going forward, with the loan-to-deposit ratio above 100%, can you really see some margin expansion? Just want to get to understand that a little bit better.

Given, also, loan growth is running below 10%, even organic loan growth, even with GDP growing around 5%, is that what we should expect? I think you mentioned around 10% loan growth for the year, but is that too conservative? Do you think you can go faster than that, given the type of growth we're seeing in Colombia? Just want to get a sense, in terms of your net interest income outlook, given the loan growth you're seeing, and if you can really improve the margins. Thank you.

Thank you, Tito. Regarding your first question, it is here in Colombia a very common situation that DTF is not increasing at the same speed, or the same trend, that is growing the interest rate of the Central Bank. We are expecting the DTF again, as I mentioned previously, to touch the level of at least 4.7% the first or the second quarter of next year.

But assuming that we don't recall the bond, the expansion of our NIM could be between 10 to 15 bps this quarter. But obviously, we have to pay that around $13 billion, one three billion dollars, in interest on the bond. So again, we expect our NIM will increase in the next coming quarters at least 20 bps more, because of the appreciation of the assets. That's we are expecting again DTF will go up in the next coming weeks or months.

Regarding your second question, the growth, we decided to maintain growth under control, basically on the consumer side for example, because we don't want to experience an kind of deterioration of the loan portfolio. And we do expect to do exactly the same next year.

So next year, we are expecting growth, 10% to 15%, driven obviously more on the corporate side the first half of the year, and maybe on the second half of the year, we will experience an increase of the consumer side.

Okay, great, thanks. That's very helpful, Jose Humberto. And just maybe a little bit more color in terms of your net interest margins for next year. Once you get this maybe 20 basis points improvement from the increase in rates that we see and this redemption of the bond no longer impacts your results, do you think you'll have further margin expansion into next year? Or is it you'll get a 20 basis point improvement, and then a stable margin, going forward?

We have to divide the story in two different tracks. In terms of local currency, we will experience an increase of 20 [basis points], or a little bit more, because the local currency will be impacted by the DTF. But in the [usual] business we are not expecting to increase our NIM. So as a combination of the two different currencies, local currency 70% of our loan portfolio, increasing the NIM to 20, 25 bps, and US dollar maintain very stable, we are able to say that 20 bps of increasing of NIM will be sustainable, at least the first half of the next year.

Okay. Thank you very much.

[Fred Mariz, UBS].

A question which is actually a follow-up on the comments you made on asset quality. I wanted to see if you could give us some color on the PDL formation, which accelerated in the quarter, with the provision relatively high in the third quarter. And especially in the context where we're seeing Colombia with one of the best GDP growth in the region, I wanted to see how you reconcile this and maybe get a sense of where NPL will go in the next quarters.

Thank you, Fred. Yes, as we mentioned in the presentation, we increased our level of provisions and the [NIM] past due loans are a little bit higher, because of any specific cases on the corporate business in Colombia and Guatemala, in some leasing business.

But that doesn't reflect any kind of trend. We expect to maintain vintages under control; we are not expecting any kind of deterioration. We are able to say the past due loans will remain healthy at a level of 3%, and also the coverage at 150%.

So this quarter was mainly driven by specific cases with corporate loans, but doesn't reflect any particular concern regarding any particular segment. Consumer are behaving very well; corporate loans as well, are behaving very well; credit cards and mortgage, same trend.

So the Colombian economy as a whole is not reflecting any kind of deterioration; probably the disposable income maintains still a very solid trend.

Okay, that's good. And do you think those specific situation will be resolved already in the fourth quarter?

Yes, sir.

Okay. Maybe just a final follow-up; considering everything you mentioned on margin and asset quality and so on, what will be your revised or your guidance on ROE for this year and next year?

For next year, we are expecting to increase our return on equity between 14% to 15%. That will be because of, under IFRS, we don't have to considering the amortization of the goodwill. And also because we are asset sensitive, you'll see a [re-pricing] of the assets faster than the liability side. So we will be able to say it gives us 14% to 15% is achievable.

