Grupo Cibest SA (CIB) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Bancolombia's first-quarter 2015 earnings conference call. My name is Jeanette and I will be your coordinator for today. (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 Velasquez, Chief of Strategy and Financial Officer; Mr. Jose Humberto Acosta, Chief Financial Officer; Mr. Juan Carlos Mora, Chief Operating Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mr. Jorge Humberto Hernandes, Chief Accounting Officer; Mr. Alejandro Mejia, Investor Relations Manager; and Mr. Juan Pablo Espinosa, Chief Economist.

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 first-quarter 2015 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 description of the main topics that impacted our business in this period. You can follow the slide presentation available at our investor relations website.

We want to start this conference call highlighting the good operating performance of Bancolombia. Net operated income grew 21% during the first quarter and 40% as compared to first quarter of the last year. This growth is a result of the [upgraded] net interest income and fees and a moderated growth in expenses.

Fees continue growing at a very healthy pace. They increased 11% compared to the first quarter of last year, as our debit and credit card business keeps growing. The assets under management increased and we distribute more insurance premium through the network and branches.

In the cost front, we keep our efforts in growing in line with [denominated fee]. That is how operating expenses grew 9.6% in the first quarter of this year as compared to last quarter of last year. The result of the revenues growing almost 2 times faster than expenses caused efficiency ratio of Bancolombia to decline to 48% in the first quarter of this year.

Income before taxes expanded 33% compared to one year ago, a pace that lead us to believe that this year is going in the right direction of profitability and value generation.

We want to highlight now with IFRS accounting, Bancolombia was not amortized goodwill anymore and that will contribute positively to earnings. On this opportunity, we want to develop this presentation in three different chapters. The first one would be the macroeconomic view.

The second one will be a comparison between IFRS versus Bancolombia GAAP in 2014. And finally, we will present the performance of the Bank in the first quarter.

Now we will like to continue with a brief description about the economic environment. For this purpose, we have Juan Pablo Espinoza, Bancolombia Chief Economist, who will elaborate more on these matters. Juan Pablo?

Thank you, Jose Humberto. And good morning, everyone. Now I will ask you to go to slide number 3 in the presentation.

In terms of economic activity, the moderation that started last year has continued. After a 3.5% year-on-year growth in the fourth quarter of 2014, we expect that in Q1, GDP expanded 2.8%. This reflects a less dynamic private consumption in investment, which has been partially compensated by a less negative contribution of net experts.

However, we believe that Colombia's reaching the bottom of the current business cycle in the first half of 2015. We think that in the second semester, activity will slowly gain traction, driven by factors such as the execution of the first stage of [4D] infrastructure projects, the launch of the new Reficar oil refinery, the stimulus measures announced by the government yesterday, and the positive effects of the real depreciation on net experts. As a result, we expect that GDP will grow 3.4% this year and 3.7% next year.

In the external sector, the current account deficit will widen to 5.8% of GDP in 2015 and will partially adjust 2% to 4% of GDP area in 2016. Regarding the exchange rate, we believe that at current levels, the Colombian peso looks fairly valued.

On the fiscal front, the decrease in [nor]-related revenues and a moderate economic growth will translate into a more pronounced central government deficit. We anticipate that it will widen to 3.4% of GDP in 2016 from 2.4% last year.

With respect to prices, in the short term, we expect inflation to remain well above the ceiling of the central bank's target range. Going forward, inflation will be subject to contracting forces.

On the one hand, food prices should adjust downwards and price pressures coming from the dynamics of aggregate demand will remain muted. On the other hand, there will remain upward pressures arising from the pass-through peso depreciation and from the increases in the minimum wage in the past two years. Incorporating all these factors, we expect inflation to expand at 3.9% next December and 3.1% at the end of 2016.

In interest rates, our monetary policy call for the foreseeable future is that intervention rate will remain at 4.5%. This is [standing] consistent with a cautious central bank, which admits that the current day scenario is mixed and reckons that the recent reduction of national income is a permanent rather than temporary phenomenon. Nevertheless, [incoming] inflation reading surprised us on the upside, the possible operate lift cannot be ruled out.

I will close this section by saying that at this moment, Colombia is adapting to our reality of significant external headwinds. But we think that the bulk of negative effects has already materialized and the mechanisms of economic adjustment will lead to a more promising macro context next year.

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

Thank you, Juan Pablo. In this opportunity and before starting the review of the quarterly results, we would like to present a comparison of the 2014 balance sheet between Colombia GAAP and IFRS. This is in order to provide an idea of the main differences. We are not providing the ties of the rate classification between accounts, but a high level comparison.

Assets under IFRS are COP1.16 trillion higher than under Colombian GAAP, mainly due to three items. First, higher fair value of the investment properties. Under IFRS, investment properties are measured using a fair value model.

