Grupo Cibest SA (CIB) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Bancolombia's First Quarter 2017 Earnings Conference Call. My name is Sylvia, and I will be your coordinator for today. (Operator Instructions) Please note that this conference call will include forward-looking statements, including statements related to our future performance, capital position, credit-related expenses and credit losses. All forward-looking statements, whether made in this conference call and future filings and 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 and services by our targeted clients, 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. Jaime Velásquez, Chief Strategy and Finance Officer; Mr. Jose Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mr. Jorge Humberto Hernández, Chief Accounting Officer; Mr. Alejandro Mejia, Investor Relations Manager; and Mr. Juan Pablo Espinosa, Chief Economist.

I will now turn the presentation over to Mr. Mora, Chief Executive Officer of Bancolombia. Please proceed, sir.

Thank you. Good morning, everyone. We are glad to be back with you today to comment on the performance of Bancolombia during the first quarter of 2017. I want to start by highlighting the consolidated results of the bank during the first quarter. We have operated in a more challenging environment, and that has been reflected in the moderated credit demand and higher provision charges. Nevertheless, our efforts in finding new sources of revenue such as fees and optimizing many processes across the organization have permitted to offset these headwinds and to maintain a solid operational performance of the business. The net profit of COP 609 billion represented an increase of 53% as compared to the same quarter of the previous year.

In general, we see very positive trends in the operational performance and despite higher deterioration, these results are in line with our expectations. I wish to give you an update on our Central American operations. As you know, these operations are relevant component of our strategy to improve overall profitability of Bancolombia. Combined, our operation in Panama, El Salvador and Guatemala represents 25% of our assets and 20% of our profits. The incorporation process of Banistmo and Banco Agromercantil has involved moderation of risk, technology and operational standards.

Now we are focusing our efforts in 3 main fronts. Efficiency gains, in particular in Panama and Guatemala where we have been optimizing the size of the branch network as well as several operating processes.

Fee generation, which today represents around 13% of the total revenues, a lower proportion than what fees represent for the whole group. We see fees as a perfect way to increase profitability while using the capital base of the bank in an optimal way.

Introduction of new products. Connected to the fee generation strategy, we intend to develop new products that we already have in the market in Colombia but do not exist in Central American markets. A good example is the distribution of insurance in El Salvador, which did not exist 5 years ago, and today is the largest contributor to fee generation in Banco Agrícola. Services that we plan to develop include regional cash management services, investment banking and structural finance products as well as corporate trust in the corporate side and asset management, credit and debit cards in the retail front. Finally, we are fine-tuning some aspects such as product portfolio and loan mix in order to obtain a NIM expansion. These initiatives aim to improve the ROEs across the geographies.

Regarding net interest margin, we saw a positive evolution of the NIM during the quarter despite a reduction of interest rates by the Colombian central bank. The NIM expansion to 6.3% was the combined effect of higher spreads on origination of new loans, a very good performance of the securities portfolio helped by interest rate cuts and most importantly, the efforts that Bancolombia has done in the reduction of its funding cost.

The franchise and the distribution network have permitted to cut rates on deposits as the central bank in Colombia has also cut rates. Additionally, we started to see the benefits of the full integration of leasing Bancolombia's operation as the funding for that portion of the business now occurs under the Bancolombia's book. We have been able to reduce the cost of funding with financial institutions and deposits as well, with a positive impact on the overall NIM. We estimate that we have been able to reduce our funding cost by COP 70 billion per year due to these integrations.

Regarding the portion of our loan book in U.S. dollars, we should see a positive impact on NIMs product of interest rate hikes in the U.S.

On the front of the loan portfolio, we have seen a significant past due loan formation which believe -- which we believe is explained by 2 main reasons: first, the corporate loans that reached the 30-day threshold during the quarter; and second, the seasonal effects that tend to cause a higher deterioration in the first months of the year. The most relevant sectors where we saw past due loans formation are those related to SMEs and some larger -- large corporate loans and mortgage loans. And we have seen the third quarter of last year, we have accelerated the pace of provisioning for these loans, with a cost of credit above 2% during this first quarter. This provisioning strategy aims to maintain a prudent coverage ratio of at least 150% on the 90-day basis.