That's good. Thank you very much.

Philip Finch, UBS.

Congratulations on your results. The question I want to ask, first of all, is regarding the big gain you had in your foreign exchange business, where you saw, I think, COP127 billion gains, which was much higher than you've had in previous quarters. The question here is, what drove the big increase, the big improvement? And going forward, what could one assume as a sustainable level?

And secondly, on slide 13 in your presentation, you have a very useful chart there, showing ROE and ROA, going back a few years. And what's quite striking is, Q4 in each year seems to be a particularly good quarter. So could you just remind us what the seasonal drivers are for Q4, which may suggest that fourth quarter this year could also be a good quarter for you? Thank you.

Thank you, Philip. Yes, this is a very particular quarter, regarding your first question, because the depreciation of the currency was particular high, 7.5%. This is not sustainable, of course. FX rate analysts and Central Bank expect that to maintain between COP2,000 and COP2,100. That would be only for this specific period, because the devaluation was very high, so we don't expect to see there again, in the next coming quarters.

Regarding your second question, we expect to close at the end of the year, based on the assumption that we will have the same trend of this quarter, next quarter, our return on equity will be at a level of around 13%, 13.-something-%. And the return on FX will remain almost flat.

So just to clarify, fourth quarter should be stronger, the bottom line?

Could be almost a little bit, because usually the last quarter you increase the volumes of loans, so we will be benefited of that.

Okay, great. Thank you very much.

Chris Delgado, JPMorgan.

My question relates to tax reforms, the proposed tax reforms in Colombia. I just wanted to get a sense of what your thoughts are on those.

And then how do you see it impacting your ROE target for 16% in the medium to longer term?

Yes, the tax reform is still in process, so we have been discussing with the government, and there is a lot of noise around the final numbers. And we are expecting a very long process of approval from the government.

But if that were the case, and we have the same tax for equity that we had four years ago, we will be impact at least double the size of the tax, because we increase our capital twice in the last four years. Because remember that we went to the market twice in our two [follow-on] operations, so the impact will be very important.

Okay, great. Thank you.

Jose Barria, Bank of America.

Just a follow-up on a previous question on asset quality. Given that you're saying that the deterioration we saw in the quarter was more specific due to some cases, I expect that then maybe we should see provision charges not be as high as what we saw in this quarter. I wanted to get your thoughts on where provisions to average loans should be.

And then also, if you could just briefly tell us what you're Tier 1 capital would be, if you had been allowed to include earnings through this year, so far. Or where it should be at the end of the first quarter when you can incorporate 2014 capital generated? Thank you.

Thank you, Jose. Yes, regarding Tier 1, the calculation, assuming that we are capturing 60% of the net income that we have today, that will increase to 9.2%, 9.3% of Tier 1 today. So that's the matter we are presenting.

Regarding provisions, yes, we are expecting to reduce the level of provisions, maybe at the same level that we had in the second quarter of this year. So that will be between [COP350 billion to COP380 billion], based on the assumption that there will not be deterioration of the loan portfolio.

Got it. Thank you very much.

(inaudible), [ITAU].

I would like to ask a question about your expectation for Banistmo operations in 2015. Do you expect to see an improvement in the profitability?

And I would also like to confirm the sustainable PDL ratio above 90 days, is it 1.4% if that?

Okay, regarding Banistmo, as I mentioned at the beginning, the Bank are running in a very good way. We are expecting an increase next year, of the loan portfolio, at around 10%, mostly in line of the rates of the competitors. But this year, 2014 and next year, 2015, we will be most focused on become the Bank more efficient to work under own systems. So we don't expect big increase of the loan portfolio [road], neither big increase of the liability side.

So again, Banistmo operation will represent an increase in terms of the loan portfolio at around 10%, 8% to 9% on the deposit base. And that will give us a level of profit, so part of $100 million at the end of next year. But next year, we will have a lot of CapEx investing because of the replacement of the systems that we are put in place in our operation.

