Grupo Cibest SA (CIB) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to Bancolombia's Fourth Quarter 2015 Earnings Conference Call. My name is [Hilda], and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions)

Please note, that this conference call will include forward-looking statements, including statements related to our future performance, capital position, credit-related expenses and credit losses. All forward-looking statements, whether made in this conference call, in future filings, 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 described in our reports 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 Hernandez, Chief Accounting Officer; Mr. Alejandro Mejia, Investor Relations Manager; and Mr. Juan Pablo Espinosa, Chief Economist.

I'd 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 fourth quarter 2015 results conference call. It is a pleasure to be with you all who follow Bancolombia so closely. Let's just start with a brief discussion of the main topics that impacted our business in this period. You can follow the slide presentation available at our Investor Relations website.

We want to start this conference call today by discussing an event over the past few days, which as most of you already know that our CEO, Carlos Raul Yepes officially announced his decision to resign on Monday. After five very successful years at the helm, in which he consolidated the Bank presence in 10 countries, he decided to step down for personal reasons. The Board of Directors fully understands and accepts his decision, expressing their most sincere gratitude and wishing him the best of luck in his future life projects, as do we all.

Also, as many of you know, Juan Carlos Mora, the current Vice President of Innovation and Digital Transformation will step into the role of CEO as of May 1 this year. Juan Carlos has held numerous leadership roles in the organization through his 25-year tenure at the Bank, including Corporate Account Manager, Head of Investment Banking, Chief Risk Officer, Chief Operating Officer and Head of Innovation and Digital Transformation.

Now moving on to economic matters and the Bank's results, we wish to share with you the main topics on this front. In the fourth quarter of last year, we completed the acquisition of Banco Agromercantil de Guatemala, reaching a 60% [counter] of that entity. This fact contributes to the additional growth of the balance sheet due to the incorporation of assets and liabilities from the operation. Now Guatemala represents 6% of the assets of Bancolombia and we complete the presence in the countries where we want to be, namely Colombia, Panama, El Salvador and Guatemala.

During this period, we saw a minimal depreciation of the Colombian peso against US dollar, which contribute to the growth. Total loan growth grew 27% in 2015 and 9% over the fourth quarter, driven by commercial and mortgage loans.

Net income for the fourth quarter was COP656 billion, a very healthy figure considering the challenging environment, higher funding cost and rates and the fact that we will have to make close to COP170 billion in provisions for our client named [Conalvias].

In 2015, our net income was COP2.5 trillion, which represents a 5.5% growth compared to 2014. Even with higher taxes, specifically the wealth tax paid in the first quarter, we are satisfied with the performance of all the Bank's business units. 2015 was a challenging year, specifically because of the generalized economic slowdown, the depreciation of the peso, higher inflation and a dearth of liquidity during the second half of the year. In 2015, we increased net fees by 9%, while also moving the Bank to a digital strategy, focused on efficiency, innovation and differentiation in the regional playing field.

In 4Q last year, net interest income grew 11%, mainly due to a spurt of economic activity in the last quarter of the year, normally related to seasonal factors. Net interest margin would also benefit with a 10 basis point increase over the quarter. We believe margins will evolve probably moving forward into this year, because of assets repricing, which already happened in the fourth quarter of last year.

It is important to note, asset quality remained healthy, despite a clear slowdown in the Colombian economy activity. Total provisions actually dropped 6% quarter-over-quarter, which was very positive in the challenging and macroeconomic environment. Funding cost increased by 10 basis points, but we were able to anticipate much of the funding necessities by pre-funding through the quarter. Funding composition was seen in the last two previous quarters, where the Bank continues to show its strength in funding, with 74% of its [profit] coming from saving and checking accounts, as well as time deposits.

Efficiency improved with the cost to income ratio finishing this year at a level of 54.6%. Expenses were clearly hit by the higher FX rate during this year and the mismatch between income and expenses in US dollars. We are confident, however, that we can make the appropriate adjustments going forward to assure that efficiency continues to improve in line with our near-term target of under 50%.

Slide number 3 summarizes the performance of the Bank. Income before taxes grew 32% and net income grew 21% over the quarter. As we mentioned before, it was a very good quarter, with solid NII growth and lower provisions. Moreover, we grew profits [overseas] 5% in 2015, even during a very volatile year with increasing taxes, the CapEx movements, funding pressures and weaker loan volumes.