The change in the value under the fair value model are recognized as a profit or loss. As a result, fair value of investment properties increased by COP520 billion. And this is mainly because one of our subsidiaries, which is the real estate trust, called funding (inaudible) Colombia.

Second, higher goodwill banks under Colombian GAAP, the goodwill is subject to an amortization charge on a monthly basis during their estimated life. Goodwill amortization is not considered under IFRS. The increase represented COP431 billion and this is mainly because of our previous acquisition of Banistmo, who the charge will be at around COP431 billion.

And third, increased deferred tax assets. As a result of the difference between financial IFRS accounting and tax accounting, the DDAs increased by COP238 billion.

The chapter of liabilities under IFRS are exactly COP1.16 trillion higher than the Colombian GAAP standard, mainly due to three items. First, present value of the 1% minimal preferred dividend is recognized as a liability.

Under IFRS, the Bank must estimate the present value of the 1% minimal preferred dividend. As a result, a liability of COP580 billion was recognized. Second, higher deferred tax liability. As a result of the difference between financial IFRS accounting and tax accounting, the TTLs increased by COP409 billion.

And third, the reduction of non-controlling interest under IFRS. The noncontrolling interest in subsidiaries must be classified as a separate component of shareholders' equity in the consolidated financial statements. As a result, the Bank's total liability are reduced by COP494 billion. The combination of increased assets and liability results in an increasing shareholders' equity.

It is important to highlight that the loan portfolio, which is the most important component of our balance sheet, experienced a significant growth due to three main charges. First, reclassification of operating leases as a financial leases. Second, the recommission of suspended interest assets. And third, recognition of [ARP] interest as a part of the loan balance.

In the slide number 5, presents a summary of the variations of the main accounts of the balance sheet and its components that we just mentioning. We want to highlight that we would be delighted to have meetings with you to give a deep explanation about these modifications and these moving into the balance sheet.

On the slide 7, we see the evolution of assets and its composition. The first thing that we have to say here is that all the numbers that we will present right now are under the same IFRS standards, so we will not talk about the Colombian GAAP. We will only talk about the IFRS.

During the quarter, the proportion of loans as a percentage of total asset was 74% as we continue focusing in our lending business. The securities proportion was 8%. The nominal value of the securities portfolio is 10% lower than one year ago and duration remains low at 24.5 months.

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 1.15% during the quarter, driven by commercial and mortgage loans. We focus our growth in the less risky products, as we want to maintain a very healthy balance sheet. On the other hand, US-denominated loans grew 1.95% during the quarter, driven by commercial and small business loans.

The 8.6% 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 Colombian pesos.

Let's remember that the Colombia balance sheet is fully matched in terms of currency, which reduces impacts of FX variations under shareholders' equity. As a conclusion, of the 20% of loan growth, if you prefer a year -- the last year, 12% is basically because of growth and 8% is basically because of exchange rate.

Today, loans denominated in dollars represent 36% of the total loan book. During the last 12 months, the overall loan portfolio grew approximately 12%, but the depreciation of the Colombian peso (inaudible) stable growth when expressing pesos to be at 21.9%.

We would like to emphasize that the fact of the net interest income of the provision expenses grew 23% more than the growth of the loan portfolio. Finally, the loan growth target for 2015 could be between 10% to 12%.

Now in slide 8, we present the snapshot of the credit quality at the end of the quarter. In general terms, we see the portfolio with a healthy quality, well covered by allowances, and we pass the loans under control.

The 30-day past due loans to total loans ended the quarter at 3.1%, slightly higher than December's ratio, and the 30-day coverage ratio is also decreased to 123%. We forecast to have a 30-day coverage ratio of around 120% in the medium term, which we believe is more than enough to absorb potential credit losses that the Bank will eventually have. Similarly, past due loan [shorter] percent between 3% to 3.5% of gross loans.

At the bottom of the table, we compared 30-day past due loans, which is the Colombian standard, and 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.

90-day past due loans have been very stable over the last two years as a result of our good credit origination process. They represent 1.7% of gross loans as of March of this year and the coverage ratio is 215%.

Slide number 9 shows the provision charges, which were COP341 billion during the quarter. It was 1.1% of the average gross loans when unrealized. We want to point what occurred in 4Q of last year, when we first adjusted the models for estimating the provisions.

We eliminated the year 2008 data and added 2013 in order to have the most recent five years of estimated potential loss. Remember that the level of past due loans that we had in 2008 was a very high level and the levels that we are incorporating in 2013 has a different level below that.

Second, new model for operational in Banagricola and Banistmo based on the loan performance of each country. That implies that we had to reduce the level of provisions because the new models represent a better indicator of the quality of the loan portfolio in those countries.

