Grupo Cibest SA (CIB) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Bancolombia's Fourth Quarter 2016 Earnings Conference Call. My name is Hilda and I'll be your operator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session.

(Operator instructions) Please note that this conference call will include forward-looking statements, including statements related to our future performance, capital position, credit-related expenses and credit losses. All forward-looking statements whether made in this conference call in future filings, in press releases or verbally address matters that involve risk and uncertainty.

Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy, and various other factors that we described in our reports filed with the SEC.

With us today is Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Jaime Velasquez, Chief Strategy and Finance Officer; Mr. Jose Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mr. Humberto Hernandez, Chief Accounting Officer; Mr. Alejandro Mejia, Investor Relations Manager; and Mr. Juan Pablo Espinosa, Chief Economist. I will now like to turn the presentation over to Mr. Mora, Chief Executive Officer of Bancolombia. Please proceed, sir.

Good morning, everyone. It's a pleasure to be here with you today to comment on the performance of Bancolombia during the fourth quarter as well as the year in general. I want to start by highlighting the solid results of Bancolombia during 2016. The net profit of COP2.8 trillion, represented an increase of 14% as compared to the previous year. Several reasons explained the good results. The strong operational performance of Bancolombia during the year and in particular our intermediation business was reflected in the net interest income. After provisions, it grew by 25%, driven by several factors. Higher interest rates on loans with a focus on maintaining funding cost at low levels. This led to NIM expansion coupled with volume growth in the Colombian operation. This trend confirms our previous conference calls' expectations and was in line with our forecast from the beginning of the year. Provision charges were mainly due to some segments and vintages of customers and SME loans. Although, we had some cases of corporate clients that defaulted and therefore required additional reserves.

Nevertheless, the growth in net interest income was able to absorb this higher cost of credit which was in line with our guidance for the year of 1.8%. On the fee front, we continue seeing a sustained growth trend, result of the increased number of transactions and new products that we have promoted over the last years. Cards and insurance distribution remained the top contributors to our fee revenues. For the year 2016, the cost to income ratio was 51%, lower than the 54.6% of 2015. In particular, we are undertaking initiatives in digital transformation along with developing channels that allow us to deliver our products and perform transaction in a more efficient way. The combined effects of higher revenue and strict cost controls were instrumental to achieving these results.

On the tax front, we experienced volatility due to several reasons that we will elaborate in a few minutes. In this front, we managed to minimize the tax burden for the corporation and despite increasing statutory rates, we ended the year with an effective tax rate of 30%. As we have said during the year, we have been able to build up capital organically. This was the result of retained earnings and a more efficient allocation and distribution of assets. The 9% Tier 1 at the end of the year was 150 basis points above the level that we had one year ago. Additionally, we expect to retain a significant portion of 2016 earnings which will [enhance] our capital position even further. We feel very comfortable with this level of capital because it is above the range that we have defined to operate the bank. On the economic front, 2016 was a year with many macroeconomic challenges. The GDP growth in Colombia was slow and coupled with high inflation levels.

The Colombian Central Bank acted promptly at the beginning of the year to curb inflation and finally in the last quarter, we started to see a change in inflation trend. After a period of interest rate hikes in the first half of the year, the bank cut rates by 25 basis points in December to 7.5%. In 2017, we should expect additional cuts as a result of the convergence of inflation towards the target range. The economy saw a positive trend in the trade front as the deficit was reduced and the current account deficit went from 6% to 4.5% at the end of the year. Looking forward into 2017, we will focus our efforts on the following aspects. Profitable growth, selecting the best risk adjusted returns, the main goal is to maximize net interest income, while keeping the past due loans [and] provision charges as low as possible.

Focus on our Panamanian, Salvadorian and Guatemalan operations through efficiency improvements on fee generations; innovation and digital transformation in order to expand our capillarity and capacity to distribute products in a more efficient way. Funding the bank at the lowest cost with the goal of mitigating the decline in net interest margin; continuous seeking efficiency gains by improving the distribution channels, the branch network and the productivity of the bank's infrastructure. Having said these, now I will turn the presentation over to our Chief Economist, Juan Pablo Espinosa. Juan Pablo?

