Grupo Cibest SA (CIB) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Bancolombia third-quarter 2015 earnings conference call. My name is Hilda 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 risks 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 report filed with the SEC.

With us today is Mr. Jaime Velasquez, Chief Strategy and Finance Officer; Mr. Jose Humberto Acosta, Chief Financial 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 third-quarter conference results. It is a pleasure to be with you today. 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 Investors Relations website.

We want to start this conference call by sharing with you some facts that drove the business during the quarter. During this period we saw a significant appreciation of the Colombian peso against the US dollar, which caused Bancolombia balance sheet to grow faster when presented in pesos.

Let's remember that the depreciation on an annual basis, it is 53% and in a quarterly basis it is 19%. This trend has also impacted, although to a lesser extent, the income statement and some lines grew faster because of this. The outcome of the mentioned effect in the FX is that the Tier 1 ratio of the Bank diminishes as a result of the growth in risk-weighted assets faster than the Tier 1 itself.

Nevertheless, despite the re-expression of assets and liabilities into Colombian pesos, the impact on shareholders' tangible equity is very small. This is due to the fact that all of our operations in Central America are [realized] and the assets that we have in US dollars in Colombia are funded with liabilities in US dollars as well.

All in all we are long dollars in the portion of retained earnings in Central America as we prefer to keep those earnings at the subsidiary level rather than bring them to Colombia.

Regarding the loan growth, we saw a 31% year on year growth when expressed in pesos and the effects movement explains about 16% of this figure. As we had predicted a few months ago, we are seeing a moderation in pace of growth of the loan portfolio and should end up this year at around 12% and probably next year will be at around 8%.

Another relevant event that impacted our results during the quarter was the issue with one of our clients, (inaudible). This is a construction company that got in trouble due to cost overruns in some projects and led to several low (inaudible) by the project sponsors, which were recently ruled against the company.

As a result the payment capacity of (inaudible) was severely affected and now creditors, including other Colombian banks, are working on a (inaudible) agreement in order to get repaid as much as possible and save the company.

We have a gross exposure of COP290 billion of which we had provisioned at around COP80 billion as of September. In the fourth quarter we should expect to have at around another COP80 billion in additional provisions regarding (inaudible).

A third topic that drove and is driving the business environment today is a tightening of the monetary policy in Colombia. The Central Bank increased its rates by 75 basis points over the last couple of months which currently puts it at a level of 5.25%.

This increase coupled with a lower growth in deposits in the Colombian system and the higher stock of long-term debt caused the cost of funds to increase during the third quarter. As a result we experienced a compression in the net interest margin during the quarter.

As the stock of existing loans re-prices and new vintages are originated at a higher rate, lending needs should stabilize and eventually go back to the levels of 6% where we were accustomed to seeing in June.

The main goal on this front has been to gather [deposits] at a faster pace without impacting the cost of funds in a significant way and to protecting the margin. In the coming months we will attempt to maintain a flexible funding structure under Bancolombia's usual standards.

Last but not least, we must highlight the fact that the line dividends and equity investments, which are not at the core of Bancolombia business, had a significant decline as compared to the previous quarter -- I mean the second quarter of this year.

During the third quarter we sold a portion of the stake that we had in a publicly list company in Colombia called [Odinsa], which had generated significant gains in the first half of the year, but did not contribute any more in the third quarter of this year.

Also we sold [Seguros Banistmo] posting a total loss of COP14 billion. These are not operated businesses and are not recurring at all. But at the end of the day we are talking at about around COP90 billion less in this quarter.

Despite these unfavorable effects, we remain positive regarding the progression of the business plan. The Colombian economy is experiencing a transition including low oil prices and high FX environment. But we are reading these signals carefully and continue operating with a primary goal of maintaining a strong balance sheet with an adequate level of provisions.

Slide number 3 summarizes the performance of the Bank. Income before taxes for the first nine months of this year grew to 12.8% and net income grew 3.8%. That gap between both figures is caused by the hybrid tax brought in the Bancolombia [subject] this year.

Let's remember that the first quarter of this year we paid our wealth tax, it was around COP162 billion, which we did not have in the second and third quarter of this year.

All in all we are comfortable with the performance of the Bank through the first nine months of the year. Bearing in mind a tougher economic environment with higher taxation and net income is growing and the balance sheet remains solid.