We also believe that we will continue some past due loan formation in the second quarter, and we intend to keep the provisions around COP 770 billion to COP 780 billion for the next couple of quarters in order to maintain the coverage ratio and the pace of charge-offs. In April and May, we have had some progress regarding particular corporate clients, and we have worked with them to restructure the operations. As a result, we expect an improvement in the credit quality metrics in the second half of this year.

As we have shared with you over the last year, the focus on capital optimization and organic generation of it is paying off as the Tier 1 of Bancolombia has increased steadily over the time frame. The retention of 68% of the 2016 net income during the general shareholders meeting held last March we reached 10.5% of Tier 1. This is a level that provides comfort and permits to have the fuel for future periods of growth. We should continue accumulating capital during this year as the loan growth is moderated and profitability is higher.

Our capital allocation plans for the coming 2 to 3 years consist in using the bank's capacity to generate capital organically and maintain a comfortable level of Tier 1 and using it in our intermediation business. As we have said in the past conference calls, we do not intend to allocate capital to new acquisitions.

Having said this, I would like to continue with the presentation of Bancolombia's financial results for the first quarter.

Now I will turn the presentation over to our Chief Economist, Juan Pablo Espinosa, who will elaborate on the main economic topics. Juan Pablo?

Thank you, Juan Carlos. Now I will ask you to go to Slide #3 in the presentation. The Colombian economy started this year at a slow pace. During the first quarter, GDP grew 1.1%, slightly below our forecast. The 4 activities with positive variations in that period were agriculture, financial services, social services and manufacturing. On the other hand, mining experienced the largest contraction due to the negative performance of oil and metals production. Overall, this behavior reflects the weakness of internal demand which was affected by the effects of the tax reform, especially the increase in the VAT rate and the higher tax burden for individuals.

Other negative factors include increase in unemployment rate and the fact that financial conditions remain tight. However, we continue to predict that activity will gradually gain traction during the year. The main drivers of the change in trend will be the moderation in inflation and the reduction of interest rate. In fact, during the past few months, several leading indicators have had more constructive readings. For example, energy demand, construction licenses, retail sales, industrial production and exports grew in March, while consumer confidence seemed to have bottomed. Finally, outstanding loans are again growing in real terms.

Going forward, we estimate that GDP will accelerate. During the second half of the year, we will see higher expansion rate. Therefore, we keep our 2% growth forecast for the full year.

In terms of prices and interest rates, we foresee that in the next few months inflation will continue to soften, thanks to ample food supply and a positive base effect. However, [after others], we anticipate some payback. Therefore, we forecast that inflation will close the year at 2-point -- 4.2%, above the ceiling of the target range. This will gradually reduce the margin of the central bank for [culminating] its policy stance. We anticipate 3 cuts of 25 basis points for the remainder of the year, so that monetary policy rate by the end of the year will be around 5.75%.

In the case of El Salvador, we estimate that the economy will grow this year in line with its potential rate. After expanding 2.4% in 2016, our GDP growth forecast for the year is 2.1%. This expectation is based on the solid performance of internal demand, which will be supported by strong remittances growth as well as low and stable inflation. In addition, our forecast incorporates the complete negotiations between government and Congress around fiscal measures and the beginning of the electoral cycle that will end with local elections in March of next year. While the payments related to pension liabilities resumed at the start of May, the talks around the fiscal consolidation plan in El Salvador with the support of multilateral institutions are ongoing and are expected to end -- to extend until June. In parallel, the Salvadoran financial sector displays a sound performance, which allow the credit channel in that country to operate robustly.

After this overview of the economic environment, let me turn the presentation to Jose Umberto Acosta who will discuss the bank's results.

Thank you, Juan Pablo. I would like to start the presentation for the first quarter of this year's results by elaborating on the evolution of assets and their composition. We can go to Slide #4.

Total assets grew 3% year-over-year, impacted by the general appreciation of the peso during the year. When analyzing the growth by currency and geography, it was explained by 3 main components: first, loans in pesos in Colombia which grew 10.4%; loans in dollars in Colombia which decreased 10%; and loans in U.S. dollars in Central American operation which grew 7.4%.

Today, peso-denominated loans represent 64% of the total loan portfolio of Bancolombia, while dollar-denominated represents 36%. The Colombian peso appreciated 3.8% over the last 12 months and the same percentage value over the past quarter as well.