Thank you Juan Carlos. Now, I'll ask you to go to slide number 3 in the presentation. After experiencing one of the most severe external shocks of the past decades to the fall in oil prices during the second half of 2016, the Colombian economy bottomed and managed to adjust its widening deficits and to moderate the acceleration of prices. In terms of growth, we foresee a modest recovery in 4Q 2016. Our growth forecast for this period is 1.7%, 0.5 percentage point higher than previous quarter's sprint.

Regarding prices, 12-month inflation has receded from its peak of almost 9% in July to 5.75% in December 2016. This correction reflects the fact that this (inaudible) such as only a phenomenon and the pass-through of depreciation to consumer prices have dissipated. A key element at the end of 2016 was that Congress approved the tax reform. It will generate additional revenues that will allow the central government to meet its deficit targets for the following years. Furthermore, it contains several elements that will stimulate private investment over the medium term.

For 2017, we foresee more constructive macroeconomic conditions. The economy will benefit from higher terms of trade, a gradual rebound in real incomes and a better performance of key sectors such as mining, agriculture and utilities. As a result, we forecast that GDP will expand by 2.3% this year. However, this forecast implies that the economy will still expand below potential.

On the other hand, after accelerating in the short term, we expect inflation to keep adjusting downwards as demand pressures will remain absent. However, the increase in the general VAT rate and the persistence of high inflation readings, make it highly likely that inflation will close this year above the target range. Our point forecast for December 2017 is 4.3%. In terms of monetary policy, inflation prospects point less contractionary conditions going forward. After some pauses in the next few months, we expect the Central Bank to cut its reference rate to 6.25% by the end of the year. Finally, we forecast that thanks to the rebound in exports, the current account deficit will adjust from 4.5% to 4% of GDP, which implies less external financing needs. Accordingly, the USD/COP would (inaudible) this year between [29,000 and 30,000]. After this overview of the economic environment, let me turn the presentation to Jose Humberto Acosta will discuss the bank's results. Jose?

Thank you, Juan Pablo. Good morning, everyone. I would like to start the presentation of 2016 results mentioning three topics that impacted the financial evolution of the bank. First, we completed the sale process of our stake in Tuya. The consumer credit unit that we run with Exito. Since the sales announcement, we have stopped consolidated it and started treating that operation as discontinued. With the completion of the transaction, we totally eliminate the contribution of Tuya and recorded an one-off gain of COP161 billion. Product of the evaluation of our remaining stake in Tuya. From now on, our stake in Tuya will be reflected in the equity method on dividends line. As a result, the economics of these joint venture remain unchanged in terms of fee income generation for both companies, Exito and Bancolombia.

Second, we also completed the integration of leasing Bancolombia and Bancolombia S.A. With these transaction, assets and liabilities of leasing Bancolombia were transferred to Bancolombia and therefore on a consolidated level, we had some minor reclassification of loans. [Although bank offer] simplification of the legal structure of the group, there was no material impact in the consolidation financials. Third, the tax line percentage volatility during the year, mainly explained by these factors. First, the FX variations in particular during the first quarter. Second, in the last quarter of that year, we had a significant reversal of income taxes due to the utilization of fiscal credits.

Finally, at the end of this year, a new tax reform was approved by the Colombian Congress. The main goal of this reform is to balance the tax burden between corporations and individuals and permit the fiscal sustainability of the government. The year-end Bancolombia's financial statements reflects the impacts of different -- of deferred taxes due to lower statutory rates in the coming years. The effective tax rate for 2016 was 30% and we forecast that will be between 35% and 37%. On slide number 4, we see the evolution of assets and their composition. Today, peso-denominated loans represents 62% of the total loan portfolio of Bancolombia while dollar-denominated represents 38%. The Colombian peso appreciate 4.7% over the last 12 months and depreciate 4.2% against the US dollar during the fourth quarter.

Total assets grew 2% year-over-year impacted by the general [depreciation] of the peso during this year. Regarding loan book in local currency, loan portfolio growth was primarily driven by mortgages and consumer loans, which continue to exhibit sustained growth at around 10% for the year. However, growth has stalled to some extent due to the year-end uncertainty regarding the tax reform and uptick in inflation of 2017.

