Grupo Cibest SA (CIB) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Bancolombia's Fourth 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 at 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 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. José 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.

Good morning, everyone. I would like to thank you for attending this conference call, in which we will present our results for the first quarter -- for the fourth quarter of 2017. And I would like to start with a description of the main events that drove our business last year.

First, I would like to highlight that the efforts we did in cost control permitted to have a real decline in the operating expenses. I would like to highlight the decline in the labor cost and the positive impact of our strategy to rebalance the branch network. As a result, the cost-to-income ratio declined below 50%, which was the goal that we set for the year.

We were also able to grow fees, not only in real terms but also faster than net interest income, despite the adverse effects of the higher value-added taxes in Colombia, which was a drag for growth, in particular in the first half of the year. The efforts to increase fee-generating services is a key component of Bancolombia's strategy to improve profitability and to use capital of the bank in a more efficient way.

We also were able to maintain the net interest margin despite the interest rate cuts conducted by the Colombian Central Bank during '17. Our strategy in this front was concentrated in managing the funding of the business, reducing the sensitivity of the balance sheet to interest rate cuts and growing faster in retail clients with higher risk-adjusted returns.

On the front of cost of credit in 2017, we had a performance that was above our estimates. This was 2.2 -- the cost of credit was 2.2%. In particular, the deterioration of corporate clients caused significant provision charges. SME clients were also affected by the economic slowdown and the depreciation of the peso. Therefore, we accelerated provision charges to cover them and protect the book. On the other hand, consumer loans behave in line with our expectations. And towards the end of the year, we saw stability on the quality of the portfolio.

Moving to the digital front. We continue making progress by growing faster in mobile and Internet banking. As we have shared with you, our goal is to migrate more transactions to low-cost channels and release pressure from the branch network. I would like to highlight some aspects of this strategy.

Now 2.5 million regular -- we now have 2.5 million regular users of Bancolombia's mobile platform. We have 300,000 users of digital bank Nequi in Colombia and 22,000 in Panama, just 12 months after its launch. Digital sales have grown steadily. And today, we open 40,000 products online every month, including e-credit cards, CD savings accounts, among others. The capacity to open savings accounts completely online has permitted to bring 45,000 new clients to the bank via these channels during the last year.

We continue introducing several products and services in our Central American operations, particularly in Banistmo, where we see more upside. This strategy made possible to grow fees 13% during '17 and complements the portfolio while using the bank's capabilities in a more efficient way. Similarly in Banco Agrícola, insurance distribution became the largest fee generator. And in BAM, the credit card fees grew. The reduction in cost-to-income in Banistmo was also an important achievement as it came down from 58% to 52% in 2017.

We continued strengthening the origination process by using data analytics in order to predict our clients' indebtedness capacity and behavior. This is a key element that permitted to grow consumer loans by more than 15% with a moderated increase in the cost of risk attributable to this segment. Similarly, we have implemented Robot Process Automation in several parts of these processes. These were typically labor-intensive processes. And as a result, the gains in efficiency have been significant, especially in labor costs.

After this review of the main drivers of 2017, now I would like to move to some of the main aspects that will guide our strategy in '18. We aim to continue managing the risk and credit cycle in order to reduce the cost of risk from current levels towards 2% for 2018. As I mentioned, '17 was a year in which the cost of credit was above our expectations.

So we will focus on managing credit risk during '18. And we don't expect a dramatic reduction, but we will work on having the cost of risk around 2% during '18. In particular, we highlight the fact that it seems like NPL ratio has reached a plateau. And in our view, it should improve towards the end of the year. We will continue doing provisions related to large corporate clients.

In the cost and efficiency front, we intend to continue our plans to bring down the cost-to-income ratio towards 48% by growing cost below 5% and (inaudible) for a high single-digit to double-digit growth in revenues. We will focus on maintaining the efficiency ratio and to be sure that the achievements we had during '17 will be sustainable during the '18.

In Central America, in particular Banistmo and BAM, we intend to increase profitability by promoting the fee-generating and more efficient loan mix. Across Central America, we are conducting a program to cut cost that we estimate will save $100 million per year. This includes optimization of the branch network, automation of processes, among others, similarly revenue initiatives.