Third, adjusting the model for international loans; what to model in particular to comply with the same standards as in Colombia. So what happened at the end of last year is we changed the models and we adjust the models based, again, on historical information of every single operation.

In line with seasonal factors, the last day of the quarter was in a week of vacation for properties in Colombia. As we have seen in past years, these tend to cause higher NPLs in March.

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 COP749 billion new past due loans again is in line with seasonal factors, similar to what we have one year ago. The deterioration came from mainly retail clients and SMEs.

The most important thing regarding loan quality is that the [interest] originated over the last year present today still a good performance as a result of the strict [played] underwriting standards and they should not represent abnormal deterioration in the next coming months.

As we mentioned before, the growth in first quarter of this year was driven by commercial loans and mortgages, which are the less risky products in our portfolio. To give you a sense, when you look at 90-day past due loan, the ratio moves from 1.6% to 1.7%, assuring that the quality of the loan portfolio was just a seasonal effect and the main company is on the 30-day and 60-day past due.

We believe that we are still too early in the credit cycle to estimate in an accurate way the deterioration that the loan portfolio will experience this year. Nevertheless, we feel comfortable with the evolution of the loan portfolio and forecast to have provision charges of around 1.4% of gross loans during this year.

Moving on to slide number 10, we see the evolution of the net interest income and funding costs and composition. NII for this quarter was COP1.8 trillion, 17% of both the same quarter of the previous year, driven by higher loan volumes and a slight increase.

The reduction of the funding cost during the first quarter played a key role defending the NIM and growing the NII. You can see at the bottom left-hand side table how Bancolombia reduced the [operating] funding costs by 2 basis points during the first quarter of this year. Even though the [intebation] rate of the Colombian Central Bank remained stable at a level of 4.5%.

During this year, we focus our efforts not only in keeping the funding cost as low as possible, but also in increasing the average time to maturity of the historical liabilities. In particular, timed deposits and long-term debt.

Our goal is to keep funding cost as low as possible while maintaining a conservative approach to liquidity risk management in an effort to defend or expand the NIM and grow the NII. We have in our favor the asset-sensitive condition of our balance sheet, which is as beneficial for net interest income.

Slide number 11 shows the evolution of the net interest margin. During the first quarter of this year, we saw a favorable evolution of the NIM, as the yield on assets improved and we reduced the funding cost. This trend was the mainly attributable of the growth of NII.

The NIM from loans ended at a level of 6.1% in this quarter, 40 basis points above the fourth quarter of last year and 10 basis points above a year ago. The NIM from securities was 1%.

As you know, Colombian Central Bank increased the repo rate 125 basis points to 4.5% in the many sales in this year -- last year. We capture a positive impact of this hike and forecast that NIM should be around today's levels in the next coming quarters.

Fees are presented in the slide number 12. During the first quarter, due to seasonal factors, fees decreased compared to fourth quarter of last year, as typically. In the last months of the year, people tend to use more plastic for their holiday purchases.

Nevertheless, fees increased 15.2% compared to the same period of last year. We continue experiencing more credit than debit cash transactions during this quarter, further proof of our effort to promote the use of plastic to pay in the stores and increase the number of credit cards in new segments.

In addition, we saw a high level of insurance fee tuition fees, which generate COP54 billion during the first quarter of this year. For the entire year, we forecast a fee growth of 10% to 12%.

In slide 11, we present the evolution of expenses. The efficiency improved during the last 12 months, as the operating income grew 21%, while operating expenses only grew 10%.

Let's remember this is the seasonality of expenses during the year. Typically, the first quarter has a lower level of expenses than the fourth one. And as a result, the best way to compare long-term trends in expenses is compare the same quarter of two years.

Today, Bancolombia is focusing in developing channels with little marginal cost and growing expenses in line with a nominal GDP. Also, we are having a strict contract in projects undertaken by the Bank. Our guidance for this year is an increase of expenses 8% to 10%.

Moving to slide 14, we see the function of the net loans to deposit ratio, which ended this quarter at a level of 112% as a result of the loan growth and the issuance of equity at the beginning of last year. The proportion of loans that we do not fund with deposits are funded with long-term debt in order to help a similar duration of both sides of the balance sheet. This strategy reduced the volatility on the net income and shareholders' equity.

In the last year, Bancolombia has issued supporting net debt that helps to enhance the BIA's ratio and to provide long-term funding. The liquidity on capital levels that Bancolombia present today are optimal for the business plan that we have designed.

Regarding capital, on the bottom right-hand side, we present the capital of deposit ratio at the end of the quarter under the new IFRS standard. The Q1 ended at a level of 8.6% and includes the appropriation of earnings after the general shareholders' meeting on March 20.

As we have said before, this is a level of Tier 1 optimal for the operation of the Bank and we intend to keep it between 8% to 9%. For the Tier 1 ratio, we ended the first quarter with a level of 5.6%, for a total BIS ratio of 13.3%.