In the consumer loans, we executed our strategy to target high-income individuals and segments with low indebtedness levels while avoiding the riskier segments of the population. The main input of our scoring model is the track record of the client along with the payment capacity. In relation to the dollar-denominated portfolio, it is important to highlight that the volume of dollar loans in Colombia declined during the year. It was at around 25% declining.

In the meantime, the Central American operation posted a moderated growth in loans, which offset a decline in Colombia. The international operational grew at around 4% in US dollars. Moving on investments, the average yield to maturity for the investment portfolio is 6.5% and the duration remains low at a level of 17.3 months. The bank continues to prioritizing liquidity and secured funding while maintaining a structured portfolio that limits exposure to higher volatility instruments.

We continue to see opportunities in sectors such as manufacturing, touring, agri business and infrastructure. Many of these sectors have been positively impacted by the weak peso. That is why, we believe in our growth forecast of 8% to 10% in 2017 for our total loan book. We will still focus our growth in the less risky products as we want to maintain a very healthy balance sheet. Now on slide 5, we present a snapshot of the credit quality at the end of the year. Credit quality improved slightly with past due loans to total loans dropping at a level of 3.3%. Also, the coverage ratio grew to 126% due to a higher provision charges.

Some loans that were deliquent have continued to deteriorate to some extent. However, new originations have been less risky and we have had fewer issues with these. Commercial, consumer and mortgage on the 90 basis standard show similar credit metrics to the prior quarter, an indication that indeed our guidance was accurate that 3Q of last year marked the worst part of the credit cycle. Having said these, we build our knowledge that the infrastructure sector has had some noise with the specific cases relating to the bridge and the project in [Sol Tramo Los]. Currently, we are assessing the outcome of the change in contract and working closely with the National Infrastructure Agency to restructure the operation.

Our main goal is to secure the money that we have lend to the project and receive it back in the designated schedule. We are paying special attention to new originations of corporate and infrastructure loans, setting up high underwriting standards and defining our risk criteria with a conservative approach. The most important part of the balance sheet regarding the credit quality and coverage is the fact that Bancolombia has today 190% of coverage ratio. We are comfortable with the 90 day coverage ratios above 150%, because that warranties that the bank has enough cushion to absorb any potential default of our client. Slide number 6 shows the provision charges which were COP2.7 trillion for the year and COP772 billion during the quarter. Provisions for 2016 were [62%] high than 2015, but still within our risk appetite and the cost of risk of the year was at a level of 1.8%, which was in line with our expectations. As we share with you in our previous conference call, the cost of risk for the year was higher than in 2015 due to a deterioration in consumer and SME loans and some particular issues with corporate clients.

The provisions made during the quarter were specifically designated to cover that vintage [that paved] that have deteriorate and runoff to over higher levels of delinquency. New past due loans was COP347 billion, down from COP892 billion in the last quarter, which shows an improvement in the quality trends. Our strategy right now is to be more selective with the clients that meet our risk reward criteria and set some stringent underwriting standards, aiming for keeping the cost of risk under control. We forecast cost of risk for 2017 similar to 2016 getting a level between 1.8% to 2%. Moving to on to slide number 7, we see the evolution of net interest income and funding cost along with the funding performance. As we have seen through the year, NII growth have been possible through the combined effort of two fronts. First, optimizing the funding terms and structure in order to keep cost as low as possible, and second, pricing loans at higher spreads. NII grew 34% year-over-year and 28% in 4Q of last year compared to the quarter of 4Q 2015. As we were able to maintain margins at a level of 6%, while keeping total funding cost very stable through the last quarter of this year.

In December, the Central Bank lowered rates by 25 basis point, which we believe is the first step in gradually easing the monetary cycle. We forecast rates [scanning] 2017 at a level of [6.25%] as long as inflation is not impacted by any significant external factors during the year. As shown in the graph on the bottom right, while DTF rate increased 164 basis point during the past year, the funding cost increased only 97 basis points. These dynamic caused NII growth. Similarly, the Central Bank increased rates by 170 basis points during 2016 to respond to factors including the transportation projects in July as the [lean] seasonal effects and pass-through effects of exchange rate as well.

