Grupo Cibest SA (CIB) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Bancolombia's First Quarter 2016 Earnings Conference Call. My name is Sophia 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 are just 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 condition, 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 client, changes in business strategy and various other factors that we described in our reports filed with the SEC.

With us today is Mr. Juan Carlos Mora Chief Executive Officer; 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 would like to turn the presentation over to Mr. Acosta, Chief Financial Officer of Bancolombia. Please proceed sir.

Thank you. Good morning and welcome to our results conference call for the first quarter of this year. It is a pleasure to be with you all who follow Bancolombia so closely. Before starting with the main topics related to the Bank results, I would like to introduce you to Mr. Juan Carlos Mora, Bancolombia's new CEO.

As you know, Mr. Mora was appointed Chief Executive Officer of Bancolombia and took office on May 2. He has spent the last 25 years of professional career at the Bank; starting in corporate banking and then leading the Investment Banking division, then assuming the role of Chief Risk Officer and Chief Operations and Technology Officer.

Last year, Mr. Mora was appointed Chief Innovation Officer with a mandate of leading the digital transformation of the bank and accelerate the implementation of digital banking platforms, which will pave the way for the Bancolombias of the future.

Now, I would like to turn the presentation to Mr. Mora who will elaborate on some topics relevant to the business. Mr. Mora?

Thank you Jose Humberto, good morning everyone. It's an honor to be here with you today to share some of the recent developments at the Bank as well as key strategic objectives that we -- as we move forward. In recent years, Bancolombia has grown significantly and it has become a major regional player, with presence mainly in Colombia, Panama, El Salvador and Guatemala. That evolution has created a unique platform to provide financial services of all level of complexity to all types of clients and industries.

Bancolombia as a participant in the financial services industry faces many challenges. Digitalization has changed the way individuals and corporations deal with their cash management, financing and savings or investment needs and banks are operating in an environment where competition, regulation and the need for value creation present many challenges. These situations force banks to adapt quickly and also to be closer to clients who are more and more demanding in terms of service channels and products.

At the same time, regulatory constraints and the need to optimize capital forces us to permanently assess our strategy making sure that the business remains sustainable and profitable. With that in mind, we plan to address several issues, the foremost representative are. First; our focus on profitability, all that we do must be reflected in long-term profitability and value creation. I firmly believe that the conditions combining Bancolombia's business case will allow us to achieve gross ROEs of 16% in the mid-term.

During this presentation, you will see very good operational results, solid margins, funding costs under control, good performance of fees, product of better and more capillary channels across the regions where we operate. Second, we believe that the value of the Bancolombia's franchise and the coverage network, both physical and electronic is unique to compete and create value. These two factors allow us to have the largest market share in Colombia, the lowest cost and most stable funding base and to process almost half of the transactions that occur in Colombia.

Our goal is to continue developing these strategies that lead to the monetization of these trends and to grow revenues at the faster pace than expenses required to generate those revenues. Third, unrelated to the challenges that I mentioned earlier, innovation plays a key role in Bancolombia's sustainability and profitability. Developing new ways and channels to deliver our services to existing and new clients is part of our strategic initiatives.

This is an effort related directly to efficiency gains. The ultimate goal is to grow revenues with little or zero marginal cost. We have invested heavily in technology over the last six years and that effort is paying off, as the fastest growing channels today are electronics and mobile. Additionally, digital banking is the best way to top the markets where 50% of the GDP and the labor force is informal and where four out of five people do not have a credit product.

Finally, on the capital front, we strongly believe that the Colombian regulatory [framework] is stringent and conservative. We understand that banks today require higher levels of capital as compared to those before 2008 financial crisis. But even as important as the core capital ratios is the way Bancolombia allocates its capital.

We reaffirm our strategy to focus on our core business, which is intermediation on financial services. Let's remember that today Bancolombia does not generate significant source of revenue from proprietary trading activities. With this in mind, we can reassure you that we feel comfortable with today's capital levels which are about two times in the minimum regulatory requirements.

We intend to keep the Tier 1 capital ratio of Bancolombia above 8% which will allow the Bank to operate in the environments that we have forecasted for the future years. Next, I would like to continue with the presentation of Bancolombia's financial results for the first quarter of this year.

Now, I will turn the presentation over to Jose Humberto who will elaborate on the main topics that impacted our business in this period, Jose?

Thank you, Juan. You can follow the slide presentation available at our Investor Relations website. Moving into the first quarter results of this year, I would like to highlight the following facts. As you know, 21% growth of the Bank's loan portfolio over the last 12 months was driven by credit demand in Colombia and the consolidation of Banco Agromercantil de Guatemala at the end of last year.