We remain cautious with the economic outlook and we are constantly making decisions to prevent any risks from materializing while focusing on efficiency, capital adequacy and profitability.

Now we would like to continue with a brief discussion about the economic climate. For this purpose we have Juan Pablo Espinosa, Bancolombia's Chief Economist, who will elaborate more on these matters. Juan Pablo?

Thank you Jose Humberto. Now I will ask you to go to slide number 4 in the presentation. Let me start by saying that recent performance of the Colombian economy has been driven by the following the terms of trade due to lower commodity prices. Moreover the continued adjustment of the economy to the shock will shape its evolution during the foreseeable future.

In terms of economic activity, leading indicators suggest that GDP growth will accelerate from 2.9% in the first half of the year to 3.3% during the second semester. Accordingly, our growth forecast for the whole year is 3.1%, slightly higher than consensus estimates of 2.9%.

However, we expect that growth will moderate next year to 2.8% due to a combination of factors that include a reduction of public spending, higher interest rates, higher unemployment and an increase in the debt burden of private agents.

With tepid internal demand and the weaker currency in 2016 the external imbalance will have a marginal adjustment. Trade deficit will narrow from $13.5 billion to $8.8 billion. This means that the current account deficit will be [above] 5% of GDP in 2016. With these levels Colombia will remain highly dependent on International capital inflows.

Meanwhile we think that next year public revenues will be lower than official estimates. So in order to meet the deficit target of 3.6% of GDP, the central government will probably need to implement further austerity measures.

We also anticipate that prices will continue to accelerate in the short-term. We have revised upwards our inflation forecast for the end of this year from 5.7% to 6.5%, well above the ceiling of the target range.

Inflation should recede in the second half of 2016 due to a correction of food prices, lower price pressures stemming from weaker aggregate demand and base effect. However, we will have to wait until the end of next year to see inflation readings come in close to 4%.

Against this backdrop we expect that the Central Bank will extend the recent tightening cycle during the coming monetary policy meetings. We then foresee that repo rate will remain at 6% during most of 2016.

Regarding the exchange rate, a challenging global context and a wide external deficit will translate into further peso weakness. Having said that, we believe that the peso depreciation will be less pronounced in the future than the one experienced in the past 12 months. Hence, after closing this year at [29.60], our USD COP forecast for the end of next year is [31.30].

In conclusion, Colombia will continue to face significant economic challenges. Even though the readings of several macro indicators will be less constructive than in previous years, we think that the country will be able to adjust in a way that will lead to a more balanced macro context by the end of next year.

After this overview of the economic environment, let me turn the presentation back to Jose Humberto Acosta who will discuss the Bank's results. Jose Humberto?

Thank you, Juan Pablo. On slide 5 we see the evolution of assets under composition. We want to highlight the fact that during the year we have increased the proportion of the loan portfolio to 74% of total assets. This means that we are locating more capital to our core business which is [business] lending.

At the same time, we have been reducing the proportion of the securities portfolio to only 7% today. The duration of the securities portfolio remains low at a level of 19.2 months which minimized risk in a very volatile environment.

We continue originated loans with a strict underwriting standard in order to maintain the high credit quality of the loan portfolio, especially in the consumer segment. The loan growth in Colombian pesos reached 10% during the quarter driven by commercial loans. We focus our growth in the less risky products as we want to maintain a very healthy balance sheet.

Regarding currency composition, today loans denominated in US dollars represent 38% of the total loan book. These US dollar denominated loans fell 0.6% during the quarter.

The general increase in assets in the quarter and year is explained by organic growth as well as the significant depreciation of the Colombian peso versus the US dollar. Out of the 31% reported year-over-year growth loan 16% again is explained by the depreciation.

Also let's keep in mind that the Bancolombia's balance sheet is fully matched in terms of currency, which reduces impacts of FX variations on the shareholders' equity.

We would like to emphasize the fact that the net interest income of the provision expenses grew 19% when compared with 3Q last year, which is the result of the growth of the loan portfolio coupled with the stable NIMs. Finally, maintained our loan growth target rate for this year at around 8%.

Now on slide 6 we present a snapshot of the credit quality at the end of the quarter. In general we saw stability in the quality of the loan portfolio allowances on past-due loans. The 30-day past-due loans to total loans stand at a level of 2.1%, stable compared to the (inaudible) ratio and to the 30-day coverage ratio also remains at a level of 119%.