During 2016, we have focused our efforts not only in keeping the funding cost as low as possible, but also increasing the average time to maturity of the stock of liabilities in particular time deposits and long-term debt. The outcome of the strategy has been the stability in the lending NIM that we saw in the fourth quarter, even with the reduction of the repo rate. Moving onwards 2017, we believe, we can sustain net interest margin during the first half of this year and forecast that volumes could grow better than expected if the economy were to pick up in the second half of the year.

We remain cautious with regard to liquidity management and believe once again our competitive advantage in funding brings through, as we continue to have the lowest funding cost in Colombian banking industry. Remember, our savings and checking accounts represent over 40% of the total funding structure which places us as an unique position in the system. Turning to page to slide number 8, we show the net interest margin. The year 2016 was very good for NIM evolution as it expanded 90 day basis points. The main reason for this expansion was the higher rates on new origination, as well as the reprising of existing variable rate loans coupled with relatively stable cost of funding. During the last quarter, we saw a small reduction in the reported net interest margin [that ended] at a level of 6%, 20 basis points below last quarter explained by a compression in investment net interest margin. Let's remember that security represents 7% of total assets, and part of this of our portfolio of investment is in US dollar, where Central American sovereign bonds that were impacted because of the volatility during the last quarter. In the lending business, we saw stability of NIMs as we continue to make disbursements at competitive spreads in marketplace.

Our guidance for 2017 is to maintain the NIM at a level of 6%, because of combination of two factors. The NIM for the local currency will compress in between 10 bps to 15 bps, but the NIMs of our international operation in dollars will increase assuming that the interest rates in the US market will increase. We are focusing our efforts in keeping the deposits at low cost as possible, in particular, savings accounts as a vehicle for our clients to keep their money within Bancolombia's pipeline, current accounts which benefit from our transactional capacity and CDs as a mechanism to provide the stability of funds and enhance the maturity profile. The evolution of fees is presented on our slide number 9. This is a front where we continue making progress as we can see in recent results. During the fourth quarter, total fees increased by 5.4% and they grew 16% as compared to the fourth quarter of 2015. The main services and products that led the fee growth were banking and ATM service as well as debit and credit card fees.

We are experiencing sustained growth in cards and users in Colombia due to rising income of individuals and also the promotion of plastic as a method of payment. We continue to see more credit and debit card transactions as a result of our commitment to promote the use of electronic methods for in-store transactions. The number of credit cards grew 5% during the year and debit grew 14%. 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 a 24% market share of the system billing and 70% of the number of cards outstanding in Colombia. 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 sustained performance of insurance and distribution fees which generate COP98 billion during the last quarter and grew 29% year-over-year. Fees represent [17%] of operating income in the last quarter, which is a good share since these are transactions that do not require a significant amount of capital compared to the lending business.

These fee initiatives are not limited to Colombia, and we are focusing our -- steadily growing the credit card segments in El Salvador, Guatemala and Panama. We highlight the relevance of the JV with like minds which we have marketed in our all geographies and that provides an interesting avenue for growth and an increase of banking penetration in the region. Finally, we forecast a fee growth of 10% to 12% for 2017.

Now moving to slide 10, we present the evolution of expenses, which grew 18% during this year. It is necessary to mention here that the consolidation of Banco Agromercantil Guatemala contribute with 7% out of this 18%, and the FX variation contributed with 3%. Therefore, the organic growth in expenses was 8% during this year, which was in line with our forecast.

The cost to income ratio for the year was 51% below the 54.6% at the end of 2015. This decline was mainly explained by the good revenue performance and strict cost control initiatives. Our target is to maintain this number at the same level at the end of this year. Operating expenses consist primarily of personnel expenses and administrative expenses which are being kept under control in their respective currencies.