We made some adjustments in the 2014 numbers that we have previously reported. It was due to the auditing process and implementation of IFRS standard for the first time. Income tax paid was significantly lower than the COP218 billion we paid a year ago. Looking forward, we are very focused on profitability through improvements in efficiency, especially cost control over the upcoming year.

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

Thank you, Jose Humberto. Now I will ask you to go to slide number 4 in the presentation. The information published since our last conference call points to more challenging macroeconomic conditions in Colombia. In terms of economic activity, after expanding at an estimated rate of 3.1% in 2015, we forecast that this year GDP growth will be 2.6%, due to a less dynamic internal demand and [a limited] contribution from net exports. However, if risks to the downside prevail, our negative scenario of 1.8% growth could materialize.

Having said that, it is worth mentioning that the economy will benefit from this substitution of imported goods for local production, the recovery of manufacturing and the execution of infrastructure projects. The silver lining of this slowdown is that after reaching a peak in the short-term, we expect inflation to experience a significant correction in the second half of the year. Besides an increasing negative output gap, lower prices will reflect a normalization of weather conditions, higher interest rates and a positive base effect. As a result, we expect that inflation will close this year in the 4.4% to 5.4% range. As prices recede, our monetary policy call is that the current tightening cycle will come to an end during the next few months, with a maximum terminal repo rate of 7%.

Despite the weakening of the peso since 2014, we foresee that Colombian current account deficit this year will remain above 6% of GDP. This high level reflects the negative impact of lower commodity prices, as well as [global elasticity] of both exports and imports to the real depreciation. Therefore, not only Colombia will remain highly dependent on the international capital inflows, but our view for the Colombian peso is still bearish. In fact, our year-end USD-COP forecast is COP3,400.

Regarding fiscal policy, the recent budget cut announced by authorities makes it more likely to meet central government's deficit goal of 3.6% of GDP for this year. Nevertheless, we think that additional austerity measures, particularly in the expenditure side will be necessary in 2016 and 2017. Moreover, medium-term scenarios reveal that a comprehensive tax reform aimed at increasing the central government revenues by 3% of GDP or more is key to achieve the path of deficit reduction set by the fiscal rule.

Against this backdrop, we think that Colombia has the ability to achieve an [ordered lending] of its economy, which is necessary to mitigate [twin] deficits and control inflationary pressures. This adjustment will pave the way to more constructive macro conditions 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.

Thank you, Juan Pablo. On this next slide, we see the evolution of assets and sales composition. We want to highlight the fact that during the year we were focused on allocating more capital to our core business, which is its lending. Total assets increased 29% over the last 12 months and [13.7%] of this growth is explained by the depreciation of the peso versus the US dollar. Also, we consolidate Banco Agromercantil assets, which contributed to 7.8% of the annual growth. Today, Colombia represents 63% of the total assets of Bancolombia Group, while Central America represents 37%.

The average yield to maturity for the investment portfolio is 6.5% and we continue to maintain our structural debt portfolio primarily for liquidity management. Also the duration of the securities portfolio remains low at the level of 18.9 months, which minimizes risk in a very volatile environment.

We continue originating 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 peso reached 9% during the quarter, driven by commercial and mortgage loans, as well as the integration of Banco Agromercantil. 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 41% of the total loan book. The general increase in assets in the quarter and the year is explained primarily by the consolidation of Banco Agromercantil, moderate organic growth and FX variations. Also, let's recall that Bancolombia balance sheet is matched in terms of currency, which reduces impacts of FX variations on the shareholders' equity. Finally, our total loan growth target rate for 2016 is 6% to 8%.

Now on slide 6, we present a snapshot of the credit quality at the end of the quarter. In general terms, we saw stability in the quality of the loan portfolio, allowances and past due loans. The 30-day past due loans to total loans stood at the level of 3.1%, stable compared to the June ratio, as the 30-day coverage ratio also remains at a level of 119%.

As we have mentioned in last quarter, Conalvias, our client from the construction sector, filed for bankruptcy during the third quarter. As of December, however, the client was officially past due and it's now accounted for in our balance sheet. We forecast to have 30-day coverage ratio ranging from 110% to 120% in the medium-term, which we believe is more than enough to absorb potential credit losses. Similarly, 30-day past due loans should represent between 3% to 3.5% of gross loans. This forecast includes the default of Conalvias.