This is a positive fact that despite the deceleration in the Colombian economy, the loan portfolio continues to grow. The performance of the net interest margins, which finally present a clear signal of expansion and of course a positive impact of the net interest income. NII grew 30% in last year, way faster than the growth of the loan portfolio.

This is a very positive fact that reflects the effort to maintain the funding cost low, the improvement in spreads on the new loans and the asset sensitive nature of our balance sheet. Fees, also performing very well as they grew 19% as compared with the first quarter of last year. In particular, we see the promotion of debit and credit cards as methods of payment and the distribution of insurance through our branches as very efficient ways to continue growing these.

During the quarter, we saw a significant increase in the level of provision charges. This is partially explained by the run-off of some existing past due loans, plus the formation of new ones, which tends to be faster in the first quarter every year. Finally, we saw a significant increase in the income taxes. This is explained by the difference between tax and financial accounting in Colombia. We will elaborate more about these in the next coming slides.

Slide number 3 summarizes the performance of the Bank. We are very happy with the good provisional performance of the Bank, since income before taxes grew 8% year-over-year. This performance is explained by the expansion of the margins, loan growth and solid fee performance. Nevertheless, we have been having a drag in the provision charges; we have an increase about 18% year-over-year. Net income fell 39% over the quarter. Clearly, the divergence between income before and after taxes is explained by the higher income tax of COP551 billion.

Now to dive into the income taxes line, it can be summarized as follows. For fiscal purposes investment in subsidiaries, denominated in US dollars are not converted to Colombian pesos in the balance sheet. Meanwhile, the US denominated liabilities that fund these investments are restated to Colombian pesos. Last year, the depreciation of the peso led to fiscal accounting losses due to the conversion of our US dollar denominated liabilities into Colombian pesos, therefore lowering the tax base, that was that happened last year.

This quarter, however, the exact opposite effect took place. The peso appreciated 5%, which decreased the level of US dollar denominated liabilities when converted into Colombian pesos, thus increasing our taxable income. IFRS reporting standards subject to our US denominated liabilities to higher or lower restatement and tax base based on the FX rate. This can be positively or negatively impact our business, and we must keep in mind that the FX rate is an [extraneous] variable.

The difference between tax accounting and financial accounting made the effective tax rate higher in the first quarter of this year, after a year of a rather low effective tax rate. Putting in another perspective, it is necessary to view the marginal performance of taxes. In the first quarter of last year, we paid COP258 billion, while in this quarter we paid COP551 billion, there is an increase of COP293 billion. This marginal increase is explained by the fact that the peso depreciate versus the US dollar in the first quarter of last year and appreciate [4.7%] this quarter.

We also paid a wealth tax this quarter, which amounted at around COP145 billion, slightly lower than the last year, and we will pay the last installment of this tax next year. Let's remember that in 2015 we paid COP160 billion in wealth tax. Now, we would like to continue with a brief discussion about the economic environment. For these purposes, 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'll ask you to go to slide number four in the presentation. Leading indicators suggest that at the start of this year the Colombian economy continuing a process of soft landing. In terms of economic activity, after expanding 3.3% during 4Q15, we forecast that in 1Q16 GDP growth was 3.2%. This pace of growth reflects the resilience of private consumption and a less negative contribution of net exports, which compensate the weak performance of investment.

However, we expect that during the remainder of the year, the pace of growth will moderate as internal demands adjusts to higher interest rates, low consumer confidence and a less rosy labor market. Hence, we keep our 2.6% growth forecast for the whole year.

Regarding prices, during the first months of the year the trend of higher inflation consolidated. So in March 12-month [rent] was 7.98%, the highest in a decade and well above the ceiling of the Central Bank's target range. But as the year passes and the economy cools off, we'll expect that price pressures will lose its steam from a maximum just above 8% in the short term we foresee that inflation will close this year at 5.4%.

Moreover, our monetary policy call is that the current tightening cycle will come to an end soon with a maximum repo rate of 7.5%. In terms of the external sector, during the past months we have seen a mild adjustment of the current account deficit due to a reduction of imports. We forecast that current account deficit will adjust from 6.4% of GDP in 2015 to 5.5% of GDP in 2016.

In addition, our view for the Colombian peso remains bearish. In fact our average USD/COP forecast for the year is 3,180. In the fiscal front, the 0.7% of GDP budget cut announced a few months ago has dissipated short term risks on central government finances. Despite this, in order to comply with the fiscal rule in the medium term, the government will need to implement comprehensive reforms.

