Grupo Cibest SA (CIB) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Bancolombia's second-quarter 2016 earnings conference call. My name is Sylvia and I'll be your coordinator for today. (Operator Instructions)

Please note that this conference call will include forward-looking statements including statements related to our future performance, capital position, credit-related expenses, and credit losses. All forward-looking statements, whether made in this conference call and future filings and press releases or verbally, address matters that involve risk and uncertainties. Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, including: changes in general economic and business conditions; changes in currency exchange rates and interest rates; introduction of competing products by other companies; lack of acceptance of new products or services by our targeted client; changes in business strategy; and various other factors that we describe in our reports filed with the SEC.

With us today is Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Jose Humberto Acosta, Chief Financial Officer; Mr. Jorge Humberto Hernandes, Chief Accounting Officer; Mr. Alejandro Mejia, Investor Relations Manager; and Mr. Juan Pablo Espinosa, Chief Economist. I would now like to turn the presentation over to Juan Carlos Mora, CEO of Bancolombia. Please proceed, sir.

Good morning, everyone. First I will like to thank you for being with us in Bancolombia's second-quarter conference call. Today we're going to share with you the recent developments at Bancolombia as well as some strategic goals as we move forward in the second half of the year.

First of all I would like to highlight that the evolution of the business during the second quarter was very positive, with the strong performance of NIMs, net loan volumes, and fee generation. The profit level for the second quarter has put us in line with our financial targets for the year.

During the quarter, we generated COP733 billion in net income, which represents an annualized ROE of 15.2%. In particular, we saw good revenue performance and improved efficiency.

During the quarter, we continued seeing a moderation in the pace of economic activity in Colombia. Nevertheless, the appreciation of the peso over the last two years has created positive conditions for exporting and for import substitution, and today we see a natural adjustment of the economic structure of Colombia: less dependence on oil, and more emphasis on local production.

Going to our business, we saw positive trends in particular in the following items. First, convergence of the growth of the loan portfolio towards the target of 10% for the year 2016. Corporates and mortgages are leading that growth.

Construction of residential real estate remains dynamic, and the first growth of the 4G projects are starting to gain traction. Meanwhile, the consumer book is moderating its growth to our projected pace for the year.

The growth in the peso-denominated portfolio was 15% year-on-year, while the US dollar-denominated portfolio decreased 1% when we exclude Banco Agromercantil assets.

Second, as we were expecting, NIMs continued to expand and that has allowed us to grow cumulative net interest income 33% compared to 2015. At the same time, we maintained our efforts to keep the funding costs as low as possible while extending the average life of the stock of term liability.

Third, we saw moderated formation of new past-due loans. This quarter, we reached a restructuring agreement with Conalvias, and the client stopped being considered past-due. Nevertheless, we kept the allowances on our balance sheet.

Additionally, we experienced very good performance of the dollar-denominated portfolio in Panama and El Salvador, which also contributed to the growth of the book in the quarter. We continue making significant provisions in order to keep the coverage ratio at a level that gives us comfort, and the origination standards and scoring models have been adjusted to include the lower forecasted GDP growth.

Fourth, fees continue growing in a very healthy way, 17% for the first six months of the year. In particular, banking fees and insurance distribution fees are the leading services. We will continue developing our strategy to enhance fee generation.

In the capital front, as we had projected, we are operating in the range between 8% to 9% for Tier 1. We saw how the level of the Bank ended at 8.5%. This has been a combined effect of moderation in the loan growth and some actions taken to improve the capital consumption.

And last, we saw we saw a very positive trend in the efficiency front. Our efforts of cost-cutting and budgeting in our geographies as well as a very good growth in operating income resulted in an efficiency ratio of 48% for the quarter.

To summarize, the operational performance is very positive, and we estimate that the second half of the year will continue down this path. In addition to the financial performance, I would like to share with you some aspects of our strategy regarding innovation and client experience. This part of our business plan focuses on addressing the challenges that the financial services industry is facing.

First, we announced a strategic agreement with First Data, a global leader in commercial enabling technology, to integrate and strengthen our technology platforms in order to improve and diversify services for business owners in Colombia. We will focus on building commerce technology solutions for merchants and facilitating access to the banking system, offering advanced technology and secure, efficient transactions. As a result, we expect that the acquiring fees will grow faster, as more of our clients will be able to pay with cards.

Second, we are making a lot of progress in the operational efficiency of our processes. As an example, we have simplified retail consumer engagement. We will make the process of opening new accounts, faster, cheaper and more convenient for our clients.

And lastly, we continue making progress in our digital banking strategy. Our platform, [NetKey], is fully operational. The idea behind NetKey is to provide unbanked retail clients with an easy-to-use platform to manage their cash transfers, and transfer it to relatives and friends at no cost whatsoever and with no minimum balance requirements.