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 our good credit origination process. They represent 1.8% of gross loans as of December 2015, with a coverage ratio of 211%.

Slide number 7 shows the provision charges, which were COP460 billion during the quarter. They represented 1.3% of average gross loans when annualized and include the additional provisions made this quarter for Conalvias. In the shaded row of the table at the bottom represents the amount of loans that became 30-day past due during the quarter. The COP615 billion new past due loans represent an increase as compared to those in the three quarter of last year and mainly represented by retail loans and SMEs. Let's remember, that the numbers presented in this slide do not include the Tuya operations. One of the outcomes of not consolidating Tuya is our lower NPL formation and higher credit quality. Besides the issue with Conalvias, we feel comfortable with evolution of the loan portfolio and forecast provision charges to be around approximately 1.7% of gross loans during 2016.

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 central bank is hiking interest rates and we should see the impact of these parts in the coming quarters. By that, we mean that the pace of loan growth will be lower and we could see an increase in the number of delinquencies. As of today, we have only seen mild evidence of this trend, but we are taking the measures to prevent any negative impact in the next coming quarters. Today, [we will run] it to grow less in an attempt to prevent a faster deterioration of the loan portfolio on higher provision charges.

Moving on to slide number 8, we see the evolution of net interest income on funding costs, along with funding composition. NII for 4Q last year was COP1.95 trillion, 14% greater than the same quarter of the previous year, driven by higher loans volumes and the depreciation of the Colombian peso versus US dollar. Bancolumbia's funding cost was pressured upwards, mainly by higher cost of long-term debt and in a lesser extent, by the central bank interest rate hikes and lower liquidity, which fueled competition among banks for deposits. The total funding cost increased only 2 basis points, while the central bank's reference increased 100 basis points to reach the level of [5.75%] 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, we have recognized higher interest rates on the new CDs, as you can see with cost of deposits rising 10 basis points.

Our goal is to keep funding cost as low as possible, which we have been able to achieve over the past months, 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 beneficial for NIMs.

Turning the page to slide number 9, we show the net interest margin. During fourth quarter last year, we saw a 10 basis points increase in the reported net interest margin, mainly in the loans NIM and an improvement in the investment NIMs. The NIM for securities was minus 0.5% due to depreciation of the Colombian government securities. We have to link the weaker NIMs to the significant depreciation of the Colombian peso against the US dollar over the past few quarters. Net interest income is recognized in the income statement using the average FX rate of the months, while the stock of loans is presented in the balance sheet using the FX at the end of the month. As a result of the difference between the average and the period-end FX, when we calculate the NIM, divided by NII, by average loans, the denominator looks bigger and as a result the NIM looks lower. The Central Bank will most likely to continue raising rates in the near-term. The gradual raising rate is a good predictor of higher NIMs as we move into the next quarter.

A breakdown analysis of fees is presented in the slide number 10. During the fourth quarter, net fees decreased by 1% compared to the last quarter, due to an increase in expenses related to the [miles] program and customer rewards. Electronic service and ATM fees were a key driver of fees during the quarter. We are experiencing sustained growth in our credit cards and new Trust in Colombia, due to the 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 for [instant] transactions. In addition, we are tapping into a new business segment, when it comes to promoting and introducing numerous benefits. In addition, we saw a higher level of insurance distribution fees, which generated COP78 billion during 4Q of last year and grew 30% during the quarter. Fees represented 19% of the total revenues of the Bank. Our non-banking correspondent channel is steadily growing as we find new cheaper ways to bring banking to Colombia's most under-penetrated geographies and client segments. For 2016, we forecast a fee growth of around 10%.

In slide 11, we present the evolution of expenses. Total operating expenses grew 9% year-over-year, partially explained by the depreciation of the Colombian peso versus the U.S. dollar, which naturally puts pressure on efficiency. The cost to income ratio has been improving over the last 12 months and was 56% in the fourth quarter of last year. Our target is to set the number -- this number under 50% in the next couple of years. For the full-year 2015, the cost to income was 54%, coming from 56% at the beginning of the year.

In the fourth quarter of last year, the equity tax that we paid in 2015 was reclassified as operating expenses and as a result the reported cost to income was higher. If we exclude this item, I mean the equity tax, which was COP159 billion, the cost to income ratio was 53%. If we take only Colombia operations denominated in pesos, the efficiency has improved consistently as a result of more selective criteria for undertaking projects, successful pricing endeavors, a faster development of low-cost channels, such as mobile banking and ATMs, of which we have 6,000 already.