In this regard, a key development will be the discussion of a structural tax reform, which according to the Ministry of Finance will take place in the second half of the year. Let me conclude this section by saying that so far, the country has managed to adjust orderly to global headwinds. Going forward, growth will decelerate further and external and fiscal challenges will still be acute. Against this backdrop, our resilient internal market and an adequate policy response will allow Colombia to remain one of the best performing major Latin American economies.

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

Thank you Juan Pablo. On slide 5, we see the evolution of assets and their composition. We see the evolution of assets in a very positive way. The growth partly sustained although moderating the pace in recent months. Most importantly, we are very comfortable with the allocations that we have today, which as you can see, is mainly focused in the lending business. Total assets increased 22% over the last 12 months and the incorporation of Banco Agromercantil loans portfolio explains 6.4% of fees growth. However, during the first quarter, the peso appreciate against the dollar, which contributed to the quarter-over-quarter decline in the total net loan portfolio.

Some important facts about Bancolombia's assets and loan portfolio. Today, peso denominated assets represents 61% of the total assets of Bancolombia, while dollar denominated represents 39%. As mentioned before, the Colombian peso appreciated 4.7% against the US dollar during the first quarter. Loans outside Colombia represents 37%.

All the products are growing in line with our expectations. The average yield to maturity for the investment portfolio is 6.8% and we continue to maintain a structural debt portfolio primarily for liquidity management. Also, the duration of the securities portfolio continues to drop and is very low at a level of 17.1 months, which minimize risks in a very volatile environment.

We continue originating loans with strict underwriting standards in order to maintain the high credit quality of the loan portfolio especially in the consumer segment. The loan portfolio in Colombian pesos decreased 0.5% during the quarter, affected by the FX rate we just mentioned and by the moderation of in-credit demand. The loan portfolio is growing less than we [can saw] last year in 2015 which is perfectly in line with our risk and credit standards, since the Colombian economy will not be growing above 3% which was the case last year.

Nevertheless, we start to perceive opportunities in some sectors of the economy, such as our manufacturing, [tourism] and infrastructure. Many of these sectors have been positively impacted by the weak peso. That is why we are slightly increasing our growth forecast of the loan portfolio to 10% this year. Originally, we design a forecast of 8%, now we are moving to 10%. We still focus our growth in the less risky products as we want to maintain a very healthy balance sheet.

It is also important to mention that Bancolombia's balance sheet is matched in terms of currency, which reduce impacts of FX variations on the shareholders equity. Last but not least, we want to highlight the fact that it's very important to understand our view on capital. That is the high regulatory capital consumption of all our assets. The proportion of risk weighted assets plus market risk to total assets is 88%, a ratio that is very high but also give us comfort because the risk weightings are very conservative in the Colombia regulatory framework.

Now on slide number 6, we present a snapshot of the credit quality at the end of the quarter. In general, we saw an expected deterioration in the quality of the loan portfolio and the coverage ratio. It is not a matter of where we sit right now, but certainly, it is something that we monitor permanently because we want to make sure that NPLs are under control and we do not get negative surprises. The 30-day past due loans to total loans netted at a level of 3.3%, above the 3% we had in the previous quarter. Also, the coverage ratio dropped to 106% from the last quarter figures of 115%.

This quarter, we finish the provisioning of Conalvias, making only a small COP30 billion dent in our P&L. We forecast to have a 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 any foreseeable deterioration of corporate clients.

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 significant portion of our assets in countries that use various standards. 90-day past due loans have been very stable over the last 2 years. However, they were slightly affected, because during this quarter, no surprise to me, it is more challenging -- in these more challenging credit environment.

They represent 2% of gross loans as of December of 2015 with a coverage ratio of 192%. The reason why the coverage ratio is dropping in this quarter is basically because the IFRS standards. When a credit is past due and it has a warranty behind that, we don't have to have the same level of provisions that we used to have. So the level of coverage that we are having right now is because of IFRS and because of they have a relation.

Slide number 7 shows the provision charges which were COP537 billion during the quarter. They represent 1.5% 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, we present the amount of loans that became 30-day past due during the quarter, which is impacted by seasonal factors. The COP810 billion new past due loans represent an increase as compared to those in 4Q last year and are mainly represent by retail loans and SMEs. Furthermore, total past due loans totaled COP4,646 billion.

Besides a few specific corporate client situations, we feel comfortable with evolution of the loan portfolio and forecast provision charges to be around approximately 1.6% to 1.7% of gross loans during this year. This is the guidance that we have been maintaining which is cost of trade could be at around 1.5% to 1.7%.