Our financial results for the period are the backbone of achieving superior ROEs, and I will reiterate the Bank's focus and commitment to generate sustainable higher levels of profitability. I would also like to emphasize that lifting profitability in all geographies, added to the boost in efficiency, will be the two fundamental drivers going forward to reach our performance goals.

Having said this, I would like to continue with the retail presentation of Bancolombia's financial results for the second quarter of 2016. Now I will turn the presentation over to Jose Acosta, who will elaborate on the main topics that impacted our business in this period. Jose?

Thank you, Juan. Slide number 3 shows the profitability of the Bank. As you can see, the second quarter shows a much improved bottom line thanks to the good performance of the Bank revenues -- in particular, net interest income, coupled with the lower effective tax rate and no tax charge-off as seen in the first quarter.

Profit before tax continues to demonstrate a strong growth at 23% year-over-year. Also, provisions have been increasing this year due to the tepid economic environment, and this understandably puts a drag on the net income growth.

Regarding taxes, we forecast an effective tax rate of approximately 38% for the year, assuming a year-end FX rate similar to the current one, COP3,000 per $1.00. Nevertheless, as we have previously mentioned, the tax rate for the year will be subject to any variation in exchange rate. We will only know the tax payable at the very last date of the year.

All included, we are very satisfied with these results because they show the strength of Bancolombia, the ability to fund the Bank at the lowest cost in the markets where we operate, the capacity to transfer interest rates to the asset side, and the ability to generate capital in an organic manner. Moreover, we take advantage of a strong distribution network, more than 7 million customers in Colombia, along with our Bank's strong local capital markets position.

Now, I 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. Now I'll ask you to go to slide number 4 in the presentation. During the past few years, Latin America has been experiencing a period of poor economic growth due to the combination of global headwinds, internal bottlenecks, and limited policy support. However, beyond this general trend there are significant differences across countries. While some economies will be stuck in recession, others will grow below trend, and a last group will manage to expand above the average of the past decade.

In Central America, several countries are benefiting from low commodity prices and a stable growth in the US. As a result, we forecast that this year Guatemala and El Salvador will expand by 3.6% and 2.3%, respectively. In the case of Panama, we expect that growth will continue to converge to its potential rate, with an estimate variation of 5.7% this year. Moreover, over the medium term we expect these countries to accelerate further, and this would allow credit to grow at a consistent pace.

For Colombia, leading indicators suggest that the moderation in activity intensified during the second quarter. In fact, we recently revised our full-year 2016 growth forecast from 2.6% to 2.4%.

We think that growth will be affected by contractive monetary and fiscal policies, which will coincide with a lackluster performance of private investment and a less solid internal consumption. Furthermore, due to the lack of significant short-term growth catalysts, and the uncertainty surrounding the discussion of the tax reform, which will be possibly submitted to Congress next October, we think that risks to our baseline in [that] scenario are biased to the downside. In a less rosy scenario, GDP growth would moderate 1.8%.

Due to the procyclical nature of credit markets, we expect that this deceleration of economic activity in Colombia will translate to a less dynamic growth of loans, particularly in the commercial, consumer, and mortgage segments, which are more sensitive to the changes in interest rates and in confidence levels.

Regarding inflation, Colombia is the exception in a tendency of low price pressures. In fact, the latest 12-month inflation print is almost 9%, the highest since the inflation targeting was introduced in 2000.

But as the second half passes and the economy cools off, we expect that price pressures will lose steam. We foresee that inflation will close this year at 6.5% and that it will converge to the ceiling of the target range in late 2017.

With the prospects of a moderating inflation and higher risk to growth, our monetary policy goal is that the Central Bank will remain on hold for the rest of the year. Given that the transmission of monetary policy actions to interest rates has been traditionally a slow and lengthy process, we expect that during the next months the market will continue to absorb the tightening in cycles that has taken place so far. In turn, this should lead to a stable behavior of net interest margins in the Colombian financial sector.

In Guatemala, we expect that inflation will close this year at 3.8% and that a 25 basis points hike in the reference rate is likely in order to keep inflation expectations under control. Finally, in the dollarized economies of Panama and Salvador, inflation in the interest rates will remain low in line with the trend in the US.

Let me conclude this section by saying that the different macro trend across the countries in which Grupo Bancolombia operates will be evident during the rest of this year, and this should bring important diversificatiaon benefits going forward. After this overview of the economic environment, let me turn the presentation back to Jose Humberto, who will discuss the Bank's results.

Thank you, Juan Pablo. On slide 5 we see the evolution of assets and their composition. Some important facts about Bancolombia's assets and loan portfolio. Today, peso-denominated assets represent 59% of the total assets of Bancolombia, and it's organically growing at a pace of 12%, while dollar-denominated represents 41%. Also, the Colombia pesos appreciated 2.7% against the US dollar during the second quarter.