Regarding the 90-day past due loans, as you checked the numbers that will be very stable number and we expect to maintain the same level at least for 2015, which means 1.5% of past due 90 days.

Okay, perfect. Thank you.

Boris Molina, Santander.

Just one detail, could you explain a little bit your non-operating income? You had a big jump in cost there in non-operating expenses and what is this? Is this a line that is going to be affected by the Banistmo integration? And do you have any idea of more or less how you are doing in terms of your execution of your costs for integration of Banistmo? I think you mentioned something around [$30 billion]. And if you're in line to meet that target and what is the number that you would expect for next year?

Yes, Boris, thank you very much. Effectively, this is the expenses that we are expecting for next year are around $30 billion of OpEx in Banistmo. That's the number that we will be reflect next year in our P&L.

And is that going to be reflected in non-operating income? In this quarter, there was a big jump in that line and if you look at earnings before taxes, there was more or less okay. But then you had a big jump in non-operating expenses and this really destroyed your quarter.

Yes, a big jump, Boris, is as we released in previous weeks. Remember now we had a mistake about our treasury operation in 2012 and 2013; that will be reflected this month with adjustments of this jump. That's the reason why you see in other operating expenses this adjustment.

Okay, wonderful. Thank you, Jose.

Cristian Hernandez, Alianza Valores.

I have one question. I would like to know, you recently signed a collective pact with your employees, having increased their salaries next year around 7%. Should we expect efficiency pressures given this? Or how could you guys work that out? Thank you.

We don't expect operation of this, because we have found, again as I mentioned during the speech, we are really now maintain under control the labor cost. So we are not expecting to increase the headcount. We want to be more efficient; we want to work with the same team and with the same people, so we don't feel any particular pressure regarding that issue.

Remember that 7% will apply for the 70% or 60% of the total employees because we are talking about the Colombian operation. But outside in our operation in Panama and in Salvador, we have a different situation that will be tied to the inflation in those countries. So as a result of that, we don't perceive any particular pressure on expenses at the labor cost.

Right. Thank you.

[Jose Restrepo, Serfinco].

I have one question. You had been mentioning [directing transaction] to electronic channels is the key to improve efficiency. Can you give us an idea how the number of transactions in those electric channels are growing, compared with the transactions made by branches in terms of volumes? And do you have guidance for that in the coming years? Thank you.

We have to explain efficiency in two different ways. First, the increase of the channels right now, we are increasing the physical branch, six to seven branch per year. Five years ago, we grew 60 to 70 branches, so that reflects maintain under control the increase of the operating.

Today, we process at around 7 million transactions per day and only 8% of that transactions are processed through the physical branches. The rest, the 92%, are processed through different channels, such as Internet, mobile banking, telephone banking. So this is the new way to distribute products and to use the channels.

We are focusing on that effort, trying to move the people outside their offices and try to use different channels.

And Jose, we are not just processing around 92% of the transactions electronically, but also the pace of the growth of the electronic transactions is much, much faster. Electronic transactions are growing around 4% monthly, all transactions, not just monetary transaction, but all the transactions around electronic channels. So the pace is very clear to move from the physical branches to the electronic channels.

Right now, people are not using the physical branch, but we are in the second stage that we are trying to promote people not using the ATMs. The use of debit cards will increase in a different ways, through gas stations, supermarkets. That's the reason why you see an increase of fees, because right now we are promoting the use of debit cards.

Do you have an idea how this electronic transactions will grow in the future? Or do you expect to grow to 95% or more?

The composition will be the same, 92% to 95% to these channels, and the growth will depend on the economy; it will depend of how fast the people move to electronic channels. Right now, we are promoting that.

We have 6 million, 7 million clients and the joint population right now. Just to give you an example, the transactions through Internet is growing at a pace of 20% per year, which is a lot.

Okay. Thank you.

Marcelo Cintra, Goldman Sachs.

My first question is just a follow-up on the non-recurring event of this quarter. I believe that you had an COP89 billion extraordinary loss this quarter related to this correction on your trading portfolio. I'd just like to make sure that this COP89 billion is pre-tax, and also, if we should expect any other adjustment, or any other non-recurring items similar to this one in the next quarters?