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 on a slower pace, the Central Bank is hiking interest rates and we shall 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 could see an increase in the number of delinquencies.

As we emphasize in the last conference call, we are taking all the necessary measures to prevent any negative impact in the coming quarters. In today's market, it is preferable to grow less in order to prevent a faster deterioration of the loan portfolio and higher provision charges.

Moving on to slide number eight. We see the evolution of net interest income and funding cost along with the funding composition. This is perhaps the most positive trend in our business because over the last 12 months, we have been able to grow NII much faster that the volumes of loans and as a result, the operating income of the Bank has grown steadily as well.

This is a combined effort in two fronts. First, optimizing the funding terms and structure and in order to keep costs as low as possible and second, pricing loans at a higher spreads. NII for this quarter was COP2.3 trillion, 30% greater than the same quarter of the previous year, mostly driven by; higher loan volumes, which grew 21% over the last year; higher spread on new originations; depreciation of the Colombian peso versus US dollar 15% last 12 months; the 114 basis points increase in the DTF, which is the benchmark rate that we use to price a significant portion of our loans, and as a result, an improvement of net interest income.

Bancolombia's funding cost was pressured upwards; mainly by higher cost on long-term debt and also by the Central Bank interest rate hikes and a tighter liquidity environment which spur competition with other banks driving up CB's rates and DTFs. The total funding cost increased by 36 basis points during the quarter, while the Central Bank's reference rate increased 75 basis points and the DTF increased 114 basis points.

These increases exemplify one of the Bancolombia's competitive advantage which is the fact that about half of our deposit in our operation in Colombia are not sensitive to the interest rates and therefore, our funding cost grow significantly less than the Central Bank's rate. On the other hand, a larger proportion of loans reprised with higher rates and the NII and NIM grow as a result of that dynamic.

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 first quarter, most of the pressure was on time deposits, as we had to recognize a higher interest on new CDs; as you can see with cost of deposits rising 32 basis points. The trend in interest rate hikes, increase in funding cost and NIM expansion that we have just seen in recent months should stabilize in the second half of this year as we believe that we have captured a significant portion of the premium benefits already.

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 the NII. We have in our favor the before mentioned asset sensitive condition of our balance sheet, which is beneficial for margins.

Turning the page on slide number 8-9, we show the net interest income. During the first quarter, we saw a substantial improvement in the reported net interest margin at 5.7%, 60 basis points above the last quarter, explained by both the investment net interest margin and the loans net interest margin. In particular, three main factors positively impacted the investments NIM during the quarter.

First, the appreciation of the Colombia Treasuries days and some other securities even though the investment portfolios only 8% of the total assets. Second investment flows mainly from international players entering the Colombia fixed income market. And third, more clients demanding structure products for hedging purposes such as FX swaps, options et cetera.

In the lending business, we have to link the stronger NIMs to asset sensitive condition of the balance sheet and to the higher spreads of new originations. The Central Bank will likely hike the rate another 25 bps in the near term in order to control inflation expectations. The rising rates is a good predictor of higher NIMs as we continue to move through the year. Although as we mentioned in the previous slide, we believe that most of the lending NIM expansion already occurred in the first three months of this year.

A breakdown analysis of fees is presented on the slide number 10. Fees are another front where we're successful with the recent results. As Mr. Mora mentioned at the beginning of the presentation, we are monetizing the competitive advantages that Bancolombia has; number of clients, channels, products, and market share. During the first quarter, net fees increased by 10% compared to the last quarter due to the lower expenses related to the credit card loyalty programs.

Banco Agromercantil bank contributed with 2.6% of the fees growth. Electronic services and ATM, debit and credit card fees were a key driver of fees during the quarter. We are experiencing sustained growth in cards and users in Colombia due to rising wages and also the promotion of these as a method of payment. We continue to see more credit and debit cards transactions as a result of our commitment to promote the use of cards for in-store transactions. In addition, we are tapping into new business segments when it comes to promoting and introducing numerous benefits and customer rewards initiatives.

Today, Bancolombia has 19% of number of plastics in the credit card market and 33% in debit card market. Also, the bank has 25% market share of dealing in credit cards and 44% in debit cards. These creates an enormous opportunity, because the plastic usage is not only a fee generator but also a source of efficiency. Banking services and asset management also are major contributor for fee growth during the quarter as well as an asset management.

In addition, we saw a sustained performance of insurance distribution fees, which generated COP72 billion during the first quarter and grew 35% year-over-year. Fees presented today 29% of total revenues, which is a good share since these are transactions that do not require a significant amount of capital compared to the lending business.