Loans outside Colombia represent 38% of the total loan book. Our loan portfolio in US dollars decreased 1% during the year-over-year. All the products are growing in line with our expectations.

Total assets grew 19% year-over-year, in line with our organic target rate of 10% growth for the year. The incorporation of Banco Agromercantil assets six months ago along with the peso appreciation of 12% explains this broad momentum. Loan portfolio growth is primarily driven by commercial loans, which continue to exhibit sustained growth around 10% for the year.

The average yield to maturity for the investment portfolio is 7.3%, and we continue to maintain a structural debt portfolio primarily for liquidity management. Also, the duration of the securities portfolio continues to remain low, at a level of 18.5 months, which minimizes risk 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 and SME segments. The loan portfolio in US dollars decreased during the quarter, affected by the FX rate we just mentioned and by the moderation in credit demand. The loan portfolio is growing less than we saw last year in 2015, which is perfectly fine and in line with our risk and credit standards, since the Colombian economy will be growing around 2.4% for this year and 2.7% for next year.

Nevertheless, we are starting to perceive opportunities in some sectors of the economy such as manufacturing, tourist, and infrastructure. Many of these sectors have been positively impacted by the weak peso.

That is why we are slightly increasing our growth forecast for 2016 to the level of 10% growth. We will still focus our growth in the less risky projects, 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 reduces the 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 consumption for all our assets. The proportion of risk-weighted assets plus market risk to total assets today is 88%, a ratio that is very high but also gives us comfort because the risk weightings are very conservative in the Colombia regulatory framework.

Now on slide 6, we present a snapshot of the credit quality at the end of the quarter. In general, we saw a deterioration in the quality of the consumer loan portfolio and the coverage ratio for C, D, and E loans.

The consumer book was impacted by three key elements: the truck drivers' strike in Colombia; the end of the quarter, usually known for the past-due loan formation; and the deterioration of credit card businesses, specifically in Banistmo.

The overall coverage ratio improves, however, because of the restructuring of Conalvias, which has a significant impact. The 30-day past-due loans to total loans ended at a level of 3.1%, below the 3.3% we had in the previous quarter. Also, the coverage ratio increased to 121% from the last-quarter figures of 106%.

Last quarter, we finish the provisioning of Conalvias, making 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% and 3.2% 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 economic 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; however, they have slightly improved during this quarter -- not surprisingly, because of the restructuring of Conalvias. They represent 1.9% of gross loans as of June of this year, with a coverage ratio of 194%.

Slide number 7 shows the provision charges, which were COP6.28 billion (sic - see press release, "628 billion") during the quarter. They represented 1.7% of average gross loans when annualized.

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 COP24 billion new past-due loans is very low, specifically due to the restructuring of Conalvias, which means the incorporation of COP260 billion that was now considered past-due. Furthermore, total PDLs was COP4.3 billion.

As we have talked about in recent months, the Central Bank continues to high-grade, and we are now at an all-time high, which translates positively into better margins but does have a negative effect over the broader economy. Delinquencies are on the rise, and the Bank must decide between growing less or otherwise taking on more risk.

We believe we have a sufficient amount of risk appetite and have not made a change to our initial strategy from the beginning of the year. We will continue monitoring the performance of the portfolio and making sure that the new vintages are disbursed under more stringent underwriting standards.

Moving on to slide number 8, we see the evolution of the net interest income and funding costs along with the funding composition. This is the most positive trend in our business, because over the last 12 months we have been able to grow NII much faster than the volumes of loans and, as a result, the operating income of the Bank has grown steadily as well. This is a combined effort of two fronts: first, optimizing the funding terms in order to keep cost as low as possible; and second, pricing loans at higher spreads.

NII for this quarter was COP2.4 trillion, 37% greater than the same quarter of the previous year, driven by: first, higher loan volumes, which grew 20% over the last year; second, higher spreads of new originations; third, appreciation of the Colombian peso versus the US dollar, which was 12% in the last 12 months. The 265 basis points increase in the DTF, which is the benchmark rate that we use to price a significant portion of our loans, is specifically in Colombia and, as a result, an improvement in NIM.

Bancolombia's funding cost was slightly pressured upwards, mainly by higher cost on long-term debt, and also by the Central Bank interest rate hikes and a relatively tighter liquidity environment as increased funding competition among banks. The total funding cost increased by 27 basis points during the quarter, while the Central Bank revenues rate increased 125 basis points and the DTF increased 50 basis points.

These increases exemplify one Bancolombia's competitive advantages, which is the fact that about half of our deposits in our operations in Colombia are not sensitive to the interest rates. And therefore our funding costs grow significantly less than the Central Bank interest rates. On the other hand, a large proportion of our loans reprice with the higher rate, and the NII and NIMs grow as a result of this dynamic.