And then a follow-up of my second question. Thank you.

Thank you, Marcelo. Effectively, it's a pre-tax, the COP89 billion, and we made the adjustments, we made the corrections, and we are not expecting any other kind of mistakes than we realized on the treasury business. Remember that was because we implement a new system, the new [deal] system at that time, but to date the operation is very well established and very well normalized.

Perfect; thank you for clarifying. My second question is related to this [infrastructure] plan; I just would like to hear from you guys what is your expectations regarding any positive impact on your growth maybe next year and 2016, and what we should expect in terms of lending from you guys towards these specific projects in the coming years? Thanks.

Thank you, Marcelo. We have been talking about infrastructure over the last [four] years and we definitely we expect that, at the end of next year and beginning the 2016, we will experience an increase of these kind of projects, and in the same line we will experience an increase of our lending business of [that model].

As a result of that we prefer, and that's the reason why we went to the market to get money for 15 and 20 years, in order to be prepared for [lending] that business. [GDP growth] is not a risk, it's not a matter of risk project; it's how to finance in a better way to offer to the clients -- to the projects [client] financing.

So you will see the impact of the new business at the end of last year, meaning last quarter of 2015, and you'll see a very, very important movement during 2016.

Perfect, okay. Just to make it clear, you mentioned that you expect your loan growth to accelerate next year, so maybe we should expect still stronger growth in 2016. Is it fair to assume this kind of pickup in growth in 2016 as well?

We are not expecting an important growth next year; we are expecting 10% to 15%, which is three times the GDP growth, or 3.5 times. Maybe in 2016 we will experience an important growth because of that, but next year we are based on the assumption that we will grow exactly the same that this year. This year, we will grow 10%, next year 10% to 15%.

Perfect. Thank you very much.

[Juan Dominguez, Credicorp Capital].

I have a question regarding efficiency and CapEx. As you move from the brick and mortar business model to alternate channels, how important is going to be the recurrent CapEx in IT, going forward? And in terms of non-recurrent CapEx, how much do you need to invest in total for Banistmo in terms of technology?

And also, if you can provide us some guidance on your net fee income for next year, that would be great.

Okay. Perfect. Based on the assumption that the population and our clients maintain the same behavior, we would expect fees again 10% to 13%, 14% next year.

In terms of investments in Banistmo, Banistmo will receive an investment of around COP30 million to COP40 million next year and that will be most of them on CapEx, and a little part in OpEx. So we don't expect -- and this is discounted when we talk about to receive $100 million of profit from the Banistmo operation, that is included.

Our guidance for expenses for the Bank next year will be 8% to 9%.

And, Juan, let me expand a little bit on the IT expenses. As you know, we have been investing heavily in the past years on IT, and we are not expecting to change that level of investment in IT in the future. We are going to maintain the level, but we are going to see the results of those investments that we made in the past, and we are doing in the future on the expansion of the electronic channels. So you don't see in the future a big jump on IT expenses.

Okay, thanks, Juan Carlos. Just a follow-up on that; how do you compare your technology with your peers in Colombia, and is Bancolombia prepared for a disruptive low cost IT model?

We have been preparing for that model for a couple of years. I think in technology you need to keep investing and in banking, which is heavily dependent on technology, you need to keep investing. So I think we have been doing that, and we will be doing that in the future.

As the low cost model, I think moving to the electronic transactions that we have been mentioning in this call, and as part of our strategy, is going to help us to move to that low cost model.

In terms of the other part of your question was how our technology compares with our peers in Colombia, I think we are in the same level. We are all investing in channels; we are investing in how to reach in much efficient way our customers; and also we are investing in the process of replacing our core banking systems in order to help to be more efficient. So I think we are all in the same page.

Okay. Thanks.

I will now hand the call over to Mr. Jose Acosta, CFO, for closing remarks.

Thank you very much. Hope to see you at the next conference call that will place in April. Thank you very much.

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