Operating expenses consist primarily of personnel expenses and administrative expenses, which are being kept under control in their respective currencies. Today, Bancolombia's oriented towers developing channels with a low marginal cost and growing expenses in line with nominal GDP. Our guidance for 2016 is an increase of expenses ranging from 7% to 8%, which we believe will be the key in obtaining strong profitability levels.

Moving to slide 12, we see the evolution of the net loans to deposit ratio, which ended the quarter at a level of 110%. The proportion of loans that we do not fund with deposits is funded with the long-term debt in order to have a similar duration in both sides of the balance sheet. This strategy reduces the volatility of the net income and shareholders' equity. Even more, it makes more sense to us to fund long-term loans with long-term liabilities and that's why the 110% is a level that give us comfort about the liquidity position of the Bank. The liquidity and capital levels that Bancolombia present today are optimal for the business plan 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 7.5%, 300 basis points above the regulatory minimum of 4.5%. The tangible capital ratio, defined as the shareholders' equity minus goodwill and intangible assets divided by tangible assets was 6.4% at the end of 4Q last year. As we have said before, we look to operate the Bank at an optimal Tier 1 ranging from 8% to 9%.

Let's also remember that the earnings generated during the 2015 have not been converted to equity yet. After the Annual General Meeting next week, we will reinvest about two-thirds of that profit in to the business. As a result, this will have an impact of Tier 1 of around 90 basis points, reaching at a level of 8.41% of Tier 1. We would only see that Tier 1 ratio in March 2016 after the Annual Shareholders Meeting. For the Tier 2 ratio, we ended the fourth quarter of last year with 4.9% of total, for a total BIS ratio of 12.5%, above the regulatory threshold of 9%.

Slide number 13 shows the return on assets and return on equity of the Bank. Cumulative return on equity for the year was 13.62% and cumulative return on assets was 1.53%. Return on equity jumped to 13.8% for the quarter, due to a lower provisioning and a stronger NII growth. We expect to continue growing the net income, although at a moderate pace, while maintaining solid solvency indicators for the rest of the year. Our guidance for return on equity for 2016 will be to be to be around 14%.

Overall, for 2015, we can highlight; first, Bancolombia maintains solid and stable loan interest margins, based on a strategy of funding cost and pricing control. Second, enhance the liquidity provision of the Bank while controlling funding cost and pricing loans according to our new interest rate environment and outlook. Third, our strategy today is focused in maintaining risk under control and this implies prudence with credit origination and monitoring a moderated pace of loan growth. And finally, we are doing efforts in making sure that the costs grow under control, while revenues grow at a faster pace. We target to have a cost to income ratio 50% to 52% at the end of the year.

After going over these slides and discussing our fourth quarter results, I would like to invite you, all our audience to ask any questions you may have and we'll be ready to take it from there. Thank you.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Thiago Batista, Itau BBA.

Yes, hi guys, thanks for the opportunity. I have two questions. The first one related to the asset quality evolution. You had a comment during the call that you're expecting the [loans and your] expenses to expand to around 1.7% in 2016. This is a material increase over the 1.3% you posted last year. So my question is, in what segment are you expecting to see this material increase in provisions during this year?

And then the second question is a very simple one, on regarding the tax rate. I'm facing a hard time to estimate your tax rate. What is the tax rate that you are expecting for 2016?

Thank you, Thiago. Regarding your first question, the cost of credit for 2015 was really 1.5%. It came from 1.2%, 1.3% it was in 2014 and in which sectors we're taking some issues, basically on commercial loans. We are seeing maybe on SMEs, some evolution and deterioration and obviously in some sectors as oil and gas transportation. But we don't have any particular strong data suggesting that deterioration is in consumer. We believe that maybe on commercial loans, mostly again SMEs and some corporate loans, regarding some sectors. So the number would be an increase in 20 bps, 1.5% to 1.7%. And you have to take in consideration that we already had a huge provision last year of Conalvias account, COP200 billion, that give us a very strong base to compare for this year.

Regarding your second question, at the beginning of this year, our expectations of our effective tax rate were to be in the range of 23% to 25% in 2015. If you double-check the number would be at around 20%. The reason why the taxation looks very low in the fourth quarter is because we made some provisions at the beginning of the year, but if you do the calculation for the entire year, would be 20%. What we expect this year? We expect that the taxation would be at around 26% to 28%.