And line number 13 shows the return on assets return on equity of the Bank. The return on equity for this period was 14.3%, a number that is in line with our expectations. Return on assets was 1.6% and the trend is that that these metrics should continue growing towards 1.6% to 1.8% (technical difficulty).

Finally, we want to emphasize the good operating results of Bancolombia over the last 12 months. In slide 16, we present the net income before taxes and taxes paid in the first quarter the last year and first quarter of this year.

Income before taxes grew 30% compared with the last year. But income tax plus wealth grew 133%. This means that the improvement on operating metrics of the Bank was upset totally by the higher taxes. In the coming quarters of this year, we will not have the wealth tax.

After presenting these slides with the first quarter numbers to you, we want to highlight the next elements. First, we feel so proud in saying that we have a optimal performance of loans, net interest margin, and NII. We have been seeing a sustainable growth in fees in the last three years and we will be able to sustain that trend.

And the most relevant point we are having a very strict cost control and you can see that we will be able to reduce the efficiency ratio below our 50%. These three elements lead us to sustainable growth of performance in the next coming quarters.

I would like to invite our audience to ask any questions you may have.

(Operator Instructions) Carlos Macedo, Goldman Sachs.

Thanks for taking questions. I just wanted to get to the bottom of the IFRS -- the shift to IFRS. If you look at the financial that you provided for first and fourth quarter, the big difference between the fourth quarter and the first quarter was the wealth tax, as you alluded to.

If you strip that away, so looking forward to the next quarters, you actually did a lot better sequentially in terms of net income. And we will be talking about a 17% net income -- or ROE for the quarter.

Is that a sustainable run rate for the next quarters? I mean, if you just -- I know that there is seasonality in expenses and fees and other things, but from what I am understood, those kind of offset each other and without the wealth tax, the ROE does climb quite significantly.

Is that something that we should expect going forward that you maintain or sustain this level of profitability, which is well above what you have been delivering under Colombian GAAP in the prior periods?

Thank you, Carlos. I would say that the main driver of this profits, of this level of profit that we are having, no matter if it is on the rise [varies] of Colombian GAAP, the main driver is basically the performance of the loan portfolio. And we believe that we will be able to sustain that strength.

Because the main driver here is how to maintain under control the efficiency ratio. How to maintain the expenses growth below 10%. So -- and this is the matter that we are presenting to you. That the main impact, the main reason why we increased our return equity during the first quarter and the previous quarter is because we were able to reduce the level of expenses.

Agreed. But is that a sustainable -- I mean, obviously, there is seasonality that -- seasonality that comes in the first quarter vis-a-vis fourth. And year over year, growing at 10%.

So we should expect that 10% growth going forward and therefore balancing everything out -- everything else out and the income statement and margins kind of saying flat, provisions coming in line, loan growth being sustained where it is. It does point to a level of profitability under IFRS. Of course, you have to strip away the amortization and goodwill that is stronger than on a Colombian GAAP. Correct?

Correct. And we expect that. Obviously, as we mentioned in the presentation, we don't have a clear picture of what will happen in terms of quality of the loan portfolio. Second, we don't know exactly what happened with the liquidity, but today we feel comfortable with the funding cost that we are having.

And third, you probably can shake a huge impact in our results because of the exchange rate. Today, we have a level of COP2,500. We expect, as you hear from Juan Pablo, that that would be the level at the end of the year [after June]. So again, we do expect to maintain that trend.

[Guilherme Acosta], [Itau Obervay]

Congratulations on the results. I have two questions. First, what is your expectation regarding asset quality evolution for the next quarters? You mentioned during the presentation that a good part of the new past due loans were due to seasonality.

But could you comment if you expect [impure] ratio due by 30 days to improve going forward? And my second question is about the loan net interest margin. Do you expect loan net interest margin to continue increasing in the next quarters?

Regarding your second question, obviously we will feel pressure of the net interest margin in the next coming quarters because of two reasons. The first one, the funding cost. The liquidity has been dropped a lot in Colombia, so we will have a huge competition because of funding cost.

And the second reason is we are seeing a different level of loan growth for the next coming quarters. So we are not talking about growing at a level of 15%. We are talking about to grow at a level of 10%, which implies that the competition, because of the business, will be very important so that we will tie the NIM and tie the prices of the loan portfolio.

Regarding your first question, the quality, it is too soon to talk about why we are happy with the quality of the loan portfolio, because we need to at least see what happening in the second quarter regarding consumer loans and regarding SMEs. Again, you see the numbers in Colombia; inflation is at around 4%. We are not sure about how the fixed rate will impact the inflation.

So we want to receive more data in order to provide you a very comfortable guidance what will be the level of the new level of past due loans in the next coming quarters. But we don't think that --.