During this year, we have focused our efforts not only on keeping the funding cost as low as possible but also on increasing the average time to maturity of the stock of liabilities, in particular, time deposits and long-term debt. On a positive note, we feel we were very competitive in the funding market during the second quarter, although there was some pressure on the time deposits and we had to recognize a higher interest on the new CDs, as you can see, with cost of deposits rising 36 basis points over the quarter.

The trend in interest rate hikes, increasing funding cost, and NIM expansion that we have seen in recent months should stabilize in the second half of the year, as we believe that we have captured a significant portion of the benefits already this first half of the year. Our goal is to keep funding cost as low as possible, which have been able to achieve over the past months, while maintaining a conservative approach to liquidity risk management in an effort to defend our expand in NIM and growth of NII. We have in our favor the before-mentioned asset sensitivity condition of our balance sheet, which is beneficial for margins.

Turning on page -- on slide number 9, we show the net interest margin. During this quarter, we saw an upside in the reported net interest margin at a level of 6.1%, 44 basis points above last quarter, explained by the loans net interest margin, basically. In particular, there are three main factors positively impacted the NIMs during the quarter.

First, the appreciation of the Colombia Treasury, or TES, and some other securities, even though the investment portfolio is only 7% of the total assets. Second, investment flows mainly from international players entering the Colombian fixed-income market. And third, more clients demanding structured products for hedging purposes, such as FX swaps options. In the lending business, we have to link the stronger names to the asset-sensitive condition of the balance sheet and to the higher spreads of new originations.

Also briefly, Colombia shows the strongest NIMs because the repeated rate hikes during the quarter, while NIMs in Central America are significantly lower. At the end of the quarter, we had an unconsolidated NIM for Colombia of 7.1%, compared with: the 3.8% in Banistmo; 6.4% in Banagricola, which is a very positive number; and 4.7% in Guatemala for Banco Agromercantil operation. Despite the lower numbers in Panama and Guatemala specifically, we did benefit substantially from the higher rate environment in Colombia.

A breakdown analysis of fees is presented on slide number 10. Fees are another front where we continue to reap success, as can be seen in recent results.

During the second quarter, net fees increased by 6% compared to the last quarter, despite an expected setback in transaction volume momentum. Banco Agromercantil contributed with 2.6% of the fee growth. Net fees grew 12% year-over-year and 18% on a gross level.

Electronic services and ATMs, debit card and credit card fees were a key driver of fees during the quarter. We are experiencing sustained growth in cards and usage in Colombia, due to rising wage and also to the promotion of this method of payment. We continue to see more credit and debit card transactions as a result of our commitment to promote the use of cards for in-store transactions.

In addition, we are tapping into the new business segments when it comes to promoting and introducing new benefits and customer rewards initiatives. Today, Bancolombia has 20% of the number of cards outstanding in the market and 33% in debit cards. Also, the Bank has 26% of market share of billing in credit cards and 44% in debit cards. This creates an enormous opportunity because the plastic usage is not only a fee generator but also is a source of efficiency.

Banking services and asset management were also a major contributor for fee growth during the quarter as well as asset management. In addition, we saw a sustained performance of insurance distribution fees, which generated COP91 billion during the second quarter and grew 35% year-over-year.

Fees represented 17% of the second-quarter operating income, which is a good share since these transactions do not require a significant amount of capital. Our nonbanking 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.

In slide 11 we present evolution of expenses. Total operating expenses grew 21% year-over-year or COP287 billion.

When analyzing this growth in marginal terms, we find that Banco Agromercantil at the end of this quarter represented 29% of the increase. In other words, excluding BAM, Banco Agromercantil, the year-over-year growth would have been 15%, which also is affected by the appreciation of the Colombian peso against the US dollar over the last year.

The cost-to-income ratio improved significantly quarter-over-quarter because of ongoing cost-control initiatives and a strong NII growth and was 48% for this quarter. Our target is to get this number under or at around 50% level of the year in the short term.

Operating expenses consist primarily of personnel expenses and initiative expenses, which have been kept under control in their respective currencies. As we have stated last quarter, Bancolombia is committed to developing lower-cost channels based on the technological innovation and optimal customer segmentation as we strive to grow the expenses in line with nominal GDP. Our guidance for this year is an increase of expenses ranging from 8% to 10% on an organic level, which we believe will be the key in obtaining strong profitability levels.

Moving on to slide 12, we see the evolution of the net loans-to-deposit ratio, which ended the quarter at a level of 116%, slightly above the figure shown last quarter. This ratio has become relatively stable over the last year and is a level where we feel comfortable.