Ernesto Gabilondo, Bank of America.

When we summarize your guidance, I got loan growth of 8%, cost of risk of 1.7%, fees growth of 10%, expenses growth of 7%, 8%, effective tax rate of 20%, ROE of 14%. So I just wanted to know if I'm right in all those numbers. And what can we expect in terms of the correlation of the lending growth and the net interest income growth, considering the asset repricing? And with all the assumptions what can we expect in terms of net income growth?

On my second question, can you share with us the Bank's exposure to oil and gas? And finally, if may I, if you are interested in the Citigroup unit sale in Colombia, how do you plan to finance that acquisition, considering the required capital? Should we expect a capital increase or a follow-on to do that acquisition? Thank you.

Regarding your first recap about the guidance, we have only to make some correction in terms of taxation. The taxation that we expect for this year, that will be 26% to 28% as I mentioned previously. But the rest of the numbers are fine. 1.7% cost of credit, and 6% to 8% loan growth, 10% fee growth, 14% return on equity, those numbers are right.

Regarding your question, the exposure in oil and gas, remember that our exposure in oil and gas today is at around 0.8%, 0.9% of our total loan portfolio, plus companies related to the sector which is transportation, logistics that implies another 70 bps. So our exposure in oil and gas, it is -- in oil specifically will be at around 1.5% to 1.7%.

Regarding the question of capital, you see that we have enough cushion to sustain growth, expecting the loan growth 6% to 8% and expecting to be in the range of 8% to 9%. Again, the first quarter will be at the middle of the range and remember that the Bank is able to generate [their own] capital, based on the assumption that we distribute only one-third of our net profit. So we don't expect any particular increasing of capital. On the [BCN] market maybe we will do something for our international operation or something here in Colombia in local currency. So once we see an opportunity to get funding from this [BCN] market, we will do it.

But if Citigroup unit is for sale in Colombia, is this something that should increase your capital or do a follow-on to do that acquisition, or it's not something that you're expecting right now?

Ernesto, we are not contemplating acquisitions. We are not contemplating any particular process in front of the Citibank opportunity. And again we are right now focusing our efforts in sustaining the profitability, in maintaining the control of our international operations. Our management are focusing basically, right now, is trying to improve the operation there. You see a good performance in the last [two] years. We go back again to the loan growth in Banistmo and we're trying to improve every single business line in Banistmo. So today we are focusing mostly in for profitability and maintain and control our subsidiaries.

Tito Labarta, Deutsche Bank.

A couple of questions. First, following up on the provisions, I understand your guidance of 1.7% cost of risk for this year, but I want to understand a little bit, in the quarter we saw provisions decline, even though you had additional provisions related to Conalvias. So just given some deterioration you expect this year with a slowdown in growth, just want to understand why provisions seemed a bit low this quarter given that you had the additional provisions and you expect a big increase in 2016? So just want to kind of reconcile the two there. And in terms of with the slower growth that you expect this year, how much do you think NPLs could potentially deteriorate this year because of that?

And then second question in terms of net interest margin, understand it was impacted a bit by the currency. So given you expect further currency depreciation this year, could that offset the increase in rates? So do you think you can get any margin expansion this year, when you factor all those elements into that? Just want to get a bit more understanding of how your margin should evolve this year given higher rates, but also potential depreciation of the currency. Thank you.

Let's begin with the second question, you are right, yes, we believe that because we're asset sensitive, NII will increase because there are two upsides. The first one is we are blending on better interest rates, the [yield] is increasing. Second, because remember that 70% of our loan portfolio is floating, 50% in [DTA] and the other 20% related to inflation. So we believe that we will be able to increase a little bit in local currency. What we expect in US dollars? Our expectation is at least to maintain the NIM in our international operation, which will be at around 4% from US dollar operation. So the contribution of NII will be -- depends on the volatility of the FX every month. But if you remember the presentation of Juan Pablo, we are expecting to close the end of this year at the level that we are having today in terms of FX. So just to give you an answer, we are going to increase the NIM in local currency, because the two effects that we mentioned at the beginning. And the second one is we are contemplating to maintain the NIM in US dollars, basically because we have control and we have the currency in both sides of our international operations.