Now we -- when we see the portfolio by segment, we see the following. In consumer loans which grew 16% year-over-year, we executed that strategic targeting high-income individuals and segments with low indebtedness levels, while avoiding the riskier segments of the population. The main input for our scoring models is the track record of the client, along with the payment capacity, and this dynamic has also been an important driver of fees. In particular, we have been using data and analytics to estimate credit capacity and offer lines of credit to clients that present attractive risk-adjusted returns.

Corporate loans, which grew 3% year-over-year, had a slower start of the year, and we attribute this trend to low appetite of corporations to undertake new capital expenditure programs. Also, the low GDP growth of Colombia in the first quarter contributed to a lower pace of growth in corporate loans.

Our guidance for this year, we will expect a loan growth at around 6% to 8%.

Next, we can take a look at the Slide 5, where we show key financial highlights for our Central American operations. As we can see, Central America represents today 25% of the total consolidated business. In the last 3 years, the main achievements of our Central American strategy have been implementation of our corporate model to run different entities under a coordinated strategy; introduction of new products that Bancolombia has in Colombia but were not in Central American markets; enhancement of the funding structure of each balance sheet, which is independent for the other operations; enhancements of the capital position of each business; optimization of several processes, along with other initiatives to improve efficiency. We should benefit from higher NIMs in Central America this year, coupled with the greater loan growth in Panama and cost cutting in every bank.

Fees will continue to be a primary driver of revenue because of bancassurance, credit and debit cards as well as structured banking services. We have seen good improvement in efficiency in Banistmo and Banco Agrícola, and we doubled our efforts to bring down the cost-to-income ratio in Agromercantil. This ratio came down in Banistmo from 56.2% to 53.6% in this quarter. We want to stress that improving efficiency in Central America is a key initiative to reach the under 50% goal for the group in the next couple of years. Improving profitability in Central America is management's top priority. Now that we have achieved important milestones regarding its gradual integration and product innovation, we believe we will continue to benefit from Panama's high income per capita and dynamic economy, which becomes evident through the 9% CAGR on loan portfolio over the past 4 years.

Now on Slide 6, we present a snapshot of the credit quality at the end of the year. Credit quality deteriorated with past due loans to total loans jumping to 4.1%, mainly explained by 3 elements: first, Electricaribe moving into the past due category in January; second, deterioration of SMEs in Colombia due to the weather conditions in the agribusiness, logistics problems in the mid of last year and dropping retail sales; and third, a deterioration in credit cards and mortgage in our operation in Banistmo in Panama. Electricaribe, owned in its majority by the Spanish group Fenosa, is been actively intervened by the government due to the fact that it provides basic utility service in the northeast [sphere] of Colombia. This is a lengthy restructuring process, and the outcome will depend on negotiations that we are currently holding with the government and owners.

Ruta del Sol tramo is a relevant infrastructure project in Colombia, where [on the bridge] where part of the consortium developing a highway construction project included in the 4G program. The [unabridged] corruption scandal led to restructuring of this client, and this had an impact on the provisions needed to be made by different banks. We have reached an agreement with the government and stakeholders in this project where we will be paid back the debt, interest and capital going forward and have extended a grace period for the company, which means it is not past due as of the first quarter of this year. The government has mechanism to guarantee the payment of interest to the banks known as (inaudible), which is part of the government's ongoing budgeting to provide financial support for [foragy] projects. We expect payments will be made, and there will be no significant deterioration to our P&L and balance sheet due to this client. However, we have made some provisions in the meantime because of our conservative risk management approach deems it appropriate in the scenarios where clients are being restructured or where there is a renegotiation process for credit payment schedules.

As we stated in the prior quarter on the writing standard for consumer loans tightened notably, and asset quality improved on the 90-day standard. We effectively focused the sales teams on targeting higher-income customers and minimizing exposure to riskier pockets of the population.

We are paying special attention to new originations in the corporate and infrastructure loans, setting up high underwriting standards and defining our risk criteria with a conservative approach. Also, we are using data analytics and advances in credit scoring to go after the best risk-adjusted credits in consumer and growing while improving the credit metrics. The most important highlight of the balance sheet regarding credit quality and coverage is the fact that Bancolombia has today 184 coverage -- percentage coverage ratio. We feel 90-day coverage ratio above 150% give us a solid standing and guarantee that the bank has enough cushion to absorb any potential default of a client.