One particular point of attention right now is the optimization of the processes where we interact directly with customers. Our goal here is to reduce the time our clients spend at the branch and move more transactions to digital platforms and banking agents. The ultimate goal here is to continue turning the branch into a sales point rather than a transaction point and eventually increase the cross-selling ratio from the current 2.3 products per client to 3.5.

Finally, and regarding the use of the network, we continue rebalancing it in order to reach the right coverage and increase capillarity. As I mentioned, with progress in Colombia last year and today, our efforts will be concentrated mainly in Guatemala.

Now let me 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'll ask you to go to Slide #4 in the presentation. During the fourth quarter of 2017, GDP grew 1.6%, 10 basis points below our forecast. This result reflects a poor performance of key sectors, such as agriculture, retail and manufacturing. Incorporating upward revisions to previous quarters, in 2017, the Colombian economy grew 1.8%, the lowest rating in almost a decade. Going forward, we reaffirm that we'll accelerate to 2.5% in 2018.

Recently, we have seen that although some leading indicators stopped deteriorating, the weak internal demand that characterized last year has persisted. However, some of the factors that will lead to a greater dynamism in economic activity later this year have emerged. These factors include a sanguine global context, a recovery in the terms of trade, a recovery of real income and a softer monetary policy. As a result, we anticipate that growth will accelerate by the second half of this year.

Regarding prices, we have reduced our year-end inflation forecast to 3.4%. During the past few months, inflationary risks have moderated while the increase in the VAT rate at the beginning of last year is currently generating a favorable base effect. In the second half of the year, the scope for further corrections in inflation will be limited due to the persistence of core inflation and a slight rise of food prices.

In terms of monetary policy, despite the fact that the Central Bank's board has stated in its last meeting that with available information, the cycle of rate cuts has finished, we think that there will be room for an extra 25 basis points cuts in the second quarter. The good inflation readings during the next few months in the context of a still negative outlook gap will allow the Central Bank to take this step. Therefore, we maintain our previous basis scenario in which the repo rate will reach 4.25% and will remain at that level for the remainder of the year.

On the external front, we expect that the current account deficit will adjust from 3.6% last year to 3.5% of GDP this year as a result of higher exports. Thus, the country's external imbalance will be closer to its sustainable levels, although it will remain above the average of BBB (inaudible). Finally, recent events reinforce our expectations that this year, the Central Bank -- the central government will meet its deficit target of 3.1% of GDP. However, and despite higher oil prices, we think that additionally austerity measures will be necessary in order to comply with next year's fiscal target.

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

Thank you, Juan Pablo. As usual, I would like to give you a brief overview of the status of our operations across the region. Please go to Slide #5, where we can see the snapshot of our main operations. Please be aware that these numbers are reported under full IFRS and different from the numbers filed with regulators. They present cumulative numbers as of December of 26 -- 2016 and '17.

I would like to highlight 2 points in particular; in Banistmo, a significant improvement in return on equity. Cost-to-income reached 51% as a result of cost control. Cost declined 4.5% and fees grew 13%, thanks to the introduction of new products and services. Also in 2017, there was a recovery of provisions associated with the VISA assets that were finally sold and dropped down the cost of credit.

In Banco Agrícola in El Salvador, fee growth was 9% as a result of introduction of bancassurance. We maintained a low level of past due loans of 1.7% with a strong coverage ratio of 208% in a strategy to protect the balance sheet. And finally, cost control programs caused expenses to decline 2%.

Now I would like to move to Slide 5 (sic) [Slide 6] of the presentation, where we can see the evolution of assets and their composition. The loan structure of the bank reflects the new strategy to change the mix. During the last years, we have put emphasis in growth of consumer loans, which went from 14% of the loan portfolio in 2016 to more than 17% today.

As a result of these efforts, the composition of the loan book today is: corporates and SMEs, 69%; consumer loans, 17%; and mortgage, 13%. We highlight the consumer loan growth levered in our large base of clients, focusing on those with mid- and high income and using better analytical tools. Today, 35% of the consumer loan portfolio has been originated with pre-approval loans, result of this analytical process.

Loan growth for 2017 was 6%, certainly confirming the moderation that we had seen during the first 3 quarters. Nevertheless, there was a significant difference between growth in commercial and retail loans. Commercial loans grew 3.4% for this year while consumer loans grew 15%. Our strategy is to balance the portfolio towards consumer loans in order to improve the overall profitability of the lending business.