Okay. Perfect.

But Guilherme, we don't expect a huge deterioration of our loan portfolio, because again, the [pinch touches] are behaving very well.

Tito Labarta, Deutsche Bank.

Thank you for the call. I have a couple questions. I think also maybe to understand a little bit the IFRS. Because you did show the changes on your balance sheet, but you didn't show the changes on the income statement.

And when we look at the income statement, first, other operating income increased significantly. I think some of that may have been to do to FX gains, which rose almost COP100 billion in the quarter. So I am wondering how sustainable that is or did that benefit because of depreciation of the currency.

But also the nonoperating income also was kind of volatile compared to the two quarters that you showed there. So I don't know if you can give maybe some more color on the actual impact on the income statement from the changes to IFRS.

Also, were the expenses impacted at all by that? Just want to get some more color to understand really the profitability and how much also the depreciation of the currency benefit results. Because I guess, loan growth benefited because of that.

So I am not sure -- you mentioned (inaudible) loan growth, but I'm wondering how sustainable the loan growth is once the currency begins to stabilize, particularly as you have a lot of loans in US dollars today.

And then the second question, in terms of your capital ratio. I noticed you put a tangible capital ratio of 8.1%. But do you have that on a fully loaded Basel III -- do you know what your fully loaded core Tier 1 ratio would be? It would be helpful if you have any color on that as well. Thank you.

Regarding your first question, when we talk about the valuation in the Bancolombia group, that only affect us in terms of the level of profits of our subsidiaries' gross model, the international subsidiaries. So of course, the valuation will affect us on a very positive way in the net income.

Sustainable? Again, the level today is COP2,500, so we don't expect more income coming because of the FX variation. And it is marginal, because we are talking only about the profits of the subsidiaries.

The second one big difference is IFRS; obviously, we have no -- taking in consideration the amortization of goodwill that will happen this year. So those are the two main factors why we increased the level of profits this year. The first one, exchange rate; and the second one, the IFRS.

So we believe that we, because of the business, we will be able to sustain the trending terms of net income increasing basically because of the performance of the loan portfolio. Maintaining the NIM at the same level. This is regarding your first question.

Regarding your second question, yes, in terms of Tier 1 ratio, we feel comfortable the 8.1% [on your races]. It is what it is. But under domestic IFRS, goodwill is not taken into consideration. So we believe, Tito, that we will be able to maintain that level at the current rate that we mentioned at the beginning: 8% to 9%.

All right. So just to follow up, so really, on the income statement is really the only difference [my] IFRS the elimination of the goodwill amortization. Just because if you look at net income year over year, it was basically flat. But we don't have the data for second and third quarter.

Are you going to make that available so that we can really compare for the full year how we should look at it? And then on following up on the capital ratio, is that 8.1%, is that fully loaded core Tier 1 or is that still adjusted for Colombian capital regulations?

Tito, Basel III under Colombian provision, we made internal calculation and that would be 20 basis points below the level that we are talking about. And again -- yes?

Sorry. So the Basel III fully loaded would be 7.9%, you are saying?

It could be at around 7.9% to 8%. Tangible common equity.

Great, thanks. Okay -- and the other thing?

And the other thing is in terms of NIMs, we believe that we are able to support our NIM and we are able to maintain under IFRS the same trend. Again, we don't feel that the FX rate will help us (technical difficulty) the loan portfolio. And we believe that the most important thing will be the level of expenses that support that.

Great. Sorry. Not to harp on this, but will you be able to provide some more historical data other than first quarter and fourth quarter? Can you send us second and third quarter data from last year on the IFRS?

Yes. Yes. And one other things. And we will present to you every quarter the previous quarter. We are not able today to provide you the fourth quarters of last year because we are [representing] as you know probably, the Supreme Court release, the new adjustments of IFRS, the last week of December. But yes, we will send you the details about the structure of IFRS the first quarter and the last quarter of last year.

So the other quarters you will send when you report, I guess?

Yes.

Saul Martinez, JPMorgan.

I wanted to understand why provisioning levels were where they were this quarter. Your cost of risk was about 1.1%. And I understand the vintages and I understand the seasonality, but you did have some deterioration in terms of headline delinquencies. NPL formation was a little bit higher.

As you mentioned, the outlook is one that has some uncertainty. Your coverage fell considerably; actually, on 90 days, it fell, I think, if I am not mistaken, 60 percentage points. And on 30 days, about 17 percentage points. And your guidance is for about 1.5% cost of risk, so 40 base points worse.

So what happened this quarter that made you feel comfortable provisioning at the levels that you provisioned? How much does it have to do with IFRS adoption? I am just a little bit confused as to the provisioning levels this quarter -- not the fourth quarter, where you had some very specific things, but this quarter. What was the logic and why did you feel comfortable provisioning at those levels?