Slide #7 shows the provision charges, which were COP 774 billion for the quarter, up 44% year-over-year and flat compared to the previous quarter. Cost of risk was 2% for the quarter, in line with our expectations.

Provision charges were, generally speaking, due to deterioration in specific corporate clients and more challenging consumer market because of the last VAT increase and the persisting economic slowdown. The provisions made during the quarter were specifically designed to cover the vintages that have deteriorated [run up to] over higher levels of delinquency.

New past due loans were COP 1.5 billion is explained -- basically 75% of these new past due loans comes from Colombia and the remaining 25% comes from the Central American operation, specifically from Banistmo. The main segments where we experienced marginal deterioration over the quarter were: First, corporate loans in Colombia which accounted by 39% of the new past due loans, mainly concentrated in large tickets, including Electricaribe; second, small and medium enterprise loans in Colombia, which accounts 35% of the new past due loans, mainly concentrated in the transportation and commerce sectors. This deterioration is an outcome of the weather conditions in agribusiness, a legacy of logistic problems in the mid of 2016; third, consumer and mortgage loans in Colombia in the mid-low income segments, which accounts at around 10% of the new past due loans; and finally, consumer and mortgage loans in Panama, which accounts at around 16% of the new past due loans.

As you can see, we have to highlight that Electricaribe explains at around 22% of the new past due loans for this quarter. Our actions to prevent further past due loan formation include targeting the consumer and mortgage loan underwriting standards in Colombia and Panama, be more selective in new corporate loans, in particular those related to infrastructure in Colombia and pay special attention to evolution of vintages generated in the last couple of quarters. We are confident that the new model of classification of clients in the consumer segment will help us to allocate loans to clients with low risk of default. We forecast cost of risk in this year will be at around 2%.

Moving on to Slide 8. We see the evolution of net interest income and funding costs along with the funding performance. NII growth has remained resilient and reached 14% year-over-year and 6% for the quarter. Although margins have been expanded significantly, we do see moderate volumes that limit the upside potential for this line. The central bank continues to lower rate, which ended at 7% for the quarter and 6.5% in April, showing their intention to help growth in the near term. Inflation rate at 4.7% keeps the door open for additional cuts. We are expecting inflation to the end of the year at a level of 4.2%, GDP at a level of 2% and central bank's interest rate at a level of 5.75%.

As rates continue to fall, the DTF has gradually decreased, and we were able to lower funding costs during the quarter from 3.89% to 3.72%. This led to better spreads, and we have also kept the loan-to-deposit ratio stable at a level of 117%. As Juan mentioned at the beginning of his presentation, the integration of leasing Bancolombia operations permitted to reduce our annual funding cost by COP 70 billion, and this benefit was already reflected in our first quarter funding cost.

During the first quarter, we have focused our efforts not only on 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. The outcome of this strategy has been the slight improvement in the lending NIM that we saw in the first quarter. The fact that around 60% of Bancolombia liabilities are either flowing or repriced during the next 12 months leads us to believe that we have room to mitigate the impacts of rate cuts by reducing the funding cost. It is worth mentioning our savings and checking accounts that represent 42% of the total funding structure which places us in a unique position in the system.

Turning the page to Slide #9. We show the net interest margin. The year 2016 was clearly very positive for NIMs. And moving into the first quarter of this year, the margin continued to strengthen. Our NIM was 6.3%, up 66 bps over the last year. The main reason for this expansion was the higher rates of new originations as well as the repricing of existing variable rate loans coupled with the lower cost of funding in the first quarter.

In this first quarter, we saw the loans net interest margin increased to 6.6% and also a very positive 3.2% in an investment net interest margin. The investment performance is explained by the increase in the price of [their] securities during the quarter as we saw central bank rates begin to come down. 10-year tests were yielding 6.9% in December and today, they are yielding 6%. In 2017, we have been seeing the central bank making substantial rate cuts, the most recent in April, and the [Repar] rate now stands at a level of 6.6% -- 6.5%. Our forecast for year-end, again, Repar rate stands at 5.75%.