As we stated last quarter, Bancolombia is committed to developing lower cost channels based on technological innovation and optimal consumer segmentation, as we strive to grow expenses in line with our nominal GDP. This strategy related to digital innovation looks to not only control and lower expenses, but also to create better pricing strategies, commercial synergies and a low sales teams to deliver better service and products in efficient and revenue boosting manner. Our guidance for 2017 is an increase of expenses in between 6% to 8% on organic level, which we believe will be key in obtaining a strong profitability levels. Moving on slide 11, we see the evolution of capital composition of Columbia. The Tier 1 ended at a level of 9.02%, 452 basis points above the regulatory minimum of 4.5%. This is a very good ratio and most important, the continued growth in the metric lead us to reaffirm that the fact and we are in the period of capital accumulation. If we consider a dividend payout of one-third and appropriate the remaining portion of earnings, we estimate that in March of 2017, we can see a Tier 1 ratio close to the level of 10%. As we have said before, we look to operate the bank at that optimal Tier 1 ranging 8% to 9.5%. For the Tier 2 ratio, we ended the 4Q 2016 with 4.2% for a total BIS ratio of 13.3% above the regulatory threshold of 9%. Slide number 12 shows the return on assets and return on equity of the bank. The return on equity for the quarter was 22.1%, and return on assets was 2.3%.

This solid return is explained by an excellent growth of NII during the year coupled with a focus on efficiency and [fee] generation and the specific case of the taxes. The return on equity for 2016 was 14.5%, which marks an improvement over the last year and demonstrates that the performance based success of our business through the year. The effective tax rate for the year was 30% which added to high provisions is downside for overall profitability. Nevertheless, we are pleased with the number and we expect to continue on upward trend. We expect to continue growing net income although at a moderate pace, while maintaining a solid solvency indicators for the rest of the year and improving profitability. Our estimated return on equity for 2017 will be in the range between 13% and 14% while the medium term target continues at a level of 16%. Finally, the final message that we want to send is this is a very positive and very strong year in terms of the business lines. NII, NIM and fees during the four quarters remain solid and growing at a very good pace.

We obviously had some volatility on the tax burden and expenses, but at the end of the day, the numbers remain strong. So I want to recap, first NII generation was solid through the year. Second, fee generation was above our forecast which proves once again that the bank has [fiduciary finance from time base]. Third, our efficiency level of 51% is a proof of our commitment to control and tighten expenses. Four, the provisioning level has grown due to several macroeconomic upgrade cycle factors, but it is important to mention that cost of risk ended the year in line of our guidance of 1.8%. Despite the volatility tax rates, on a quarter-to-quarter basis, the effective tax rate for the year was 30% better than initially estimated. And finally, capital accumulation continues to solidify our capital position.

After presenting these slides and discussing our fourth quarter results, I would like to invite our audience to ask any questions you might have and we are gladly to take it from there. Thank you.

(Operator instructions) Tito Labarta, Deutsche Bank.

Hi, good morning, thanks for the call. Couple of questions. I guess first on expenses. We did see a big pickup in expenses in the quarter. I think, there was additional maybe bonuses paid given the high ROE for the quarter, but that was partially due to the negative tax rate. So, I want to understand what will be more recurring level of expenses going forward? I know you mentioned for the year if you strip out Banco Agromercantil and the appreciation of the currency, it would be around 8%. Is that the kind of growth that we should expect going forward or it could be even maybe below that given the additional bonuses paid in the quarter and then the second question I guess is on the tax rates, I understand with the tax reform, the tax rates coming down, but it just still be pretty high in 2017, I think around 40% or maybe just below that. So what would be an effective tax rate that we should expect, I guess for this year and next year? And do you think it will come down to that 32% in 2019? So if you could give some more color on that? Thank you.

Thank you Tito. Yes, we are expecting for this year 2017, an increase of expenses at around 8%. As you mentioned, that's correct. The pickup of expenses in the fourth quarter was [explained by] those factors that you mentioned. Again, the guideline will be 8% for 2017, and we don't expect any major change on the expenses front. Second, the effective tax rate, yes, was 30% for 2016. We expect 35%, at around 35% for 2017. And maybe the same level for 2018.

Thiago Batista, Itau BBA.

Hi guys, thanks for the completely presentation. I still have one question on loan growth. During the presentation, you already mentioned most of the guidance for the [main] lines of the business in 2017, but you didn't mention anything about the loan growth, could you share with us your loan growth expectation for this year, divided by the [main] segments of the bank?

Thank you, Thiago. Yes, the loan growth that we are expecting for 2017 will be at around 7% to 8%. In our geographies, the upper side of that range will be the Colombian operation maybe reaching the level of 9% and on the lower side of the range will be our operation in Banco Agricola that that will be between 3% to 4%. In corporate loans, we expect a growth of 9%, in consumer and SMEs, we are expecting a loan growth in Columbia operation at around 10%.