My second question is related -- is more specific -- or is specific as well. Fee cost guidance of -- I guess fees 10% to 12%, cost of 8% to 10%. How should we think about that? Because that growth is on what? IFRS? Colombian GAAP? Or should we think IFRS numbers compared to Colombian GAAP?

I mean, the numbers are not as substantially different for those items in Colombian GAAP and IFRS, but there are some differences if you compare the 1Q and 4Q. So should we take the old numbers for the full year and now in IFRS, they are going to be 8% higher or 10% higher?

I just want to make sure I understand how you guys are thinking about that growth guidance. Because we are comparing two different accounting standards when we are talking about growth items this year versus last year.

Okay. Regarding the first question, the coverage ratio changed in the way that we calculate because of IFRS. But if we see the calculation with the same measures, we see this year better than the last two years in the first quarter.

That is why we consider that today the change in the level of the coverage ratio is because of the increasing past due loans that is normally in this quarter. It is -- that is the answer for your question.

So if you calculate the coverage ratio with increasing the past due loans, that is why it is the change in the percentage and the [admission] in, I don't know, 20 base points or something like that. That is the answer for your question for the first one.

On the second one, I consider that the credit cost would be around -- in that range of 1.2% between 1.4%. We don't know what is happening with the consumer portfolio, because we were more flexible in the last quarter of the last year. So part of the increase in the NIM could be because of the increase of the fees and the fees on the NIM could be because of the increase in the credit card portfolio.

And it has helped quite much for the good results. And it could be seen in the provision. So that is why we considered that we can have a range in the credit cost for this year.

Okay. Let me just go back. I'm sorry. I will play devil's advocate little bit, because -- and I understand there is some seasonality and maybe currency impact. But the NPL formation was high relative to what you have had in first quarters in the past. And maybe it is not apples to apples, but your provisioning this quarter was 46% of your NPL formation, which is the lowest I think it has ever been.

So I understand there is new accounting standards, but 1% cost of risk in the quarter or slightly above that NIM environment where the economy is, as you mentioned, decelerating and you had some deterioration that in line slightly worse than what you've had in the past, it doesn't -- there is something I'm missing in terms of the logic of why the provisions are where they are at.

I understand you may have lower coverage going forward, but you burned a lot of coverage, too. So I am still not clear. And also you just said 1.2% to 1.4%. Earlier, you said 1.4%. So I am not really sure -- I am really confused on how you are thinking about asset quality and credit risk going forward.

Yes. Under the new method, we can't have more provisions that the regulation -- the way that the regulation tells us that we have to do it. So that is why we have no discretion around the provisions. We have to know that in every bucket, we have a different way to have operation.

That is why when we add every bucket in the past due loans, we had different provisional level. That is why when we add everything, we have the coverage that you see. We have no discretion around that.

Another thing is that if you see the last year in the first quarter, and the last two years, we changed the method. Now we have under incurred loss; before, we were under expected loss. And those methods are quite different in the way that you take the window data and the period.

Before in expected loss, the [supreme] tendency went 10 years before and now we get 5 years before. And we change the years of the window every year. That is why the method is quite different.

The thing, Saul, is we are in line with the methodology. The second thing is, remember that for 60- and 30-day past due, you have to have a provision of only 3%. So looks that we are having only half of the deterioration, but the reality is that 30 days and 60 days, it is most of the deterioration than you are seeing.

So for 30 days, you have to accomplish with 2% of provision. And for 60 days, around 9%. So that implies that for 100 new -- COP100, you have to comply only on one dollar --.

Nine dollars.

-- of provisions. That is the reason why it looks like so small the amount of provisions. Because it is in the first buckets.

Okay. So I know there is uncertainty, but when you look out going forward, you mentioned, Jose Humberto, 1.4% is what you are expecting for the full year. Is that -- I mean, I just want to confirm that is your best guess at this point of what your cost of risk will be for 2015. Is that correct?

Yes. That is correct, Saul.

Okay. And then the second question -- I know -- I don't want to hog the whole time here. But second question: the growth guidance that you gave, is that IFRS in 2015 versus Colombian GAAP in 2014? Is that how should we think about that growth?

It is IFRS comparing previous year and this year. Again, we are seeing obviously not the same trend in terms of the loan growth. And as the reason why we move our target from 15% to 10%, because we are not seeing the same level of business in every single bucket.

My question, though, was on the income statement items, though. Because when you say 8% to 10% cost growth, 10% to 12% fee growth, we don't have IFRS for 2014. So we can't compare IFRS 2015 versus 2014. We should be thinking IFRS 2015 costs versus 2014 costs when we think about that growth?

Yes. Yes. All of guidance that we are giving to you right now, it is based on IFRS. Comparing IFRS 2014 and 2015.