We are focusing our efforts in keeping the deposits as low cost as possible, in particular saving accounts as a [banker] for our clients to keep their money within Bancolombia's pipeline; current accounts, which benefit from our transactional capacity; and cities as a mechanism to provide the stability of funds and enhance the maturity profile. Our NIM forecast for the rest of the year would be -- to be between 5.8% and 6%.

The evolution of fees is presented on Slide #10. This is a front where we continue making progress in all geographies, as can be seen in the recent results. During this quarter, fees increased 6% and they grew on an annual basis 11%. The main drivers for fees are credit and debit cards, bancassurance, cash management and trust activities. We continue to see more credit and debit card transactions as a result of our commitment to promote the use of electronic methods in -- for in-store transactions. To date, Bancolombia has 24% market share in the system billing and 13% of the number of cards outstanding.

Banking services and asset management are also important drivers for the fee growth as we attain 9% growth of these segments. In particular, the assets under management that Bancolombia manages today accounts for COP 30 billion, 3-0, and have increased 30% in the last year, 3-0. These 3 initiatives are not limited to Colombia. We -- and we are focusing on steadily growing the credit card segments in El Salvador, Guatemala and Panama. We highlight the relevance of continuing to cross-sell products across geographies and taking advantage of opportunities to boost banking penetration in Guatemala and in El Salvador.

Now moving on Slide 11, we present evolution of expenses which grew only 5% during the year. The cost-to-income ratio for the year was 51%, below the 54% from the last quarter. This decline was mainly explained by the consistent revenue performance and strict cost control initiatives across all geographies. Our target is to maintain this number under 50%. It is important to highlight that the cost-to-income ratio for the last 12 months accounts 50.3%. These results are currently being impacted by our digital strategy and the use of analytics which aims to create better pricing strategies, to be more accurate approval process and commercial synergies, more efficient processing of operations via use of robotics and, finally, to maintain the size of the bank in terms of branches as other low-cost channels represents the most efficient way to grow. Our guidance for 2017 is to increase of expenses by 6% to 8%.

Moving on Slide 12. We see the evolution of capital position of Bancolombia. The Tier 1 ended at a level of 10.53%. This is a very good ratio and most importantly, the continuous growth in the metric lead us to reaffirm the fact that we are in a period of capital accumulation. Considering the dividend payout ratio of 32%, we effectively saw a substantial jump in our primary capital this quarter. Nevertheless, as we have shared with you in the past calls, the capital levels that Bancolombia present today are optimal for the business plan that we have designed. For the Tier 2 ratio, we ended at a level of 3.9% and BIS ratio 14.5%.

Slide #13 shows the return on assets and return on equity. The return on equity for the quarter was 11.4%, and return on assets was 1.2%, impacted by, first, higher provisions; second, a moderation in the NII; and third, the COP 58 billion in wealth tax paid the first quarter. The return on equity for the last 12 months is 14.5%. We expect to continue growing net income although at a moderate pace, while maintaining solid service indicators for the rest of the year and demonstrated the strict cost controls and negative effective pricing we have mentioned during the past quarters.

Our estimated growth for the rest of the year will be between 12% to 13%, while in the medium term target continues to sit at a level of 16%.

We have to apologize. As you hear in the call, we have to evacuate the building, and we are not able right now to open for Q&A. We can do something. We have to evacuate but our Investor Relations team could answer the questions since they are in a different building. We are really sorry.

We are ready to take questions.

(Operator Instructions) And our first question comes from Guilherme Costa from Itaú BBA.

My question is about the margins. Could you comment on the evolution of margins going forward? We saw a very good performance in this quarter due to the increase of spreads, the faster growth in the local currency loans and also the contraction in the cost of funding. But considering deferred contraction in the monetary policy rate, how do you see your margins evolving in the coming quarters? Do you expect part of those positive effects we saw during this quarter to affect the contraction in the monetary policy rate?