Loans denominated in dollars accounts for 34% of the total loan portfolio. The dynamics of loan growth is reflected in Colombia, where the loan portfolio grew 8%. On the other hand, we saw consistent demand for dollar-denominated loans, in particular in our operation in Panama. The securities portfolio remains around 7% of the assets, and in the fourth quarter in particular contributed with a good performance of the NII. Regarding the outlook of the rest of the year and according to the macroeconomic environment, we believe that the loan growth will be faster in the second half of 2018. Our expectation is to grow at around 9% to 10%.

Moving on to Slide 7. We present the situation of the credit quality as of December. 30-day past due loans presented a slight improvement in the last quarter, mainly due to the reduction of corporate past due loans. Nevertheless, 90-day past due loans posted deterioration due to runoff of clients who were already past due. Here, we highlight the fact that the pace of the deterioration seems to be slowing down due to the measures taken to curb this process. We remain cautious about the evolution under the writing standards. Due to seasonal effects, we might see some deterioration in the first months of this year. The coverage ratio of 90 days past due loans was 164%, in line with our targets. And we expect to keep it around that during this year.

The next slide, #8, presents the provision charges of the quarter. We continue having high provision charges during the quarter, most of them related to commercial loans. One goal for 2018 is to reach the optimal level of coverage of large corporate clients and maintain the desired coverage ratio. During the quarter, we saw an improvement in the pace of deterioration of the loan portfolio. New past due loans totaled COP 622 billion. And in particular, we saw improvement in the corporate book.

We remain cautious with the quality of the loan portfolio. And in the next months, we expect to have provisions similar to the ones we have had in the second half of last year. Our forecast for cost of risk for this year will be at around 2% based on the assumption that the loan growth will be 9% to 10%, which will dilute the charge.

Moving on to Slide #9. We show the evolution of the net interest income and the funding cost. Net interest income presented a positive performance during the quarter and during the year. It grew 8% during the whole year while the gross loan portfolio grew 6%. The performance of the NII is explained by 3 conditions: first, 6% loan growth during the year; second, the change of mix in the loan portfolio growing faster in retail; and third, the efforts to bring down the cost of funding in an environment of interest rate cuts.

Regarding the cost of funding, our strategy has been focused on: reduce the cost of long-term debt by rolling over the bonds; promote savings accounts, which grew 11.5% versus growing 2.4% in time deposits; reducing the 7.8% stock of funding with international banks; and finally, perhaps the most important one, the reduction in the duration and cost of certificates of deposits in Colombia. The combination of these factors have permitted to bring down the loan-to-deposit ratio to 115%.

In the next slide, #10, we present the NIM. In 2017, we offset the NIM compression despite 300 basis points in the interest rate. For the whole year, NIM went from 5.96% to 6.07%. On the other hand, securities had a good performance during this year. Although with some volatility in the fourth quarter, Colombian government securities appreciated due to the reduction of interest rates and contributed to 2.6% NIM. We expect the reference rate in Colombia to come down 25 basis points and an improvement in dollar margins as a result of higher U.S. rates. As a result, we estimate the NIM for 2018 to come down at around 20 basis points and will reach the level of 5.8%.

On Slide 11, we can see the evolution of the fees. Due to seasonal factors and more economic activity in the last months of the year, we saw a positive performance of fees in the last quarter of last year. Fee growth was 8% for 2017, adding value to the results. This growth was driven by credit cards, asset management and bancassurance. The evolution in Colombia has been impacted by the deceleration of the economy and also the increase of the value-added taxes, the VAT.

On the other hand, in Central America, the growth of fees has been at double-digit pace. Banistmo, which grew fees 13%, had a very positive performance in banking fees and credit cards. Banco Agrícola, which grew fees 9%, continued making progress in bancassurance. And today, that is the largest fee-generator for the bank in El Salvador. Our forecast for fee growth in 2018 will be 12%.

Now moving to Slide 12. We present the evolution of expenses, which declined 13% during the quarter. As we have mentioned in previous conference calls, we have normalized operating expenses during this year in order to avoid seasonal variations that typically affect the 4 quarters of previous years. For 2017, we are pleased to highlight an OpEx growth of 3.5%, which is below inflation and below our initial estimations.