But we don't have IFRS 2014 is the question. I don't know what IFRS costs were in 2014, because we don't have that number. So how -- so the guidance is not that helpful unless I know what that number is. And we don't have that number for 2Q and 3Q.

Yes. But remember the loan portfolio is not changing a lot under IFRS. It is including some items, but at the end of the day, we have the capacity to recognize what happened with the economy and what happened with our loan portfolio.

I will say no matter if it is IFRS or Colombian GAAP. The business plan that we are having, it's in line with our expectations and we are very comfortable saying that we expect to grow 10% to 12%.

Okay. Let's go off-line, because I think there is something lost in the translation. I am not asking about loan growth; I am asking about fee growth and cost growth. And (multiple speakers) we're not -- that growth -- I am not sure how to calculate that growth if I don't know 2014 IFRS cost or 2014 IFRS fees.

Right. In terms of --

So how should we think about that?

Yes. So in terms of fee growth, we have the numbers because -- different sections -- because of the number of clients, because of the number of credit cards. So at the end of the day, we know that all the things that we are doing right now promoting certain products, we will be able again to sustain the 10% to 12% fee growth.

And I say it again. No matter if this is IFRS or ColGAAP, because it is a transactional product that we've been able to measure very, very simple way.

Juan Dominguez, Credicorp.

Thanks for hosting this call. I have three questions. One is a follow-up question on provision expenses. I want to know exactly what changed in terms of provision expense recognition.

And also, I guess you are not recognizing in your consolidated statements the contracyclical operations that you have to put out front in origination under Colombian regulations. So I wonder if that is correct, if you can tell us if that is a correct statement. Those provision expenses are not including a contracyclical provisions.

The other two questions, I just wanted to follow up on the Banistmo operation. How our results doing there? And also, you mentioned when you were talking about NIM that you are expecting some competition in the funding side. And I wonder what are your expectations on DPF, given this new competition?

Okay. Thank you, Juan. Regarding your second question about contracyclical provision, remember that on the IFRS, the concept of contracyclical provision doesn't exist. So we expect that the [scent] of the government under regulators probably will put in place a new regulation to cover that [loan].

But you are definitely right: there is not contracyclical provision, as Rodrigo mentioned. We are not allowed to put provisions that they are not recognized as a provision.

So again, we expect during the year that the government will take the right measures. And we are eager to that, because we will be able to increase the level of provisions -- no matter if it is on the -- of the buffer side of the capital or in the asset side of the level of provisions.

Regarding your third question, Banistmo is performing very well. Banistmo is growing at a pace of 10% to 12%, the loan portfolio. We are very close to finish the process of implementing our systems and procedures better than expected. The bank is running very well.

And the third element is remember that Banistmo at the beginning of the process (technical difficulty) more provisions (technical difficulty) loans. Right now, we believe that past due loans is under control before we create a collection department in Panama. So right now, we reduced the level of past due loans between 30 days and 90 days.

And probably the level of return on equity in Banistmo (technical difficulty) at the end the year at a level of 12%. So the numbers in Banistmo are very, very good numbers.

Regarding the competition funding, yes, DTF, we will expect that the DTF will increase the number, but nothing of that happened. You probably know, because you have here local operations that all of the banks we are moving for deposits on the longer side.

We are not moving to 90 days. We are moving to 6 months, 12 months, 18 months in order to provide a structural funding. So we don't believe that the DTF will increase a lot. So we will have a marginal benefit of the moving of DTF. And the first question --.

Okay. Thanks. Yes. Just -- yes, sorry.

Okay. In the first question, we have to remember that we have two different methods to calculate the provisions. There is one that that they use -- ColGAAP -- and this expected loss. And there is another one that is under IFRS that is in incurred loss. So that is the main difference.

But if you compared the numbers, under the incurred loss that it's IFRS, we have to change every parameters, every year. And the last year, we took five years of history in the period window. And 2008 was a very bad year in terms of that we had a lot of defaulting consumer portfolio and commercial portfolio.

And we replaced that year for 2013. That is why, because of that year, 2013 was very good. We had different parameters that were much better than the ones that we had a year before.

That is the main reason. And there is another one; that when we acquired HSBC, we worked with parameters that we had in Colombia and Salvador. But last year, we calculate the parameters with the loan portfolio that we had in Panama. That is why we had a better provisions or less provisions than in Panama, with its own parameters, than the ones that we had with El Salvador and Panama.

Those are the two main reasons we changed the provision under IFRS. (inaudible), Juan, regarding the models that we are having in our operations is we had a more refined model because we changed the numbers and we had just the models of provisions for every single country that give us more refined number in terms of provision.

At the beginning of the process, when we took the country of Panama, we have a model that represents a standard model. Right now, we are having a Panamanian model of provision space on the numbers than we are no running.