Thanks, Guilherme. That's a good question, very relevant for today's rate environment. Indeed, we are expecting more rate cuts in Colombia, but we have been positioning the balance sheet in a way that this effect is not as high on our NIMs, especially the lending NIM. We have been promoting the origination of loans with a higher spread, and that's basically the main reason for the expansion that we saw in the fourth quarter 2016 and the first quarter of 2017. Of course, we had a benefit from the performance of investments, which we believe is not sustainable in the rest of the year. So we are basically putting our efforts in 2 fronts: first is maintaining the cost of funding of the bank as low as possible. We have around 60% of our total funding repricing or taking new rates within the next 12 months, so that's an advantage. And second, we're implementing some methodologies to better price each product that we originate today. That's, I would say, the main component of our strategy, to price better our assets and maintain margins as high as possible. For the rest of the year, we forecast NIMs -- combined loans and investment should range or move between 5.8% and 6%. So the 6.3% that we saw in the first quarter, we don't see it as a sustainable metric for the second or third quarter. It should experience some compression.

Our next question comes from Carlos Macedo from Goldman Sachs.

Quick question, first, on taxes. 40% effective tax rate in the quarter. Last year, you had a similar kind of behavior and then in the fourth quarter, you reversed a bunch of taxes. Just trying to get an understanding what should we think about as the tax rate for this year and for the next quarters, really? Are we going to see a similar kind of path as last year? Second, asset quality. You talked a lot about the different categories and what got hit. Just wanted to see if you had any visibility on 2 things: one, if there was already some sort of impact from the higher VAT on your newer vintages and even some of the older vintages in consumer lending in Colombia; and second, whether your forecast for higher unemployment in Colombia through the end of the year means more pressure on the asset volume on the consumer side. It was weaker on a 30-day, but it was stronger in a 90-day NPL kind of comparison.

Sure. Thank you, Carlos, for your question. Regarding taxes, remember we have this year a new tax regulation which basically eliminates some of the volatility that we had in 2016 in relation with the performance or the evolution of the FX. We were affected in our effective taxes that we paid in 2016 by the conversion of dollar-denominated liabilities to pesos, and that created this high effective tax rate in 1Q and a reversion in the last months of the year. We do not forecast this volatility in 2017. As a matter of fact, we are working ourselves with an effective tax rate ranging from 35% to 37%, very much in line with the figure that we saw in 1Q. We're confident that we'll be able to forecast pretty accurately the income before taxes. And therefore, this line should be less volatile and more predictable, basically around 400 to 500 basis points below the statutory tax rate in Colombia. Remember, we had some operations -- we have some operations outside Colombia paying a lower statutory tax rate. Regarding asset quality, especially in the consumer side, indeed we have seen a deceleration in consumption patterns and some loss of traction in the job creation process in Colombia. Basically, we have not seen that figure reflected yet in unemployment, but we are considering a potential negative impact in our performance, especially in credit demand and perhaps some deterioration in these retail loans somehow related to the VAT increase that we had in 2017.

Regarding unemployment rate in Colombia, it has been flat during the last months. We considered that it is not in that way for the next months, but we target credit policies in the last quarter of 2016, and we -- for the end of the year, we are going to have better behavior of the consumer portfolios in both countries, in Panama and Colombia, that have the largest clients.

Our next question comes from Jason Mollin from Scotiabank.

My question is related to the overall profitability levels. And we heard of ROE and ROA. We heard some comment that the near term, and I guess putting everything together, the margin, the NIM expectation 5.8% to 6%, expense growth in the 6% to 8%, provisions in the 2% cost of risk, provision to loans in the 2% range. It sounds like we're talking about ROEs in the 12% to 13% range going forward. When can we -- when should we see some kind of turn -- I mean, we're going to have the pressure on from -- on margins from rate, but when can we see this turn to the longer-term 15% target that was mentioned as well for ROE?

Jason, that's a very relevant question for the strategy of Bancolombia. In this year, we are forecasting a ROE ranging from 12% to 13%. This is a year when our forecasted net income is going to be relatively flat as compared to 2016, mainly impacted by high provision charges, as we saw in the first quarter. We're finally seeing a positive impact of the efforts made in the efficiency front that should materialize in a different way in the second half of 2017. And we also forecast that in 2018 when the loan portfolio starts growing, we complete this credit cycle of higher NPL formation and provision charges. That should be a boost for the bottom line of Bancolombia. So it is going to be a gradual process of ROE improvement. We intend to keep a similar level of leverage as the one we have today. So ROA gains will be the main driver for this ROE expansion, which again, should happen between 2018 and 2020, hitting this target of 16% over the next 3 years. That is going to be a combined effect of lower provision charges, growth in the loan portfolio, therefore growth in NII, sustained fee growth and cost control.