Alonso Garcia, Credit Suisse.

Good morning everyone and thanks for taking my question. I would like to touch base again in net interest margin, considering the lower Central Bank rate you are anticipating and also in terms of the kind of the mix you're expecting for loan growth in terms of segments and currency, and what is your forecast for net interest margin this year and what kind of margin on that securities is embedded in that forecast? Thank you.

Alonso, basically the NIM that we are expecting for the treasury business, you know, this is very complex to talk about it, but we are expecting making a NIM based on the assumption that the sovereign papers will be at a level of 7% [based] on the consolidate level of 6%, we are expecting a NIM of at around 1%. Regarding the NIM for 2017, what will happen in Colombia, there will a slightly compression of the NIM because interest rates will go down. So we will expect that compression of the NIM of 10 bps. As we mentioned on the speech, previous in the US dollar lending, we will be expecting an increase of the NIM because of the interest rate and the asset sensitive condition that we have in our internal operation. Basically, what we are doing right now is to promoting the increase of the loan portfolio in consumer and SME segments. Meanwhile, the corporate loans remain at a level of 7%. So you'll see in the next coming years, maybe slightly change on the composition of the loan portfolio, take it [and back that] of the momentum of the economy. So our efforts in Colombia operation will be focused on [retail] SME business as well as [certain] Banistmo operation in Panama.

Ernesto Gabilondo, Bank of America.

Hi, good morning and thanks for taking my call. Two questions on my side. One is given the new tax reform is likely to affecting the [bid loss], what are you expecting for the consumer loan growth and for the cost of risk, do you expect to create additional provisions related to Electricaribe or [oxbridge]. And can you share with us Bancolombia's exposure in both cases. My second question is about the tax reform, I just want to know if this has excluded the wealth tax and I would like to know how much do you expect it, this could strengthen the capital ratio?. Thank you.

Thanks, Ernesto. The tax reform, no doubt, that will impact in the consumer segment, at least for the first half of the year. That's the reason why we are expecting, and we are telling you that the, our guidance of cost of credit will be 1.8% to 2% assuming some deterioration at the consumer front, but we believe that the second half of the year, the number will be much better in terms of that. Regarding corporate loans, yes, we have been doing provisions regarding some specific cases, and again, that 2% that we are telling you about cost of risk is including additional provisions that probably we have to do in the corporate segment. Regarding the wealth tax, that would be the final -- the first quarter, you'll see the final quarter of wealth tax, but we don't foresee any other tax regarding corporate tax for 2018 neither 2019.

Maria Barriga, Davivienda Corredores.

Hello, thank you very much for taking the results. I had one question regarding El Salvador's operation, which is the rating agencies have taken negative actions against the country's rating. So I was wondering if a further rating could impact your operations there or [unchain an impairment]. Thank you.

Thank you. Regarding our Salvadorian operation, we are focusing there in profitability. As I mentioned previously, loan growth will be very, very low at a level of 2% or 3%. The only impact that we receive from the current situation in Salvador, that was the evaluation of our securities portfolio that we have in sovereign bonds in Salvador, but if you double check the numbers of El Salvador the return on equity remains at a level -- on a very stable level. We don't foresee any specific concern regarding liquidity. We -- the last two years, we have been working diversifying the funding structure. You see [Florida], we went to the market two years ago with a bond issuance. So, at the end of the day, the operation remain stable. We are trying to focus to maintain the book in a very healthy way and you see that the level of provisions there it is very high and the level of past due is under control.

(inaudible)

Hi, thank you very much for taking my questions. I have two doubts that I will be glad that you help me to solve. My first question is regarding your operation in Central America. Can you tell us more about how is the operation going there? And my second question is regarding asset quality, do you have any concerns about Bogota massive transport companies and small or medium enterprises here in Colombia?