Thanks. Thanks for the answer. I just -- as you can guess, we are very confused about the second thing changes. And okay. You told us that you are expecting some regulatory pronouncement about what is going to happen with contracyclical corporations.

If you put it in the asset side or in the equity side, that means that your ROE right now is overestimated in the sense that if you put in the buffer side, your equity will increase. Or if you put it in the asset side, you will have to recognize that in provision expenses going forward. Is that right?

And second, I know that you have to comply with the expected loss model for regulatory compliance here in Colombia. I wonder if you can give us some guidance of how your provision expenses look like under the expected loss model for the first quarter?

Okay. Regarding the first question, we are not changing the model. If you check the numbers that we are showing you, first quarter and last quarter of last year, we are not changing that because of IFRS. We are changing that because we are changing our models. First. Just to clarify that.

Second, obviously, if we have to comply with a new contracyclical regulations, that will reflect in the P&L and probably it will affect a certain level of return on equity because of that.

And third, the expected losses we are thinking is probably in line that we have already were explained that we are expecting a cost of [crater] around 1.4%, 1.5%. We are expecting that.

Past due loans at level of 3% to 3.2%. And we want -- and this is very important. We want to maintain a coverage between 120% and 130%, which is comfortable, because the new methodology that we are applying. So we are applying the methodology and we are in line with our expectations.

Thank you very much for the answer. Congratulations on the results again.

(Operator Instructions) Boris Molina, Santander.

I had a question regarding the way you present your income statement under IFRS. In traditional Colombian GAAP, you were mixing interest income and capital gains in your income from securities. And it appears to me that this remains so in the new format.

Now [I trace] IFRS in other countries, separates this and allows us to calculate proper margins. Now is this the case that you are continuing to report a combination of interest income and capital gains on securities in the financial income line? And if this was the case, was this a choice from the regulator or is this a choice that you took?

It is kind of -- Boris, good morning -- a kind of mandatory regulation. So what happened in our income statement, in the loan portfolio, we are adding, as we explained at the beginning, every single operation. We are adding the [noninter sack wall].

And in terms of the loan portfolio, as you said, we have to unify both and to maintain, as you said. Normally, the income that comes from the business portfolio plus the valuations of that income (inaudible) to mark to market. So that would be together.

Okay. Okay. Wonderful. I guess just a curious implementation, but there you go. So it was your regulator that told you to put it in this format.

It is the because of the regulation, Boris.

Okay. I understand.

Remember that we have in the past -- in a different lines, we have in the past the NII from the security portfolio on the business line. But we have down on the other side of the income statement, the mark to market value. Right now, we have together.

Okay. I understand. It would be interesting if (inaudible) you could make the distinction so that we could actually look at what is actual interest income and what is mark to market. So (multiple speakers).

We will send you information. Yes, Boris. We will send information, but it is split. You can see what has happened in terms of margin and what happened in terms of mark to market. Just to define why the profits or why the losses.

Wonderful. Wonderful. Thank you. Now going back to the issue of the operation with [arian] capital regulation. As we have discussed in the past, the Colombian implementation IFRS has been partial. There are still some aspects of the regulation that are not implemented in Colombia.

And we believe that the idea was going to move from contracyclical provisions towards an expected loss model or something like that that would allow you to lower your coverage ratio and help the excess provisions that you have later to 90 days, which is still pretty large, after the impact of higher capital requirements.

So when you are talking about the regulatory drive, is this something just related to provisions? Or are there more parts of the IFRS standard -- sorry, the Basel III regulation that will be implemented in Colombia anytime soon? Is there a combined work or it is only work on provisions?

I would say that that would be more focused on towards oriented to IFRS, which means that probably, the regulation will be focused on buffers of capital instead of more provisions.

But we are not sure. They are carefully seeing what happened with the financial institutions in Colombia and we will hear from them in the next coming months. But the answer is it will be more towards IFRS standards, of course.

Okay. Now because when you are talking about it and the incurred loss provisioning model, if you were to apply that, you would probably need to reflect much lower level of provisions. So I suppose that your regulator told you not to reverse the provisions until the new provision regulation comes through. Is that the case?

Boris, we don't expect that the new models will be another -- or the level of provisions that we are having on our will be dropped from [120%] something from [100%]. We feel that the models and they are reflecting right now the right models in terms of loan provisions. So we don't expect a deterioration, if I may say, deterioration of the provisions of the loan portfolio.

We have no further questions at this time.

Okay. Thank you very much for participating in this conference call. We are ready to answer your questions. We know that this conference call were more focused on IFRS adjustments. So if it is necessary, we will talk with all of you guys to clarify every single movement that we had to do in the new financial statements.

Thank you very much for participating on this conference call. And we hope to see you soon. Thank you.

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