The proportion of loans that we do not fund with deposits is funded with long-term debt, in order to have a similar duration on both sides of the balance sheet. This strategy reduces the volatility in the net income and the shareholders' equity. It makes more sense to us to fund long-term loans with long-term liabilities, and that's why the 116% 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 ended at a level of 8.5%, 400 basis points above the regulatory minimum level of 4.5%. This is a very good ratio and, most importantly, the continuous growth in the metric led us to reaffirm our estimation for this year will be a year of capital accumulation.

Now that we talk about capital, we wanted to make a reference of the rating agency actions taken yesterday by Fitch. Considering the recent reviews of the sovereign rating of Colombia, influenced by current accounts and fiscal deficits as well as the impact of the depreciation of the Colombian peso on Bancolombia's Tier 1 ratio, Fitch decided to reduce the rating of Bancolombia from BBB+ to BBB. With this rating, Bancolombia is at the same level of the sovereign rating; and despite it is a downgrade, it is still an investment-grade.

We continue our conversation with the rating agencies to share with them the evolution of the business and, in particular, our capital accumulation process. Nevertheless, as we have shared with you in the past calls, the capital levels that Bancolombia presents today are optimal for the business plan that we have designed.

In particular, we identify four factors to support our thesis. First, the Colombian regulation is very conservative and the risk weightings of assets is very high. Nevertheless, Bancolombia is well above the regulatory level, and the fact gives us comfort.

Secondly, the simple leverage of Bancolombia is very low. Third, when we run our models to estimate the economic capital required to operate the Bank, we find that the requirement is to have a Tier 1 of 4.4%, which is very similar to the regulatory requirement.

Fourth, 22% of our equity is in dollars, which mitigates the impact of the appreciation of the Colombian peso on risk-weighted assets. And 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 generate the capital to achieve that growth.

As we have said before, we look to operate the Bank as an optimal Tier 1 ranging from 8% to 9%. For the Tier 1 ratio, we ended the quarter with 4.7% for total BIS ratio of 13.2%, 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 for the quarter was 15.2%, and return on assets was 1.5%.

The return on equity rebounding is anticipated after the improvement in NIMs and NII. This quarter marked more normalization of profitability, keeping in mind the oncoming headwinds of the rest of the year.

We expect to continue growing the net income, although at a moderate pace, while maintaining solid solvency indicators for the rest of the years and improving profitability. Our target of return on equity for this year will be in between 13% to 14%, while the medium-term target continues to sit at a level of 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 in our lending business and sustained development of our portfolio of services. The lending business should benefit from higher volumes and better margins as well as an optimal diversification and risk management criteria.

And second, our focus on efficiency. This is a necessary condition to sustainable profitability. Our efforts in digital transformation, increased [capability] of our channels, and process optimization will contribute to this initiative and will permit the business to continue delivering value to our shareholders.

After presenting these slides and discussing our second-quarter results, I would like to invite you, our audience, to ask any questions you may have and we'll gladly take it from there. Thank you.

(Operator Instructions) Ernesto Gabilondo, Bank of America Merrill Lynch.

Hi, good morning, and thanks for taking my call. After the recent increase in interest rates, the re-pricing on loans, and that the economic growth is slowing, how do you perceive to create demand in the coming quarters and next year?

And just another question about the asset quality. We saw an improvement in NPLs but some deterioration in the cost of risk; I think mainly that was due to the consumer segment. So I just want to know to what extent should we expect this ratio to continue trending up? Or what are the reasons behind, to expect stable behavior? Thank you.

Okay; thank you, Ernesto. Regarding your second question, the asset quality, at the beginning of the year, we talked about that our cost upgrade would be at around 1.7%; today it's currently 1.7%. We saw, as you mentioned, a deterioration in the loan portfolio, but we don't expect a huge deterioration. We believe that at the end of this year, our cost of credit will be between 1.7%, 1.8% cost of credit.

Obviously because of the economic cycle, we foresee any specific deterioration basically in consumer loans. What happened in our operation was a deterioration in the Panama operation that we have right now under control. So just to give you an answer, we don't expect a major deterioration in the loan portfolio for the second quarter, and we believe that we will be at around 8.8% of the cost of credit.

Regarding your first question, we took advantage of the high interest rate, high [shelter] of the Central Bank. We believe that we will be able to sustain the NIM in the second quarter.

The challenge will be focused basically on the cost of funding. So the NIM, we are expecting to sustain the NIM the second quarter, and we will focus our effort on the funding cost. That's the idea.

Regarding the credit demand --

The credit demand, yes. Regarding the credit demand, yes, we believe that the credit demand will align at a level of 10%. We saw an increase the first quarter, but then we see a reducing pace of growth the second quarter; and the third and fourth quarter we will see exactly the same trend.