As we mentioned at the beginning of this presentation, (inaudible), a client from the construction sector, filed for bankruptcy, Similar to a Chapter 11 filing, during the third quarter. Nevertheless as of the end of September it had not stopped servicing any of its obligations with us and therefore it is not classified as a past-due loan and its rating remains at a level of 8.

Since we forecast the client will be default of its loans we started making provisions during this quarter. As of September we had charged COP86 billion that run through our P&L.

We forecast to have a 30-day coverage ratio running from 100% to 120% in the medium-term, which we believe is more than enough to absorb potential credit losses. Similarly, 30 days past-due loans should represent between 3% to 3.5% of gross loans. This forecast includes the default of (inaudible).

At the bottom of the table we compare 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 a good credit origination process. They represent 1.8% of gross loans as of September of this year with an excellent coverage ratio of 211%.

Slide number 7 shows the provision charges which were COP491 billion during the quarter. They represented 1.5% of average gross loans when unrealized and include COP86 billion attributable to (inaudible).

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 COP581 billion new past-due loans represents an increase as compared to those in the previous quarter and are mainly represented by retail loans and SMEs.

Let's remember that the numbers presented in this slide do not include the (inaudible) operations, one of our outcomes of not consolidating Tuya is a lower NPL formation and a higher credit quality. Besides the issue with (inaudible) we feel comfortable with the evolution of the loan portfolio and forecast provision charges to be around 1.6 to 1.8 of closed loans during this year.

As we have shared with you in recent months, it is important to keep in mind the context in which we are operating. The Colombian economy is growing at a slower pace, the Colombian Central Bank is tightening the interest rates and we should see the impact of these facts in the coming quarters.

By that we mean that the pace of loan growth will be lower and we can see an increase in the number of delinquencies. As of today we have only seen a mild evidence of this trend, but we are taking the measures to prevent any other negative impact in the next coming quarters.

Today we will rather to grow less in an attempt to prevent a faster deterioration of the loan portfolio and higher provision charges.

Moving on to slide number 8 we see the evolution of the net interest income, NII, and funding cost along with funding composition. NII for this quarter was COP1.75 trillion, 31% greater than the same quarter of the previous year driven by higher loan volumes and the depreciation of the Colombian peso versus the US dollar.

Bancolombia's funding cost was pressured upwards mainly by higher cost on long-term debt and in a lesser extent by Central Bank interest rate hikes and lower liquidity which fueled competition among banks for deposits. The total funding cost increased by 19 basis points while the Central Bank [reference] rate increased to 4.75% by the end of the quarter.

During this year we have focused our efforts not only in keeping the funding cost as low as possible, but also in increasing the average time to maturity of the stock of liabilities, in particular time deposits and long-term debt. Nevertheless during the third quarter most of the pressure was on time deposits as we have to recognize as a higher interest on news and new CDs.

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

Turning the page to slide number 9, during the third quarter we saw 5 basis points compression in the reported net interest margin mainly in the loans NIM. The NIM from securities was minus 1.3% due to the depreciation of the Colombian government securities.

You have to link the NIM compression to the significant depreciation of the Colombian peso against the US dollar in the last days of the quarter.

Net interest income is recognized in the income statement using the average FX rate of the months while the stocks of loans is presented in balance sheet using the FX at the end of the period. As a result of the difference between the average and the period end FX when we calculate the NIM divided by NII the denominator looks bigger and as a result the NIM looks lower.

The Central Bank will continue raising rates in the near- to medium-term since it is becoming more likely the Fed will hike spreads before year end. The gradual rise in rates is a good predictor of the higher NIM as we move into the end of this year and the beginning of next year.

A breakdown of our analysis of fees is presented in the slide number 10. During the second quarter net fees increased by 4% compared to the last quarter. We have been experiencing sustained growth in our credit cards and usage in Colombia due to rising rates and ample credit availability.

We continue to see more credit and debit card transactions during this year as a result of our commitment to promote the use of cards following the stock transactions. In addition, we are tapping into new business segments when it comes to promoting and introducing numerous benefits.

In addition, we saw a higher level of insurance distribution fees which generated COP60 billion during the third quarter of this year. Our nonbanking corresponding channel is specifically growing as we find new cheaper ways to bring banking to Colombia most underpenetrated geographies and client segments. We forecast a fee growth at around 8% for this year.