Our next question comes from Nicolas Riva from Citi.

My question is in loan loss provision. So I look at the cost of risk in the first quarter, it was 2% which was just below last quarter and you are guiding for 2% this year as you just said. At this level, this 2% level, it's still quite above the historical average for Bancolombia. If I go back 10 years, the average has been around 1.7% and given the current emphasis on commercial loans for many years in which cost of risk was even like 1.1%, so my question is, it looks like the outlook for this year for loan loss provision is not going to be much of a change from the first quarter. But when can we expect the cost of risk to go back to your historical average?

Well, we think that the situation in Colombia is not going to behave well, as Juan Pablo told us in the economic review, but we think the cost of credit is going to be 2% during this year. The trend for the next year is going to be 1.6%, 1.5% if the economic conditions improve for the next 2 years. So I think that it is a year that we are going to see these levels, 2%, 1.9%. But for the next year, we are going to come back to the trend that we had during the last 5 or 6 years.

Sorry, so you said for next year, you are seeing the cost of risk, you said 1.5% to 1.6%? You said for next [2]?

I think that's for the next years, I mean the 2018, 2019. But for this year, it's going to be 2% -- around 2%.

Our next question comes from Ernesto Gabilondo from Bank of America Merrill Lynch.

Almost all of my questions have been answered, so just one from my side. So what are the challenges ahead for Bancolombia? How do you perceive the risks related to Electricaribe, System Integrale or [El Sorte de Bogotá]. what is happening in El Salvador and Grupo Visa in Panama? On the other hand, despite the central bank continues to lower rates, how do you see the NIM for the year? I think you are no longer expecting NIM compression of 10 basis points, right?

Thank you, Ernesto. Certainly, interesting questions. Several challenges. Some of them are under the control of Bancolombia, some of them are not, in particular, the macro environment of the countries where we operate. Central America is a challenging region. You have seen the evolution of trends in Guatemala and El Salvador, where we have 2 significant operations that we also intend to improve in terms of profitability. So the macro in Central America as well as in Colombia will drive a significant portion of the growth that we will see in the coming years, and we are confident that the Colombian economy, in particular, will rebound and will grow faster in 2018 and 2018, driving credit demand and revenue generation. That's somehow connected to the expectations and the challenges that we have in Central America. That's an operation that, as Mr. Mora mentioned at the beginning of this call, has been already integrated, but we still have many processes to be fine-tuned and improved in order to reach the levels of profitability that we want to have from these operations, bringing them up towards the average of the group and helping the overall improvement in the performance of Bancolombia. For this particular time in 2017, we are very concentrated on keeping the quality of the book. We saw already what happened in the first quarter in terms of NPL formation. We intend to keep the formation under control, in line with our risk appetite. And that involves making decisions to originate loans with better standards and follow the existing loans that you just mentioned, such as Electricaribe, to try to recover those loans if possible, otherwise to make sure that we are conservative enough to make the provisions and to keep the coverage ratio in the levels that we intend to have, high hundreds for the 90-day standard. And finally, a long-term challenge or decision that we have followed in the recent years is to improve the efficiency levels and the way that Bancolombia operates in an ever-changing environment, basically developing the products and the channels that we require for the coming years to be more efficient in the distribution process of our products.

And about the expectations that the central bank continues to lower rates, how do you see the NIM for the year?

Yes. We are forecasting a year-end rate of the Colombian central bank at 5.75%. Nevertheless, as we mentioned before, the sensitivity of our balance sheet today is lower than it used to be some years ago, and we are positioning it in a way that we will not experience a NIM compression or at least a significant NIM compression from this trend. We're paying special attention to the funding side of the business. It's very relevant. It permits to keep the funding costs relatively stable and low but most importantly, we are doing most -- we're doing significant efforts in keeping the origination rates as high as possible, using better pricing strategies, selecting the best risk-adjusted returns in our clients, using all the tools in our portfolio to maintain the NIM as high as possible. Again, we forecast 5.8% to 6% for the rest of the year.

Our next question comes from Marcelo Telles from Crédit Suisse.