So we don't expect a major increase in loan portfolio. Neither, we don't expect a drop in the number.

We are expecting, as you probably heard from our Chief Economist, meanwhile the economy in Colombia is growing at a level of -- a pace of 2.4%, we are growing at a different pace outside because typically growth in those countries are at a different level.

So meanwhile the loan growth in Colombia will be 8% to 10%. We see, for example, in Panamanian operation growing at a pace of 10%; Guatemala growing at a pace of 8% to 9%. So as a combination of that, we'll see ups and downs, but at the end of the day 10% will be the number at the end of the year.

Thiago Batista, Itau BBA.

Yes, hi, guys. Thanks for the opportunity. I have two questions. The first one on fees: You posted a material expansion in the bancassurance fee. Could you give us a little more color on your strategy on the bancassurance business?

And the second one, just a follow-up on your [expanded] loan growth. You just said that you were expecting a loan growth of 8% to 10%. If I'm not wrong, in the first half of the year your loan book expanded by almost 1% or around 0%. Is it feasible to see this big improvement in the loan portfolio expansion during the second half of the year?

Okay, regarding your second question, the loan growth, the situation is as follows. Remember that we have almost 65% of our loan portfolio is in local pesos. The local peso is behaving at a pace of 10% to 11% growth the last 12 months.

In the US dollar track, we are not growing. We are growing only 1%, and that situation is explained mainly by the loan book in US dollars in Colombia.

What happened in Colombia is the corporate trade demand for US dollars shifted from US dollar to local currency. So we are experiencing a decrease in the US dollar loan book in Colombia.

Meanwhile, the other loan books in the offshore, in the international operation, it's growing at a good pace. But with the combination of factors, we are only growing 1%.

What we expect for the rest of the year? We're expecting the same in both currencies: maintaining the growth in local currency, in peso, to align 10%; and to maintain the loan growth in US dollar outside in between 5% to 10%.

Regarding your first question, fees, what's going on with bancassurance is we are the number-one dealer of insurance for Suramericana, for example. So we are penetrated in our consumer segment with those bancassurances, and the numbers are growing at a base CAGR in the last three years at around 20%.

What we expect the next coming months, we are expecting same level of growth because we are promoting the use of the insurance in our branches. Remember that we have more than 6 million clients here in Colombia.

Although it is a very successful business in our operation in Agricola and in Salvador, we are growing also at a pace of 20%, 25%. Obviously, the number is still very low, but we are promoting the use of insurance.

And it is reflected because a new proposition composition of the society, people are beginning to realize that buying insurance, it's a very good business. So it's a sustainable fee income at least for the next two years in the same numbers as a growth of 20%.

Tito Labarta, Deutsche Bank.

Hi, good morning and thanks for the call. My question is on net interest margin, following up a little bit more. I understand you said you expect it to remain stable for the rest of the year.

But -- so that means you don't see any more increase in spreads? We saw some good performance this quarter. So I just want to make sure you're thinking that, that you can increase the spreads more.

But also on the sending side, I understand you feel comfortable with your loan-to-deposit ratio, but we have seen deposits fall now for two quarters. Do you think that could add some more pressure on the funding side that maybe then could negatively impact the margin?

And then also I understand you expect rates to remain stable for the rest of the year. But if rates were to rise some more, where do you think you would feel more pressure: on the asset side, where you can increase spreads again; or would that at more pressure to your funding costs, particularly with the loan-to-deposit ratio where it is? I just want to get a little bit more color on your outlook for margins. Thank you.

Okay, thank you, Tito. Yes, what we expect the second half of the year is -- we took a (inaudible) the momentum of the first half have increased the interest rate and DTF will increase as well. The second half of the year, we're expecting a flat interest rate in terms of DTF, and we expect a minimal increase of the Central Bank interest rate.

So for that reason we are not expecting on the asset side a better indicator of NII. We are expecting to maintain that indicator of NII.

As you said, what is the challenge? The challenge is to maintain the funding costs under control, and that will be very challenging again because, obviously, the cost of funding is increasing.

So what we did is tried to pre-fund and to lock part of our funding. Remember that one-third of our funding structure is CDs, so we already locked part of them, and we will take advantage of that.

So we believe that the third and fourth quarter we will try to maintain funding costs under control. And this is basically because, as we mentioned in the speech, half of our deposit is now price-sensitive because it's a retail business.

So again, the guidance here is to sustain the NIM at the same level. The challenge would be 2017, because probably if the inflation change and the interest rate goes down, and because we are asset sensitive we will feel a pressure of the NIM that will be the second -- the first half of next year.

Regarding your second question that interest rates will remain stable, again, the structure of funding -- we are funding basically from -- what happened with loan-to-deposit ratio is in the operation in Panama we are growing at a pace of 10%. But on the liability side, we're not growing at the same pace; we are growing at a pace of 7% to 8%. So we are covering that gap with medium-term loans from international banks.