In slide 11 we present evolution of expenses. Total operating expenses grew 26% year on year, partially explained by the depreciation of the Colombian peso versus the US dollar, which naturally puts pressure on efficiency.

The cost to [income] ratio has been improving over the last 12 months, although it increased sharply in this quarter to 57% due to the acceleration of expenditures and [subpar] growth in net interest income. Our long-term goal is to be around 48% to 50% efficiency ratio.

If we take only Colombia's operations denominated in peso, the efficiency has improved consistently as a result of more selective criteria for undertaking projects, a faster development of low-cost channels such as (inaudible) of which we have at around 6,000.

Operating expenses consist primarily of personnel expenses and administrative expenses which has been kept under control in the respective currencies. Today Bancolombia's oriented towers developing channels with low margin at cost and growing expenses and aligned with nominal GDP. Our guidance for this year is an increase of expenses ranging from 8% to 10%.

Moving on to slide 12, we see the evolution of the net loans to deposit ratio which ended the quarter at a level of 112%. The proportion of loans that we do not fund with deposit is funded with long-term debt in order to have a similar duration in both sides of the balance sheet.

This strategy reduces the volatility on the net income and shareholders' equity. It makes more sense to us to fund long-term loans with long-term liabilities and that is why the 112% is a level that gives us comfort about the liquidity position of the Bank.

In the last weeks of the quarter the liquidity situation tightened in Colombia and we have decided to play safe and take additional time deposits in order to improve the liquidity profile of the Bank. The liquidity and capital levels that Bancolombia presents today are optimum for the business plan that we have designed.

Regarding capital, at the bottom right-hand side we show the capital adequacy ratio. The Tier 1 ended at a level of 8%, 250 basis points above the regulatory minimum of [4.5%]. The tangible capital ratio defines the shareholders' equity minus goodwill and intangible assets divided by tangible assets was 7.9% at the end of this period.

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%.

Let's also remember that the earnings generated during the first nine months of the year, which are already in the shareholders' equity lines, are not included in the Tier 1 calculation and, as a result, in the hypothetical case of a portion of those earnings the Tier 1 will increase at around 60 to 70 basis points.

People only see that the Tier 1 ratio in March 2016 after the annual shareholders meeting. For the Tier 2 ratio we ended the three quarters of this year with 5.3% for a total BII ratio of 13.2%.

Slide number 13 shows the return on assets and return on equity of the Bank. Cumulative return on equity as of the third quarter of this year was 13.49% and cumulative return on assets was 1.54%. Return on equity dropped to 11.2% for the quarter due to high provision expenses and lower net interest income growth.

We expect we will continue growing net income, although at a moderate pace, while maintaining solid service indicators for the rest of the year.

For the first nine months of this year we can conclude that: first, Bancolombia maintained solid and stable loan interest margin based on a strategy of funding cost and pricing control; second, enhanced the liquidity position of the Bank while controlling funding cost and pricing loans according to a new interest rate environment and outlook.

Our strategy today is focusing maintaining risks under control and this implies [prudence regarding] origination and monitoring on a moderate pace of loan growth.

And finally, we are doing efforts and making sure that costs grow under control while revenues grow at a faster pace. We target to have a cost to income ratio at around 50%.

(inaudible) that the previous five years the banking industry were in the middle of a positive environment, very low interest rates, very optimal level of commodities.

But today we are at the end of the cycle and we are facing a different cycle in the next coming quarters, which means that we will be focused basically on providing a very solid disrupter of funding and the loan growth will be originated basically because of the deposit growth. And also we will be focused on maintaining the NIM under control.

After presenting these slides and discussion of the third quarter results I would like to invite our audience to ask any questions you may have and we are ready to take it from there. Thank you.

(Operator Instructions). Carlos Macedo, Goldman Sachs.

A couple of questions. First on the margins. As you said, liquidity tightened and funding costs went up, (inaudible) the third quarter rates went up again in Colombia last month. Just wanted to see if there is any impact on this for the fourth quarter.

And then how quickly do you think you could convert the higher rates into your loan spreads, as you mentioned, going back up to 6%. Whether you see that happening already in the fourth quarter or whether it is going to be something that phases in in the first half of next year?

Second question partially related to that, 8% loan growth next year down from say around 13%-14% this year. Where do you expect the greatest deceleration? Is it going to be on the corporate side, it the consumer side going to slow, mortgages? Where should we expect loans to slow the most to get to that 8% level? Thanks.