The other question regarding cost of risk, remember that BAM is affecting the financial statements, but it's not affecting the P&L. So that's the reason why it looks a lower level of provisions in the income statement, in the balance sheet. But at the end of the day, the first quarter you'll see a better performance of NII and maybe you'll see the optimal level of provisions for Banco Agromercantil. So that's the reason why we believe that the 20 bps will be enough to absorb those potential extra provisions that we will have because of Banco Agromercantil.

I have to highlight, Tito, that today in the Guatemalan operation we have a level of provisions of 120% to-date of the past due loans in Guatemala. And remember that the Board of Directors in Guatemala has been composed for also management of the Bancolombia, since the announcement of the 40% stake. So we are adjusting step-by-step in Guatemala provisioning levels.

Just want to follow up. I thought on the FX forecast for the year that you have mentioned COP3,400 by year-end. So that does imply some depreciation from the current level today, which is just above COP3,100, did I misunderstand that or --?

That's correct. But again in our forecast, we assume almost -- remember that at the beginning of this year, in January, we had COP3,400 FX. So we are having almost the same level. Those are mainly volatile, that we will explain every single quarter what happened and how it affects us. Remember that 41% of our assets today are in US dollars, so that would be very complex, I will have to give you all the elements to understand how the volatility is affecting NII and how the volatility is affecting efficiency ratio, which is the two main effects of FX variation.

Saul Martinez, JPMorgan.

First, I want to drill down a little bit on your view on the macro economy. Your economist sounded somewhat cautious and that makes sense when I look at Colombia, there do seem to be a lot of macro imbalances, the current account deficit is very, very sizable. Doesn't seem like aggregate demand has corrected yet to reflect that, inflation is running high, you have monetary policy tightening and still negative real rates, fiscal dynamics are somewhat challenged and it doesn't seem like we'll get a tax reform until at least later this year.

You mentioned the downside, that there is more downside risk to your base case. But is there -- what probability do you see, even worse scenario playing out over the next couple of years, a harder landing scenario, because if you take a step back and look at Colombia, you haven't had a recession, I believe since the 1990s. And it does seem like there are a lot of macro imbalances that are affecting the economy. So how do you sort of gauge the risk of a worse landing than what you are expecting, including a sovereign downgrade?

Two, what would not necessarily a hard landing scenario mean, but a downside case scenario, say the [one point] -- I guess 1.8% real GDP growth mean, Jose Humberto for your guidance, for your outlook. How do you think about that scenario, what it would mean for your cost of risk, what would it mean for loan growth, how would you think about that?

I will jump to Juan Pablo to answer the first part of your question and then we will talk about the second part.

Yes, sure. As we mentioned before, actually risks to economic activity are biased to the downside and in that sense with today's information, I think that the likelihood of having the 1.8% growth scenario for this year is becoming more likely. But I would also say that basically what we think is that, I mean if you compare this situation to previous ones, what we think is that, I mean we are not in --- I mean, it's not very likely to see a sharper deceleration, but instead to have a long period of low growth, basically because, first the external shock that the economy has received has proved to be more prolonged than we expected before. And secondly, because we don't see that there is scope for counter cyclical policies on the monetary or the fiscal side. So in that sense the potential change in trend in growth that we could see in the future would be more autonomous type of recovery, which would be a rather mild one.

And the second thing to mention is that based on the composition of Colombian GDP, actually the possibility of seeing a sharper slowdown and possibly negative growth will be contingent on the performance of consumer first, and second the performance of investment. So the last time that Colombia had a recession, what we saw was a simultaneous reduction in both consumer and investment. And we actually think that despite of this challenges that type of scenario is not very likely right now. What we do think is that out of those two components, the most effective in this situation could be perhaps investment, but we have to remember as well that going forward infrastructure projects will be a very important factor behind that part of GDP.

So your view is that the most likely scenario, that a recession is unlikely, but that the most likely scenario is that Colombia grows below potential GDP for a handful of years.

Yes. This and perhaps next year as well.