That's the reason why the number of loan-to-deposit ratio change. But again, in our Colombian operation, we have a ratio of loan-to-deposit at around 100%. The situation is in our international operation because it's mainly driven in US dollars and we have to use the international facilities.

That's the reason why we went to the market with BCM, and we raised money from Banagricola a year ago, and we raised money from Banco Agromercantil two years ago.

Nicolas Riva, Citigroup.

Thanks, Jose Humberto, for taking my questions. My first question is on capital. Your Tier 1 increased 30 basis points quarter-on-quarter; now it's 8.5%, which is the midpoint of your guidance of 8% to 9%. And the increase seemed to be driven by a reduction in the risk-weighted assets, which were down 2% quarter-on-quarter.

Now, I know that loan growth was quite low quarter-on-quarter, only 1%. However, I wanted to know what was the reason really for the reduction in the risk-weighted assets on a quarter-on-quarter basis.

And then my second question on tax is: the structured income tax rate has been quite volatile in recent quarters, 49% in the first quarter, 32% in the second quarter. And overall this year it has been up quite substantially from last year, which was 20%.

So I wanted to ask what's driving the volatility in the structural income tax rate, and also what's the guidance for the tax rate for the second half of this year. Thanks.

Thank you, Nicolas. Yes, the reason why the risk-weighted assets reduced is because the [DIR]. Remember that we allocate part of our liquidity in -- 7% of our assets is allocated in the investment portfolio, mostly in sovereign Treasuries. So we are using less DIR, and that's the reason why the number increases in terms of Tier 1, which implies that we are using our capital in the best possible way and trying to allocate in the best possible way. And you'll see us try to maintain that number again, 8% to 9%.

The second question regarding taxes, remember that the first quarter we were impacted because of appreciation. The FX rate came from COP3,150 to COP3,000. That was appreciation of the currency.

Very important; that affects us in terms of taxes. So for the year, the guidance is we are expecting a tax rate base of 38%, assuming that the FX will be kind of stable. Which means we believe, as our Chief Economist said, that the FX rate will be at the end of this year at the level of COP3,000.

If it is what it is, COP3,000, the tax rate base will be 37%. But if something happens in terms of appreciation or depreciation, that will change the tax interest rate.

Catalina Araya, JPMorgan.

Hi, yes. Thank you. Just my quick question is following up on consumer lending. I was surprised by the increase in the acceleration of consumer loans, which this quarter grew around 19% year-on-year versus only 8% year-on-year in the first quarter. You said at the beginning of the call that in terms of risk you're being conservative, especially in the consumer segment; but we see this huge -- or accelerating in growth and NPLs increasing 20 basis points.

So I want to know, understand, where this growth is coming from.

And then my second question, just following up on bancassurance, you talked about 6 million clients in Colombia. How many of these clients have insurance products? Thank you.

Thank you, Catalina. Regarding your first question, what happened with consumer loans is we decided to go to the high-income individuals. We use a new tool inside the bank which is analytics. We were right now very efficient in the approval process of those population; so as a result of that, we increased the level of loan portfolio for those individuals.

Also we are offering them more tenure. Instead of lending for one year, we are lending for two or three years.

But as you mentioned, Catalina, mostly focused on high-income individuals in order to avoid deterioration of the loan portfolio. And remember that deterioration of the loan portfolio, part of it is seasonal; the other part is because of the Panamanian operation; and the other part is because some corporate clients. It's not related mostly to the consumer business; it's related for the whole range of business that we are offering.

So the answer is, we were very focused with the high-income individuals and we tried to take advantage of that and to lend them more money.

Jose Humberto let me -- Catalina, let me precise a little bit to what are our expectations around loan growth. As we said, we expect our book to grow at around 10%. How do you divide that growth?

Mortgages are going to grow 12%-plus, so that's going to be the leading part of the portfolio. Commercial loans will grow around 8% to 10%; and as we mentioned, there are some corporate projects, infrastructure in Colombia, and other corporates in-country, so that part of the book will grow between 8% and 10%.

On retail, it's going to grow around 5% to 6%. So we are expecting that retail part of the business is going to grow at a pace that is going to be lower for the next of the year.

Also remember, Catalina, that 58% of our loan book is basically commercial loans. So we're talking about -- the loan growth will be basically on that segment.

Regarding your second question of bancassurance, out of the 6 million clients we have right now, 800,000 clients are using bancassurance. So you see a huge potential in growth. That's the reason why we believe that the number of growing at a pace of 20% will be sustainable at least for the next two years.