Regarding your first question, yes, we well be probably facing an increase of funding costs in the next coming quarters. And on the asset side we are seeing some particular things. First the [DTF] at the end of the day will increase because they are right now showing a little bit the real cost of the money for 90 days. So we will probably see an increase of the DTF.

But the most relevant point is the second point is now the banks we are lending in different deals. We are increasing our spreads and you see the pricing of the loan portfolio is increasing not only in corporate loans, also in mortgage. So you will see something of that.

Third, banks in our case at around 25% of our total loan portfolio is short-term loans. So the opportunity to repricing will appear in the next coming quarters. So we will have -- we will take advantage to reprice part of our loan portfolio.

Four, we have seen the last month we are seeing long-term loans, big corporations are demanding for loans for three to five years. As you probably know, those loans -- they have better deals and better spreads. So because of that we are able to say that at least for the first quarter of next year we will see an increase on the side of NII on the asset side.

Regarding your second question, yes, we see a de-acceleration and probably the main driver of this de-acceleration will be consumer. Now we are seeing a loan growth of consumer at around 10%, next year will be at around 8%.

And also we see a kind of de-acceleration of mortgages as well. Mortgages used to grow at a faster pace of more than 30% in the last five years. Today we are seeing at around 15% to 20%. So we perceive that the number will be ranged 10% to 15% regarding mortgages.

Okay, thank you. Just going back to the first question. I mean we are looking at the DTF, it's still well behind the benchmark at 461 versus 525. And the last cycle of rate increases that lagged the benchmark by a wide margin never quite got to the premium where it was at it the past.

Is that something that you expect to happen again in this cycle? Is that -- would that have a negative impact overall on your ability to generate net interest margin?

Yes, yes, that is true that the DTF -- there is a lot of discussion here in Colombia about it, how -- what is the reality about DTF against the real cost of the money in short-term. But you know what, it is happening exactly the same that happened in other countries that you compensate that with a better spreads. So banking industry are compensating the lack of the DTF with better spreads.

Okay, perfect. Thank you so much.

Tito Labarta, Deutsche Bank.

A couple questions, first in terms of asset quality, just I didn't -- what was the total exposure you said you have to (inaudible)? And once that becomes non performing how much will your past due loan ratio increase?

And then do you think it could be any other corporates where you could be impacted because of this?

And then my second question in terms of profitability, you mentioned last quarter you think you can do about a 15% maybe 15.5% ROE this year given the ROE we saw this quarter. Do you think that is still possible? If so how would you get there? So you can give a little bit more color in terms of profitability. I guess not just with next quarter but also for next year. Thank you.

Thank you, Tito, yes. The case of (inaudible) is a unique case. We are not seeing a deterioration of the sector in terms of construction. This is the very particular in its originator for a very particular situation.

And the numbers are -- the total exposure that we have is COP290 billion. We expect to have a provision at the end of the year in total at around COP160 billion, COP180 billion pesos. And today for the third quarter we have COP86 billion.

So what we expect the [per] quarter in terms of provisions regarding (inaudible) another COP86 billion to COP90 billion in order to cover the loan portfolio.

Regarding your second question, our guidance to go back to the level of 15% will be for 2016 and that will be mainly driven by the efficiency level. As you see our numbers in the last three, four years we have been able to maintain cost under control and we are -- probably our guidance for cost increase next year will be at around 5% in order to provide the 15%.

As regarding your question this year, we expect to close this year of return on equity at around 13.5%.

Okay, great. Thank you. That is very helpful.

[Guillier Costa], Itau Barra.

I have two questions. My first question is about the asset quality evolution. Could you comment on your expectation for 2016, if you expect the past due loans to increase? And what is your expectation for the cost of risk of the Bank?

And my second question is about the reclassification you did in this quarter for the service fee income. We saw that you reclassified some operating revenues and expenses into fees. Could you give us more color on this?

Regarding your first question, the asset quality evolution, today we don't feel comfortable saying that the vintages are deteriorating. We don't have enough data to suggest that deterioration -- it is appearing in our loan portfolio. That is the reason why we expect to have a cost of credit next year in between 1.6% to 1.8%, again (inaudible) is a very particular case.