Our non-banking corresponding channel is steadily growing as we find new cheaper ways to bring banking to Colombia's most under-penetrated geographies and client segments. Today we have more than 6,000 of them. Finally, we forecast that fee growth of at around 8% to 10% for this year.

In slide 11, we present the evolution of expenses. Total operating expenses grew 24% year-over-year or COP347 billion. When analyzing this growth in marginal terms, we find that the consolidation of BAM at the end of 2015 represented 45% of the increase. In other words, excluding BAM the growth would have been at around 13%, which is also affected by the depreciation of the Colombian peso against the US dollar over the last year.

The depreciation of the US dollar in the last 12 months accounted 15% and the proportion of expenses in US dollars of the bank is at around 14%. Operating expenses consist primarily of personnel expenses and administrative expenses, which have been kept under control in their respective currencies. Let's remember the seasonal performance of these items which causes them to grow more slowly in the first quarter of this year.

Today, Bancolombia's oriented towers developing low cost channels based on technological innovation and optimal customer segmentation as we strive to grow expenses in line with nominal GDP. Our guidance for this year is an increase of expenses ranging from 8% to 10%, which we believe will be the key to obtaining a strong profitability levels.

Moving to slide number 12, we see the evolution of the net loans to deposit ratio, which ended the quarter at a level of 114%. This ratio has become relatively stable over the last year, and it's a level where we feel comfortable. The proportion of loans that we do not fund in deposit is funded with long-term debt in order to have a similar duration of both sides of the balance sheet. This strategy reduce the volatility in the net income and shareholders' equity.

It makes more sense to us to fund long-term loans with long-term liabilities and that's why the 114% is a level that gives us comfort about the liquidity position of the Bank. Regarding capital on the bottom right hand side, we show the capital adequacy ratio. The Tier 1 is at a level of 8.2%, 370 basis points above the regulatory minimum of 4.5%. The capital levels that Bancolombia present to date are optimal for the business plan that we have designed. In particular, we identify four factors to support our thesis.

First, the Colombian regulatory is very conservative and the risk weighting of assets is very high. That's why the minimum Tier 1 to operate in Colombia is 4.5%, which looks low compared to other regulations. Remember that risk-weighted assets plus market risk are 88% of our total assets. Nevertheless, Bancolombia is well above the regulatory capital level and the fact give us comfort.

Secondly, the (inaudible) Bancolombia is very low. The ratio of assets to equity is only 10 times. So in general terms, our balance sheet present have greater component of equity than banks in other jurisdictions.

Third, when we run our models to estimate economy capital required to operate the bank with the asset composition that we have and the risk parameters that we [branch] in our models, we find that the requirements is to have to a Tier 1 of 4.4% which is very similar to the regulatory requirement. So we can say that we run the business with about 400 basis points of capital, above the level that we believe is required from an economic standpoint.

Finally, given the business cycle that we are going through today, we do not see the need to have more capital. The credit growth forecast for this year is very moderate and we will organically originate capital to achieve that growth. We do not plan to push more M&A opportunities in the coming years as we focus in the optimization of our operations in Central America.

As we have said before, we look to operate the bank on an optimal level of tier 1 ranging from 8% to 9%. For the Tier 1 ratio, we ended the first quarter of this year with 4.8% for a total BIS ratio of 13% above the regulatory threshold of 9%.

Slide number 13 shows the return on assets and return on equity of the bank. The return on equity of the quarter was 8.1% and return on assets was 0.8%. Return on equity was significantly affected by the 56% of effective tax rate for the first quarter by the wealth tax as well as a higher provision charges. We do not see this quarter as a good proxy of the performance of the bank and preferred to focus on the income before taxes, which is not impacted by the gap between fiscal and financial accounting and therefore a higher effective tax rate.

We expect to continue growing net income although at a moderate pace, while maintaining solid solvency indicators for the rest of this year and improving profitability. Our target of return on equity for this year could be 13% to 14% while the medium term target will be 16%.

After presenting these results to you, I wish to reaffirm two main goals for the future. First, our focus on profitability. This will come from a combined effect of growing of our lending business and sustain a development of our loan portfolio services. The lending business should benefit from higher volumes and better margins as well as an optimal diversification and risk management criteria, which is key during the next coming quarters.

Second, our focus on efficiency. This is a necessary and mandatory condition to sustainability and profitability. Our efforts in digital transformation increase capabilities of our channels and process optimizations will contribute to this initiative and we will permit the business to continue delivering value to our shareholders.

After presenting business lines and discussing our first quarter results, I would like to invite our audience to ask any questions you might have and we are glad to take it from there.

(Operator Instructions) Carlos Macedo, Goldman Sachs.