Thank you, Juan Pablo. Yes, I would just complement the answer of Juan Pablo, align with the Juan Pablo's scenario. What we are seeing in our committees and our risk committees, in our business committees is based on hearing from the industry, didn't see any huge deterioration. We see activity, we are seeing (inaudible) people are moving. Obviously people are cautious, people are trying to reduce the level of debt or they are trying to reallocate it, but we are not forcing any particular worst-case scenario, Saul. And when we decide the business plan at the beginning of the year, obviously the worst-case scenario has a certain weight, 15% to 20% of our total forecasting. So of course, we contemplated the worst-case, but in a very, very, very low percentage. And again, if you go to the committees hearing in the Bank, you see a very important activity and the companies are using the banking services, the companies are taking loans, actually are taking local and US dollar loans, because the FX, it's helping also to take it up.

And just one just generalized comment. Because it -- and I mentioned, because it doesn't matter for earnings, but my cost of risk for 2015 was the same as Thiago's, it's [1.3%]. So I mean, I mentioned it, because we can go over the details offline perhaps, but going from 1.3% to 1.7% is very different than going from 1.5% to 1.%7 in terms of the earnings impact it would have, hope so. Maybe offline we can discuss that, but it does -- I seem to have the same number as Thiago does.

Saul, this is Alejandro. Remember something that the incorporation of BAM's assets only affected the balance sheet. So when we calculate the average of gross loans is higher than the cost of provisions for the whole year, so that tends to underestimate the cost of risk. If we isolate the impact of BAM, currently we are reaching a level closer to 1.5%; that's why we mentioned that figure.

Exactly.

All right. I will go over this with you. We can go over it offline because it maybe, -- I'll have to look at honestly how we calculated the average, because, I think we're not -- I mean, we're probably giving a little bit too much weight to BAM. But even then, even if we don't, I don't think we get to 1.5%, but I'll go over this with you offline.

We'll double-check and we'll go back with you Saul and all of you guys.

Jason Mollin, Scotiabank.

In fact, I have two. My first is just on the top-down, you've been talking about the slowdown in GDP in Colombia to this 2.6%, let's say base case. What about with over a third of your assets in Central America, what are you looking for in El Salvador, Panama and Guatemala, if you could give us some color? And particularly, maybe you can relate that to the growth in loans coming from those markets out of this 6% to 8% guidance that you're talking about for 2016? And my second question is how does Bancolombia assess or calculate its cost of equity in the current environment? What is kind of your hurdle rate for investments, for putting your capital to work? Thank you.

Yes, regarding the rest of the geographies in which we are, when we talk about 6% to 8%, [it's because of] the wide range of growth, depends on the operation outside. First, in El Salvador, we are expecting to a loan growth 3%, remember that the economy El Salvador is growing almost flat. In Guatemala, we are expecting 7% to 8%, because there is a huge activity in Guatemala, because of the proximity of Mexico. And in Panama, we are assessing that loan growth could be -- again I know there's a good year as the previous one, that was 10% this year, we are expecting 8% to 10% on loan growth for Banistmo. So those are the combinations. And, plus Colombia, give us the comfort to talk about 6% to 8%, regarding your first question.

Regarding your second question, the cost to equity, today, we are calculating obviously based on different scenarios. We are talking about today at around 13% of cost to equity. And if you want to go on deep detail, what we are contemplating to this calculation, we can talk to you directly.

Victor Galliano, Barclays.

I have a few follow-ups here. Just on the provisioning for Conalvias, I heard you throw out a number of COP170 billion and I then heard you throw out another number answering one of the question of COP200 billion for provisions for Conalvias. Can you just clarify, which is the right number there and where are you in terms of the provisioning process there, is it all done in 2015? That's my first question.

My second question is about capital. So you talked about 90 bps coming through to add into core equity Tier 1, following the approval of the accounts in March. Is that retained earnings or do we need to deduct something from that 90 bps for dividends, that's my second question? I do have a third question, but I'll let you deal with those two first.

Regarding Conalvias, let's present some numbers. The total amount of capital of the loan was COP260 billion. In the third quarter, we announced a part of the provision, because we want to prevent a deterioration, so we made a provision in the third quarter of COP86 billion. In the fourth quarter, we made an extra provision of COP117 billion. So at the end of this year, the total provisioning out of COP260 billion was COP203 billion.

Okay.

That's the reason why we are talking of the fourth quarter a provisioning level of COP117 billion, but as a total including the whole year COP203 billion.

And is that now done or do you expect to do some additional provisioning?

We expect to do some additional provisions and maybe at the end of the first quarter we will have fully provisioning.

Okay.

Okay. The second point regarding the capital, the [90 bps] increase those are retained earnings and goes to directly to legal reserves and it will be accounted as of Q1.