But again, we only see a slight deterioration on SMEs and this is because once you see FX volatility and cost of credit increasing these kind of companies feel the impact immediately. But again, 1.6% to 1.8% next year, just to give you an idea about the cost of credit regarding the loan portfolio. And regarding your second question -- Alejandro?

Yes, this is Alejandro, good morning. The classification is an outcome of the process of adjustment to IFRS. This year is, remember, a transition year from Colombian GAAP to IFRS. So we are receiving permanently recommendations from our auditors, the internal process of reporting to better show the economic reality of the Bank. So we decided to reclassify some of these fee revenues into other income line that we present at the bottom of the P&L.

Yes. What happened with IFRS is we received at the end of last year the last adjustments of the government. So you can understand that we process in the previous quarter, it is a very complex process. So that is the reason why during this year we are making some adjustments to make comparable the numbers with the previous year.

Okay, perfect. Very clear. Thank you.

Saul Martinez, JPMorgan.

I am going to play devil's advocate a little bit and ask how you see -- how you can get to a 15% ROE in light of the backdrop in Colombia? As you guys -- because when you take a step back it seems very, very challenging to me.

You have an economy that is decelerating. You have a still sizable credit count deficit in spite of a severe depreciation in the currency. You have fiscal and monetary policy tightening. And you have a higher tax rate, higher tax rates going forward. It seems like the banks are on the cusp of a credit quality cycle. Even your guidance of 1.6% to 1.8% coming from a low base implies fairly rapid growth in loan loss provisioning.

You have a repo rate that has gone up considerably more than the DTF rate and I frankly don't know if the DTF rate and the repo rate the relationship is going to hold. And obviously that is negative for your financial margins, an increase -- a faster increase in the repo rate.

It seems -- so when I take all this together, even with a very moderate increase in cost, even with you guys managing on costs, on pricing it seems very, very difficult to see any type of earnings growth next year. In fact, it looks like you could see the situation where earnings decline and ROEs come down from current levels.

So, can you just give me a little bit more color as to how you actually see ROE expansion from current levels in the current environment?

Yes, yes, you are right, it's challenging times. But remember that we have not only a Colombian Bank, we have 30% of our assets outside Colombia. And if you double check the numbers outside, for example, we just have a (inaudible) operation.

The return on equity there, it is at around 17% and Banistmo also will contribute it because Banistmo is on track, it's growing at a very good pace which is 12% and they are recovering a lower level of return on equity than they had. So this is the first point.

To your International operation will help us not only on the return on equity side also, it will help us in cost of credit and all the metrics.

Second, as I mentioned at the beginning of the process, I would say that Bancolombia will focus our efforts trying to maintain a very solid deposit base from our clients. So today we are doing all the efforts to maintain cost under control and if you double check we have the lowest cost of funding coming from clients because we have a huge network of branches. So next year the focus will be the deposit base.

And third, it is demonstrated that we will be able to reduce the pace of growth of cost and there is some specific areas in which they are not growing in terms of cost, they are growing negative way. And it is a very, very strong statement saying that we expect to grow 5% cost next year.

On the side of the income, again in Colombia [happening the pricing] it's adjusting and banks are adjusting pricing and customers and clients have recognized that this is different times. And this is in our favor because of sensitivity.

I agree with you in terms of the DTF, that will not help us in terms of NIM. But the deal, the new spreads and the (inaudible) also will help us.

And remember, fees is based is because of transactional level, we are 45% of the total transactions in Colombia, we are the number one in every single business regarding the retail business and cash management. So, based on those combinations it's challenging but this is our challenge to get to 15% of return on equity.

No, that is helpful, thank you. What proportion of your earnings currently come from Central America?

At around 20% today. And this is very relevant. The numbers that come from Banistmo, every moment it is more solid and stable. So at the beginning remember a year ago the net income from Banistmo were a level of $60 million, today we are talking at around $100 million. That will help us in terms of profitability of the operation. And the profitability of the operation again of (inaudible), it is very stable.

Okay. And final question. On the tax rate -- and I know we have discussed this in the past. I mean you are having a very low tax rate in spite of the fact that taxes went up in Colombia and, as you have explained, Central America and Banistmo is a contributor to that.

But shouldn't we see the tax rate be moving up in the coming years? Or is the mix shift going to be so pronounced that it doesn't allow -- it allows you to keep a stable tax rate?