Thank you. Good morning gentlemen. Thanks for taking questions. Couple of questions, first on the tax rate, because as you've mentioned, it was a little bit or significantly higher than what we've been seeing and the currency contributed it. Is there any kind of visibility that you can give for the tax rate this year? Of course, if the peso continues to gain value the tax will be higher.

Is there a rule of thumb, every 5% value; the effective tax rate is a 100 basis points. Anything you can give us as guidance in order for us to better forecast your bottom line. Second question, you mentioned that margins are probably reflected all that they will, at least the lending margins with the increase in rates that your credit costs, the cost of risk is 1.5% for this quarter, is probably at the lower end of your guidance for the year, which means it's going up that with the economy still growing, but not at a very fast pace, that loan growth will probably not accelerate from credit levels if anything decelerate. Excluding the tax, you probably did around a 15% ROE this quarter, would that be a good level for the remaining of the year? I mean given all this pressure, is that something that we should expect going forward or is 15% a little bit too strong?

Okay. Thank you Carlos. Regarding your first question I have to highlight one specific thing. We are not talking about tax paid, we are talking about provisions of tax that we'd pay at the end of this year based on the FX of the last day of the year. So this is only a provisioning and we will expect to have a certain level of volatility.

And just to give an idea, if we close this year at the same level of FX that we are having today, at the end of the day, nothing will happens, because at the beginning of this year FX rate was 3,180 and as you hear from our Chief Economist, we expect kind of same FX rate. So excluding that effect that obviously implies volatility, our tax could be at around 30% to 32% at the end of this year, excluding the effect of variation of FX.

Regarding your second question; yes, we believe that a kind of deterioration will come because you see the numbers, the growth of GDP is below as expected maybe a little bit of unemployment rate, interest rates is going up, so that's the reason why we're keeping in mind the 20 bps extra for the next coming three quarters. So again, we continue our guidance in terms of cost of credit. We believe that today it is 1.5% and in a very orthodox way, we expect to close this year at level of 1.7%.

But again, as I mentioned during the presentation, our restructuring really now is now tightening the standards in order to prevent any potential deteriorations. The deterioration that you saw, basically is on SMEs and usually this kind of companies are very -- in fact are very sensitive for FX variations and some buckets of the population in terms of consumer, but nothing relevant or material in terms of deterioration.

Thiago Batista, ITAU BBA.

Hi guys, thanks for the opportunity. I have two questions, the first one, Mr. Mora comment in the beginning of the call, that the revenues tend to expand at a faster pace than the expenses in the coming years. Do you believe that the main highlighting of those, the revenues will come from the margins or from the NII or from the fees.

You mentioned that the fees are -- active a 20% of your total revenues, how much do you imagine that this should achieve in the medium term. And my second question is about asset quality, especially on the corporate or the Company segment, we saw some deterioration in this portfolio in this first Q, how much more do believe that your PDL ratio should expand especially in the corporate segment?

Regarding your first question, the NII, the strong update of the NII or the support of [NII] for the next coming three quarters will come basically for the lending business. If you double check the presentation, the NIMs there are very positive and the fee growth again, as you mentioned, they grow these 18% this year. The guidance for us this year could be at around 10%.

So three-fourths of the total NII will come from the lending business and 25% will come from the fee-income business and the fee-income business basically supporting the level of transactions, not supporting based on the assumption that we will ask for more fees for our clients. So the level of transaction is growing on a very good pace. So that's the way we design the NII for this year.

And as a marginal point of view, the 8% of the securities we'll support in some quarters because of the volatility. For example, this quarter, it help us with 3%, NIM, but remember that for two quarters, the previous, the last quarter of last year it [supports] with 0% of NIM, so that depends on volatility.

Regarding your second question, the deterioration incorporated are very, very unique. I mean there is some specific cases, we don't perceive any kind of deterioration as (inaudible) because corporate loans and commercial loans in Colombia, for example, to given an idea in term of US dollars, they have a natural protection because of, they are exporters so they have protection.

So we don't see any specific deterioration and in our operations outside, in Central America which means Guatemala, El Salvador and Panama, we don't foresee any potential deterioration as a trend. Always you will see an in specific case, and if you ask us about oil industry and regarding all the industry related to oil, we have only an exposure of 1.4% of our total loan portfolio in those industries. So we don't expect a major deterioration Thiago.