And let me expand a little bit on that. We have been building a strategy around insurance for the last three to four years, and it's a business that is growing at a very good pace. Insurance penetration in our countries is very low. But we have customers and we have a distribution network that is very powerful, so we are taking that product on our distribution network and the results have been very good.

We expect that pace to continue since we see a very good demand for this kind of product not just in Colombia, but as we mentioned before in the other countries that we are present.

(Operator Instructions) Neha Agarwala, HSBC.

Hi, congratulations on the results, and thank you for taking my question. I would like to go back to the tax rate for the year. You started the year with a tax guidance for the year of 26% to 28%, so now that has changed to 38%. I just want to clarify that.

And given that the statutory rate for this year is 40% and next year it's going to increase to 42%, would we expect a similar increase in the effective tax rate for the years going forward as well? Thank you so much.

Thank you. The reason why we are moving from 26%, 27% of tax rate to 37% is because of a combination of factors. First, the number of operation is growing in Colombia. We are obtaining gains because of the operations, so we believe that will imply more taxes.

Second, because -- remember then we had a tax reform two years ago in which we are assuming the tax is growing 9% marginal; this year we will be growing 11% marginal. So that's the reason why the number jumps to 37%.

And your second question, would you please repeat it? Remember me; the second question was --?

Yes, the [incentive] statutory rate for this year is 40%, and your effective tax rate you are guiding for the year is around 38%. Next year the statutory rate would increase to 42% under the tax reform.

So what should we increase -- a similar increase in the effective tax rate as well? And what is the expectation for the years going forward?

Yes, I'm sorry about that. Probably next year we will talk about it from 37% to 39%. Obviously, all of that depends of FX condition, because the variations affect us in terms of tax. But the answer is, we'll go from 37% a year to 39% 2017.

Sebastian Gallego, Credicorp Capital.

Hi. Good morning, everyone. Thanks for the question. Just following up on the NIM side, but going to 2017. First, what's Bancolombia's view on any potential hike rate by the Fed? And how is this going to affect also the cost of funding and the NIM potentially, seeing also lower interest rates in Colombia by the Central Bank? Thanks.

Yes, we talk about the local situation; we talk about what happened with inflation and what will happen again with inflation next year. That will depend the interest rate of the Central Bank.

Again, if the interest rate of the Central Bank goes down, the repricing of the assets will be faster than the repricing of our liability, and we will feel a compression of the NIM for at least the first -- the whole year during 2017.

But as always happens also, we will be benefiting because of the marginal funding cost also will be reduced. So at the end of the day, in terms of local currency we are expecting to sustain the NIM around a level of 6% to 6.1% at the current level. We are not expecting neither goes up because interest rate hike is done; but we are not expecting too it goes down because we will do the best effort to maintain funding under control.

On the US dollar universe, obviously if interest rate goes up -- again, will happen exactly the same. The LIBOR will be up, the spreads will be maintained, and we will do exactly the same on the liability side.

So it's not a function of what happened in terms of the interest rate in the US. It's a function that the way we will structure the funding to attain the business in both currencies, in local and US dollars.

Jose, if I can add something about that, is that actually we expect that the tightening cycle in Colombia is going to be ending soon. And we actually believe that there is going to be a space in time in which monetary policy will remain stable, because basically we have a still very high inflation rating, so we don't foresee that change in cycling the monetary policy will occur anytime soon. I mean that downward trend in rates, in our opinion, will take a while to occur.

We have time for one more question. Natalia Casas, Ultraserfinco.

Hi; thank you for the call. I would like to know a little bit more about the efficiency ratio. What do you expect about the rest of the year? It will be under 50% again?

Okay, Natalia. Regarding efficiency ratio, over the -- it's a function of not only expenses, also the income ratio. And it's behaving very well.

You see the expenses growth were 20%. Out of that 20%, 7% were Banco Agromercantil, the new operation that we have in Guatemala. And if you do the math, the other expenses, 40% are in US dollars. With the valuation of 12% during the last year, we are talking about 5% because of FX variation. That means then we are in the growing of expenses at a level of 8% to 9%.

And this is our guidance and we are doing our efforts internally to maintain the number 8% under control. How we are doing that? Basically, try to, for example, in terms of business, using in a more efficient way the distribution channels, different branches as Juan mentioned at the beginning of his speech.

Maintaining under control the number of projects. We are not growing the branches; we are trying to move forward using different channels with lower cost. And because of that, I would say that we will be able to sustain that number, 8% expenses growth, this year.

At this time we have no further questions. I'd like to turn the call back to Juan Carlos Mora for closing remarks.

I would like to thank you for taking the time to hear our conference call and to be with us. We reaffirm that we are very happy with the overall results and that we keep working on maintaining the profitability and the results of the Bank. If you have further questions, don't hesitate to contact our IR team, and hope you see in our third-quarter conference call results. Thank you very much and have a good day.

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