My question is with regards to asset quality. You did mention the impact on your past due loans related to Electricaribe, But I'd like if you could share with us what impact was on the -- on your provision expenses? And the other question still related to asset quality is you mentioned something like revamped credit origination and risk policies, particularly on the consumer side. Can you detail a bit more what are you doing on that front, to be more specific in terms of the initiatives or the systems that you have that is allowing you to be more -- or to better assess the risk of your client base?

Okay. On the consumer side, we have stagnant policy since the -- as I said, since the last quarter of 2016 in both countries, Panama and Colombia. We had gone to other markets like low income that we are not going to be very emphasizing on that segments of the market. So the new (inaudible) that are the new loans that we write in January and February, those are quite good. So we expect that the deterioration that we accumulated in the last year we are not going to have it in the second half of the year. So we consider that on the consumer side, it is going to improve for the second half of the year. Regarding SMEs, as we mentioned, we had problems last year with climate factors and transportation problems with the sector in Colombia. That's -- we keep with that problem, but we consider that at the end of the year, we are going to have on that portfolio of the SMEs loans better behavior, so with clients' policies on consumer side and SME side in Colombia and Panama. The other countries are behaving well, and we don't consider problems in Guatemala and El Salvador.

Our next question comes from Sebastian Gallego from CrediCorp Capital.

I have 2 questions. Can you provide a breakdown of the deterioration on BBLs in -- within the mortgage segment per city in Colombia? And how -- and can you provide a bit more color on that front? And also, the second question is related to the Central America operation. Can you provide a target of ROEs for each of the operations in Panama, El Salvador and Guatemala?

The deterioration in the mortgage portfolio is more in the north part of Colombia and the central part. That's the -- that's we have seen. It's not very different among regions. The range is about 5.5% and 7%, but it's not very different the behavior in the different cities in Colombia.

And the second question Sebastian was regarding...

And second question was regarding the targets for ROEs among the operations in Central America.

Yes, sure. Yes, today, as you saw in the presentation, Central American operations combine are operating in high single digits ROE under the IFRS standards. That is going to be a gradual process of improvement. We mentioned regeneration, changes in the mix of the loan portfolio, downsizing the size of the network in Guatemala, in particular. We believe having the right size is paramount for achieving efficiency levels that we intend to have. We wish to keep similar levels of efficiency across regions. And certainly, Central America is a region that presents opportunities for improving this metric, bringing it down to levels of low 50s, more in line with the operation of the combined group. So for the next years, we will -- we forecast an ROE expansion of around 1% per year, moving afterwards the 14%, 15% that we have today in Guatemala. So the net contribution of the -- again, will be an improvement in the ROE on a consolidated basis for Bancolombia.

Our final question comes from Edgar Romero from BBVA.

I have 2, actually. The first one is can we expect during the second half of this year marginal BBLs from Electricaribe? And the second one is related to bank in Guatemala. I would like to have more details on the results as long -- as even though there was a big drop in efficiency from 80% to 66% and net income actually dropped $10 million to $21 million, so what actually explains this drop in profitability?

Excuse me, could you repeat the question please. We didn't hear.

The first one or the second one?

The second one.

Okay, the second one is related to bank in Guatemala. Even though the efficiency actually dropped from 80% to 66% in the quarter, the net income actually dropped $10 million, from $31 million to $21 million. So I'd like to see a little bit more detail on the results. So what actually explains this drop in net income?

Thank you, Edgar. In particular, in Guatemala, keep in mind that net income does not fully reflect the efficiency condition of a bank. Efficiency is calculated -- or we record it as the operating expenses into operating revenues. That's before provision charges. And Guatemala has been a market where we have accelerated the pace of provisioning, which of course, impacts the bottom line that you mentioned. And I would say the most relevant part for our strategy in Guatemala is to reach the right size of the book -- of the network of branches, excuse me, basically, providing the platform that permits the bank to continue growing in this economy with the same infrastructure and capacity that we currently have, adjusting the bank to the right size. And additionally, we like to complement is that we have accelerated the pace of amortization of intangibles that we have in that particular operation.

We have no further questions at this time. I'd like to turn the call over to Mr. Alejandro Mejia, Investor Relations Manager.

Thank you. Well, thank you all for being with us today in this 1Q '17 results. We expect to have you again in August when we report the second quarter numbers. And if you have any further questions, please feel free to contact us. We'll be happy to help you. Thank you very much and have a great day.

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