Thiago and let me complement a little bit. Jose Humberto, this is Juan Mora and regarding your first question, we firmly believe that we need to work hard on expenses. So when I said that we believe that the income will grow faster than expenses means that we are working on both sides, but firmly believe that we have a work to do on expenses and the bank to be more efficient. So it's both sides as Jose Humberto mentioned we expect fees to grow since we have been working heavily on new products and also the mix between our loan portfolio moving to segments with higher profitability while working on risk and also our firm commitment of keep working on expenses.

To complement what Juan said, one of our main goals is to reach a level of efficiency at around 50% in the next coming two years. Obviously when you see our numbers, 40% of our expenses are related to FX. So the impact of the devaluation or appreciation of the currency will put some volatility in our [comps].

Nicolas Riva, Citi.

Jose Humberto my question is, I'm going to go back to capital. So your Tier 1 ratio did increase 70 basis points quarter-on-quarter this quarter as you capitalize the return earnings from last year. However, this increase was slightly below your guidance of about 100 basis points increase, you were expecting that be at about 8.5%.

And also, you're not going to be capitalizing earnings for the next three quarters but you will grow your assets are now you're guiding for 10% loan growth this year and probably your risk-weighted assets could grow in line with that. So that means that by the end of this year, your tier 1 ratio could be very close to the 8% or below that, which is the minimum of the range that you think you feel comfortable without issuing equity. So what makes you confident that you will still not need to raise equity.

And also something specific on this. Right now the minimum tier 1 ratio in Colombia is 4.5%. However, Colombia is still not in Basel III. Is there a timeline in which Colombia is going to take up Basel III requirements and in that case is Colombia expected to impose additional capital requirements, which means that the minimum probably is not going to be 4.5% but higher than this.

And then my second question on loan loss provisions, if you can repeat the number of provisions you booked for Conalvias this quarter and if you expect now to be fully covered in your exposure as a Company? Thanks.

Thank you, Niko. Regarding your first question, our guidance originally was yes, to increase our level of tier 1 of 100 basis points after our general assembly. But if you double check the loan growth, it's better than expected, so that consumes part of the capital that we talked at the beginning of the process. Our guidance originally were grow 6% to 8% loan portfolio, and you are seeing a strong growing, so that was the first reason.

The second question regarding were we happy with the capital with the Tier 1 during this year? Yes, the level of capital will drop once the loan growth appears, but remember that to understand what happened with the Colombian banking regulation is, there will be a jump of Tier 1 every March once the General Assembly took place.

So you'll see the number below 8% last December, you'll see the number below 8% this December. But again, you'll see the number above 8% on March, based on the dividend payout. So again this is a kind of floating goal, but at the end, on average, the level of capital will be at a level of Tier 1.

Regarding your second question, yes, we have fully covered the Conalvias or we believe that we have the coverage that is comfortable for the process in which we are right now. And what we did was -- COP30 billions of Conalvias, that was the last provision. We did provision of Conalvias in three different tranche, in the third quarter of last year, the big tranche were in this last quarter of last year and the remaining portion was in this quarter.

Ernesto Gabilondo, Bank of America Merrill Lynch.

Hi, good morning and thanks for taking my call. Can you share with us, what are you hearing regarding the new tax reform, like there will be an increase in the value added tax and some government cuts. So considering this impacts and tightening cycle to continue, are you comfortable with your expectation for a GDP growth of 2.6% for the year.

My second question is related to the net interest margin expansion. Can you share with us how much have you reprised loans and do you have a sensibility of how much Bancolombia's net interest margin benefit from an increase in interest rates. And lastly, in terms of your expenses growth guidance, what are the measures behind to improve the customer income level? Can you give us more color on your process optimization. Thank you.

I can maybe speak about the tax reform proposal. Well, basically what we have today is a series of recommendations by several commissions that have been analyzing the Colombian tax structure. However, these recommendations are not mandatory for the government. Actually, the government is working at this moment on that proposal. So at this moment, we don't know the details of such proposal because that would be something we'd be presenting to Congress by July.

What we would expect from that reform is or basically the goals of that reform would be two-fold. First, increase the tax revenues by around 2% of GDP but secondly to adjust the fiscal, I mean the tax efforts by the agents in the economy. So there is a, I mean a consensus in the country that especially the tax rates paid by corporations need to be revised. So we would hope to expect those type of elements in the reform, but as I mentioned it is too early to be very specific on that.

And because of that precisely, we do not include I mean any type of tax effect on our growth forecasts because we would like to foresee how would be the composition of the tax effort by components so we can be more sure if there is going to be an effect on internal demand or not.

Let me complement a little of Juan Pablo. We heard directly from the President two weeks ago that they will present the tax reform to the Congress during the second semester of this year. And as Juan Pablo mentioned, we expect this to be positive. As you know the tax structure in Colombia, it's complex. So we hope that this reform simplifies the tax structure and allow us to predict taxes in a better way.