The operation in Central America, the growth there is still low. We are there promoting the products we are replicating our experience here in Colombia with services focusing on retail and individuals trying to implement products, technology. So, we see a huge potential of upside on the retail business. On the corporate business, we are taking advantage in Panama, for example. The loan growth there is, it's positive. So at the end of the day, the next two, three years will be focused there on efficiency and try to improving operation, basically helping with the loan growth. Regarding the asset quality and the Bogota names that you raised, we have right now enough level of provisions and this is a very -- we are monitoring every month the situation. As again, the 2% will reflect our idea about how we will increase the provisions for 2017.

This is Juan Mora. We are also working very closely with the authorities of Bogota and also with the operators of the massive transport system to work out the solution for the -- that of the system and as Jose Humberto mentioned, meanwhile we have enough reserves to cover the risks while we are in the process of solving the situation.

Neha Agarwala, HSBC.

Hi, I have a question on the deferred tax assets. Have you seen or do you expect to see any impact from the revision in the tax rate on your deferred tax assets and should that affect your effective tax rates in the coming years in any way? Thank you so much.

Thank you, Neha. Yes, our tax rate, you see was 30% in 2016, we expect 35%, 36% in 2017. And we will expect a kind of same level for 2018. You know, the tax reform, you never know what's happening. There is medium term [loan], so our expectation is to maintain almost the same level for 2017 and 2018. Again, 35% to 37%.

Edgar Romero, BBVA.

Hi, good morning, thanks for the call. I have two questions, the first one is how much can we expect Bancolombia to provision in [Puerta el sol dos] during the first quarter 2017, and the second one is, how much does Bancolombia have committed in financial closings in 4G road projects just to expect, how much the bank will cash during 2017. Thanks.

Edgar, thank you for your question. Regarding Puerta el sol dos, we are ahead on provisions of what the law requires. So we are very comfortable with the level of provisions that we have right now and we don't expect during the first quarter, any change from that. And we also expect that the situation is going to evolve in a way that we can find a solution on that project that is going to help the continuity of the 4G projects in Colombia. So we are very optimistic and as a matter fact there are news today about how that situation is going to be solved. And as a matter of fact, we don't see any additional provisions. Regarding our commitments on the 4G projects, I just want to say first that 4G and infrastructure projects are very important for Columbia for the development of Columbia and we at Bancolombia and also as a financial system had committed to promote the development of the projects. And I think that that should be the case going forward. In the case of Bancolombia, so far we have commitments around COP5 billion and those commitments are going to be completed in the next four to five years. And as we mentioned during our speech, we will keep analyzing any project and how they are going to develop in the future, but we are optimistic that the way that Puerta del Sol is going to be solved is going to mark the track for the development of future projects on 4G.

Sebastian Gallego, Credicorp Capital.

Hi, good morning, everyone. Thanks for the presentation. I have two questions. The first one is regarding efficiency in Central America operation. Could you share with us current level of efficiency in each of the operations where you have a bank and also could you share with us the target for each operation in terms of cost to income ratio? And the second question from my side is also on asset quality. [Juan] you mentioned your guidance of 1.8% to 2% in cost of credit, but could you share a low-case scenario for this year? Thank you.

Sebastian, yes. In terms of efficiency, we have a very mature operations in El Salvador for example which the level is below 50% of efficiency, but we have, as you know very well, our, if I may say brand new operation in Banistmo. We have to implement new systems, we have to implement new procedures. So, the level of efficiency there is still very high level. So, in both case, Banco Agromercantil, the idea is in Guatemala and Panama, try to reduce that level and that will be a very long run. So, we have to do it in the renewed target of two to three years to take a level of the three operations at least at a level of 50% to 55% efficiency level. That's the idea in terms of the international operations along with the growth and increasing the NII. Regarding asset quality, we have an scenario of positive scenario assuming that some of the corporate case will run in a better position that the cost of credit will be -- again the range will be 1.8% to 2%, but could be 1.7% in a very optimistic scenario.

We have no further questions at this time, do you have any final remarks?

We would like to thank you for attending this conference call and your interest on Bancolombia's results. We expect 2017 to be a year in which we continue to consolidate our operations in Central America to continue the trend on gaining efficiencies and looking for ROEs in the line that we mentioned. Again, thank you very much for your interest in Bancolombia and we hope to see you soon and expecting to be with you on the first quarter 2017 results. Thank you very much.

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