You are right, Saul, the reason why the tax in the third quarter is because two reasons. First, the reason that you are saying, which is the International operation we pay 27% tax instead of 37%, 39% that we pay here in Colombia. The offshore operation in Panama pays 0% tax against 39% of Colombia. So that helps us a lot.

And the second reason is during the first half of the year we had our calculations based on the profits at the end of the year, so we make provisions for tax. This quarter we see that is not necessary to have the same amount of provision.

And regarding your question about what we expect for the next coming years in terms of tax, we expect to sustain and maintain the same level of taxes because this year we have a huge impact because of wealth tax, we will have the same every -- the next two years. And also the increases of the other taxes, but we will be able to maintain at the level that we are having today.

Okay, thank you very much.

Jorge Kuri, Morgan Stanley.

Just wanted to go back to the expenses. So you have talked about a bunch of initiatives that are ongoing to try to control expenses. However, we are not seeing the results of those and I think you have been talking about them for over a year now.

So exactly what happened this quarter that expenses went up as much? And what gives you confidence that over the next 12 months you will be able to cut the pace of growth to basically half of what you are doing today?

And again, in the context of that being something that you have been focusing now for over a year and we really haven't seen the results, at least not the results as you portray them, any color on that would be greatly appreciated.

And just to clarify on the last question, you had a 13% tax rate in the third quarter and you are saying that taxes are going to stay at the level they are. Can you just clarify -- I mean I am sure you not saying 13%. So what is the exact number that you're thinking about for the effective tax rate in 2015 and 2016? Thank you.

Thank you, Jorge. Regarding expenses, we have two impacts because, again, FX. It is very complex for a Colombian Bank to explain what happened with expenses when you have 30% -- 32% of expenses are outside in our international operation.

And second, because internally the expenses in Colombia, around 15% of those expenses are also linked to the devaluation because we are paying software license, we are paying international payments and in linked to the precision of the currency (inaudible) that affects a lot.

And the second reason is EVA, we had a provision for bonus plans. At the beginning we made a huge provision, that is the reason provision for a modification plans looks high. We don't expect to maintain that level for the last quarter in terms of EVA qualifications.

What we expect for quarter, it is a seasonal effect and we probably expect an increase of expenses in order to compensate what happened in the first quarter. If you double check expenses every single quarter the first one was almost 60% of the second and the third one. So we expect an increase of 10% to 20% expenses the fourth quarter.

At the end of the day we expect expenses growth at around 10% for the whole year. Excluding FX, obviously we are talking about not including the depreciation. Regarding your second question, taxation. We expect to close the year at a level of 25% of tax rate.

And for next year, sorry?

Next year 25%, 26%.

All right, thank you.

Philip Finch, UBS.

Really just one follow-up question on the cost of risk, which I think you said in your presentation that you expected to end this year at 1.6% to 1.8%. Can you clarify, is that the fourth-quarter level or for the full year of 2015? Obviously in previous quarters the rate has been at a lower level. So I am just trying to ascertain the magnitude of provisions in the fourth quarter. Thank you.

Sure, Philip. The cost of credit has gone up slightly over the last couple of quarters. As a result of the situation that we explained before we decided to take a more prudent approach to provisions in particular with this client, which has not been classified yet as past due loan (inaudible). But we made close to COP80 billion to COP90 billion in provisions already.

So probably in the fourth and in the first quarter of 2016 we will see a cost of credit in the neighborhood of 1.5% to 1.6%. We should experience some mild deterioration in the retail and SMEs portfolio. So we contemplated that possibility in our own forecast to be around 1.6% to 1.7% for 2016.

Okay, thank you very much.

Carlos Gomez, HSBC.

Also a follow-up on the earnings (inaudible). Can you give us a breakdown of the earnings by geography? Also tell us where your ROE is currently in Panama. And if I may ask, I mean we all understand it is very complex to run a country with different currencies and different geographies.

But I think it would help everybody understanding if you were to break down on the financial information between domestic and international operations so that we can actually follow the impact of the dollar. And I wondered if that is very difficult. Thank you.

Thank you, Carlos, that is completely true. Our next conference call will be with a breakdown of countries just to encourage you, just to give you a clear idea in which point we are in terms of diversification. That is absolutely true.

Regarding your first question, yes, the income statement, 20% comes from International operations and 80% comes to local operations. And it has a clear explanation. The NIM outside, because it's a dollarized economy and it is a US dollar operation, the NIMs are at around 4% and the NIMs in Colombia are around 6% to 7%. That is the reason why the number is 20% international, 80% local operations.