And Ernesto, going to your question regarding NIMs, the sensitivity is for every 100 basis points on the Central Bank moves the interest, our sensitivity of NIM sits at around 9%. Regarding pricing of loans, it was a combination of factors. We increased, on average, our loan portfolio for corporate and consumer on average we increased 150 bps and the reprise occurred during this first quarter on a very important portion of the loan book and obviously, that effect you will see very important during this first quarters but the second half of the year, you would see a kind of plateau in terms of NIM growth and NII growth.

And Nicolas, regarding your previous question, I'm sorry about that, regarding Basel III, remember that the local regulations is a kind of -- there is some specific points regarding Basel III, but we expect that the second wage of Basel III will take place maybe 2018 and they will be focused mainly on buffers of provisions, they will be focused on liquidity, but we are now still working on that. But the level, that capital we are having today is depending on Basel III. If you want to, [we'll shake up] very, very internal details, we can share with you in another call.

(Operator Instructions) Alonso Garcia, Credit Suisse.

Hi, good morning. Thanks for taking my question. Regarding the investment portfolio, and I know there might be some volatility here, but was kind of NIM do you believe would be fair to expect for the remainder of the year compared to the 3% this quarter or in terms of cost contribution compared to COP184 billion reported in this first quarter. Thank you.

Yes our pace, our model are suggesting that the NIM could be at around 1% to 1.5% and this is a comparison between the benchmark interest rate against our funding cost of the total deposit data we are having. So 1% to 1.5% is the guidance for NIM for securities portfolio.

Victor Galliano, Barclays.

You did mention talking a little further about capital. I saw in your forecast that you are looking at a depreciating peso going through to the year-end. There is obviously loan growth of about 10%. You've got over a third of your assets in dollars, which is positive for your earnings stream. But can you explain to us, I think you mentioned that you, I don't know how, that there was going to be some, there was less sensitivity to the peso depreciation of the capital ratios.

Can you explain to us a little more and give us a bit more color on that about how you're doing that? Because the sense I have is that clearly your long dollars, so therefore this should actually adversely impact your capital ratios. And in addition to that, it seems like you have a lot of your intangibles in dollars as well. Thank you.

Yes Victor. First, just because of the depreciation of the currency we use at around 40 bps of Tier 1 last year because the depreciation of 30%. As you can see in our forecast, we expect to close at around 3,180 FX. So we don't expect a huge impact in terms of consuming capital because of depreciation of the currency. But I have to highlight one specific factor. We have at around 20% of our equity in US dollars. That give us a kind of protection in terms to protect us from the volatility of FX. So with that in mind, we don't expect a major impact of capital because of devaluation.

Okay, but you have a lot more assets in dollars, right?

Yes. Right now, we have 40% of our assets are in US dollar, but 22% of our equity also in US dollars.

Carlos Gomez, HSBC.

Hi, good morning. Actually, there will be two. On the tax rate, you gave the guidance of 30%, 31%. Could you clarify, will that does or does not include the wealth tax? And then, a specific question about your credit card portfolio, we have looked at your 20-F and when we look at your domestic credit card portfolio, it has declined 25% year-on-year. Was that a reclassification or was there an actual reduction into your credit card business. Thank you.

Regarding your first question, we are not contemplating in our guidance, the 30% to 32% tax, we have not contemplated the wealth tax. The wealth tax is assuming on the financial statements as expenses, it's not a tax. So we are not contemplating that. Regarding your second question that you mentioned that we are losing some market share, we have to depreciate the numbers, if it is a bidding or number of plastic. So we will call you back during the morning just to clarify what's happening within local business.

Carlos, in general terms, our credit card portfolio has been very dynamic. In terms of plastics, number of plastic, in term of fees, in term of interest rates, it is one of our focus. The portfolio is growing, it's not just growing in Colombia, but it is also growing in the other markets in Central America. So we will have to double check the numbers. But in general terms, it is growing healthy and we are -- keep our focus on credit cards and on payments specifically is going to be one of our main sources of income, of revenue in the future.

Carlos probably what happen is the bidding in US dollars for Colombian population because of the FX variation people reduce in a very dramatic way the acquisition in the US dollar goods. So probably that was one of the reason the bidding maybe shows a drop, but we will double check with you.

We have no further questions at this time. I will now turn the call back over to Mr. Acosta for final remarks.

Thank you very much and thank you all of you. I hope to see you in the next conference. And if you have any specific question, feel free to contact us. Alessandro or even any person of the team. Thank you again.

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