Do you also disclose your fully loaded core equity Tier 1 or is that something we should discuss offline?

We can discuss offline.

And just very quickly on Central America, you made some references earlier about Banistmo and especially with regard to acquisitions, you're not interested in acquisitions, clearly the focus now is to extract better returns from the acquisitions that you've made over the last three, four years. Can you give us a little bit more color around what you see in terms of those ROEs in those businesses in particular in the case of Banistmo, where you are -- where you were in 2015, perhaps where you expect to be in 2016, a bit like you've given us guidance on ROE overall of 14%?

What happened in Banistmo is, we replicate the same risk criteria that we are having in Colombia. So we are right now very active on corporate loans. The new challenge in the Banistmo operation is how to sustain the loan growth of 10% that I mentioned previously. And the challenge is how to fund it. So we have to use some different funding resource, different retail business, so that's the reason why we closed the deal a year ago [with] our syndicated loan was $300 million, and also we put in place a new facility from international banks of around $1 billion and that was at the end of 2014. So the challenge is, if we want to maintain that growth, we have to touch the international market in order to provide funding.

What we are doing also in terms of the efficiency level, remember that we have our brand new systems IT platform and we are right now developing new products with add-value services that we believe that from the retail business we will increase the level of income. And we believe that our pace of growth in the corporate loans also, that it has the comfort to increase the NII. So as I mentioned, we expect to increase the return on equity for the next coming two, three years, at least to the level of 13%, 14% of return on equity, based on those considerations. [Supportive for me], maintain the loan growth and moving to our new products and increase the level of services that we have in Panama.

Okay. So where was the ROE in 2015?

10%.

Natalia Casas, Ultraserfinco.

I just like to know a little bit more about the efficiency ratio. You just mentioned that the FX depreciation makes pressure on the efficiency ratio. So I want to know, what are you going to do improve this ratio in this year, because you're expecting like 8% peso depreciation for 2016 and you already have been promising for like two or three years an efficiency ratio around [15%], so I like to know, what are you going to do this year to achieve this guidance or what shall we expect about it?

When we talk about the expenses, remember that we divided the speech in two tracks, the first one, what happened with US dollar that is not under our control. And remember that 41% of our total expenses are denominated in US dollars. Not only the expenses, cross border operation also, some expenses locally tied or related to FX. So that will be very complex to maintain control on these matters, I mean, FX.

What we are doing and that's the reason why we explained the second track is, what we are doing in terms of local currency in each geography. In the case of Bancolombia, we've been able to maintain cost under control and big effort were focused here in Colombia. And it's happening, and the numbers looks very, very solid in terms of efficiency. The Colombia itself operation in local currency.

And what we are doing in the other geographies is doing exactly the same that we are doing in Colombia, implementing for example the [PMO], reducing the level of projects, maintain labor cost almost frozen, different measures that we have been very successful here in Colombia. Now, we are on the second stage implementing those measures cross-border.

So 2016 will be the year to achieve the guidance. Right now it does shape like the 50% number, right?

52% if we don't see any particular big change on FX. Again, based on the assumption that the -- at the end of this year we will be at the rate of COP3,400 per dollar, we'll be able to reach that level, 52%.

(inaudible).

I would like to ask, given that you have improved an increase in authorized capital, would you -- how likely would you consider to be a new IPO for this year, given that you are not looking into any acquisitions and that you are looking into an increase in 90 basis points in Tier 1. I would just like to know if you have any plans of making any new issuances in this year?

As we made an explicit announcement two months ago and relevant information announcing and telling to the investors that we are not contemplated to go to the capital markets to raise equity. And the only one purpose of that general and extraordinary assembly was to put in place some corporate governance rules. And we took the momentum and took the advantage to put an authorization to increase the capital level. But that was only the point to get an authorization.

Remember that the Bank usually wants to have clear hands to work, if the market conditions were optimistic. But today, again, it's not contemplated and we don't have any particular issue into the Bank in which we believe that the level of capital will drop. And so again, for 2016, the Bank is not contemplated to touch the market, I mean the equity market.

Maria Barriga, Davivienda Corredores

Go ahead, Maria. Hello.

Perhaps her line is on mute. Please go ahead with your question.

Okay. I think that, thank you very much for attending the conference call. We hope to see you next conference that would take place in the three months. Thank you, everyone. Have a very good day.

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