Regarding return on equity in the different geographies. Again, 70% in [Bancolombia] and today the [banking] operation will be at around 11% coming from 7% that was two years ago.

So you see a real recovery of the operation in Banistmo because of a combination of better loan portfolio, reducing in a very important way the cost of credit because provisions were very low, and increasing a little bit the fee income in the business in Banistmo.

So at the end of the day that will convert to support that 15% that we are expecting for the next coming years.

If I can follow up on Banistmo. At the time of the acquisition you mentioned a target, a (inaudible) target of reaching 18% ROE, you just mentioned 15%. Is that an intermediate target or that is your new assessment of what the long-term profitability of this operation is?

Carlos, in Banistmo in particular we have been very prudent with the capital position of the Bank. You probably recall that we decided to retain all the earnings that the Bank had generated during 2012 and 2013 in the Bank so we did not pay a dividend. So the solvency position of the bank has increased over the last 24 months when we had had control.

So, ROEs today are lower than the 18% that we got when the Company was acquired because of a lower leverage of the operation. And remember the 18% included operations that did not enter in the deal, loans and operation of cash management outside Panama which were not part of the acquisition.

Instead of bringing the money back we prefer to maintain to allocate capital because the loan growth -- it is happening, we are regaining market share in a very different way. So that is the reason why we prefer to look at capital (inaudible) there.

So again, this is a 15% on the accounting equity that you have retained in Panama. Can you give us that number? And personally that does not include the goodwill generated in this acquisition, correct?

No, it is not including, it is not including the goodwill if I understand your question, Carlos.

No, the question is what is the current capital base of your bank in Panama. This 11% is on what equity base?

It is -- we are double checking here the numbers. We have at around $800 million in capital which is at around a Tier 1 of at around 10%. We will give you -- we will send you permission regarding the capital structure of Banistmo, but that would be at around 10%, very solid.

Thank you very much.

Mauricio Restrepo, BTG Pactual.

Two follow-ups, the first one on expenses. You mentioned a 6% growth for next year. But I was wondering which will be like the drivers taking into account the depreciation of the currency and also the high inflation in Colombia, and mostly some of the components of the expenses are linked to those key variables.

In addition, the second follow-up is on the capital that you have in Central America. Maybe you can tell us how much is the excess capital that those subsidiaries have and if you can be prepared for new acquisitions with this capital?

Regarding your second question, we -- by now the capital allocation that we are having on international operations basically are mainly focused to sustain the growth. We are not expecting to shake any opportunities of business because we are on digestion mode with the operation in Banistmo.

The management is focusing the efforts trying to put Banistmo on track which is happening at the end of the day with the numbers. So the excess of capital, again, it is basically allocated because of loan growth and because of expectations of regaining market share and the Panamanian case.

Regarding the 6% that we are expecting this year. Yes, inflation will be challenging. But remember that inflation -- the expectation of inflation will be (inaudible) at the second half of this year. So obviously in labor costs we will have less flexibility of increase to maintain the control expenses of the operating cost.

We are right now again focusing the efforts trying to some areas to grow 0% and in other areas to grow minus X%. So that would be the big effort. We want to compensate the new challenging environment basically of the cost control.

Okay, perfect. Very helpful.

Natalia Casas, Ultra Serfinco.

I want to know a little bit more about the efficiency ratio. I understand that this time it was really hurt because of the COP depreciation. But I would like to know why this is happening. What is the proportion of your administrative costs that are in US dollars or what is going on? Thank you.

We estimate, Natalia, that roughly one-third of our expenses, something like 35%, are in dollars. That includes the operations in Central America which are dollarized, plus some expenses that we have in Colombia also in dollars.

In addition, remember there was a significant drop in the dividend and equity contribution of some of the investments, so the revenues were affected on a non-recurring basis because of this drop in revenues.

So, the cost to income ratio was slightly higher than the term or the long-term term that we forecast for 2016 and 2017. As Jose mentioned at the beginning, we should be ending 2015 in the neighborhood of 50% to 52% ,but on a long run basis we should be below 50%.

Okay, I think we'll close the conference call. Thank you for your questions and hope to see you in the next coming quarterly conference call. Thank you very much, all of you.

Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you for participating. You may now disconnect.