In particular, 3 aspects contributed to the reduction in expenses during the quarter: first, the reduction in personnel expenses; second, the adjustment to the calculation of bonuses based on the final results of the year; and third, the positive migration towards low-cost channels and reduction of the network of branches. As a result of the strategies implemented, the level of efficiency reached a level of 49.2%. For 2018, we expect to grow operating expenses between 4% to 5% and the cost-to-income ratio will be at around 48%.

In Slide 13, we present the evolution of the main channels. As we have mentioned during the year, one of our main goals in client experience and efficiency is to promote the digital channels that have little marginal cost. The pie in the bottom right shows how mobile and Internet represent the largest portion of total transactions in Bancolombia.

Similarly, the growth in capillarity through banking agents permits to optimize the role of the physical branch on reaching clients with a channel that has variable cost instead of fixed cost. In 2017, we grew 1,600 banking agents, reaching more than 10,000, and shut down 117 branches. We will continue enhancing the offer of digital services to our clients, maintaining a strict cost control, continue rebalancing the existing network and focusing in optimization.

Now let's move to Slide 14, where we present the evolution of the capital position of the bank. In line with the trend that we have seen during the year, the bank has operated above 10% Tier 1 and it is in the process of accumulating capital. As we have shared with you, we feel comfortable with the current levels of capital, 10.2% Tier 1, and consider them optimal for the business plan we have set for the bank in the next coming years. Let's remember that this level of capital does not include the earnings generated in 2017, which will be appropriated in the Annual General Meeting next March. That should put our Tier 1 ratio at around 10.7%.

Finally, we would like to mention some seasonal effects on the income statement that impacted the fourth quarter. We had other operating income gains related to the return of COP 86 billion of income taxes from previous periods and COP 88 billion related to gains of the real estate assets that we have through our Fondo Inmobiliario Colombia and other kind of assets. We posted a higher equity method contribution due to income from our investments in Tuya and other noncontrolling subsidiaries. We have COP 173 billion impairment of our stake in Tuya due to the annual appraisal of this vehicle. The net impact of the gains on investments was offset by this impairment, reducing the volatility of the results for the whole year.

Finally, we present the return on equity for the period, which was 16%. For the full year, it was 12%. Our forecast is to gradually improve the return on equity towards the 16% target that we have set for 2020. In particular, we estimated that in 2018, we should be in the range of between 13% to 14% return on equity.

After these positive results in 2017, I would like to highlight that in 2018, we expect a recovery in the loan growth towards 9% to 10%; a small compression of the NIM reaching the level of 5.8%; growth in operating expenses between 4% to 5%; and cost-to-income reaching 48%; a 12% fee growth across all geographies; cost of risk around 2% with the same amount of provisions in nominal terms; and finally, an effective tax rate of 32%.

After presenting these slides and discussing our fourth quarter results, I would like to invite you, our audience, to ask any questions. Thank you.

(Operator Instructions) And our first question comes from Tito Labarta from Deutsche Bank.

My question, I guess, is on expenses, given the sharp improvement that we saw this quarter. And I understand your guidance of 4% to 5%. But I guess, how should we think about it on a quarterly basis? We saw a lot of movements there. Should we expect either a jump or a decline every fourth quarter? Just trying to understand that. And if you can also just give some more color on how you were able to reduce it. I understand lower bonuses and less expenses. But maybe if you can give a little bit more clarity on that on why the sharp reduction as well.

Thank you, Tito. Yes, the reason why you see high volatility during the 2017 were basically because we tried to normalize the level of expenses quarterly. What you will see in 2018, that will be up a very stable line in terms of expenses. Again, 4% to 5% will be the expenses growth. We are expecting to maintain our headcount under control. We are expecting to continue processing the new products and services through digital challenges, reducing cost. So you don't expect a high level of volatility. The reason why we reduced the provisions for bonds were because our original budget were impacted by the high level of provisions. So that was the reason why in the last quarter, we reduced that provisions. But it's not a one-off. It's a normalization of the level of provisions that we design annually.

And Tito, Juan Mora. Even though we tried to normalize the effects of accounting, the fourth quarter is the one in which we account for all the adjustments because we know the results of the year. So we work to normalize and to have the expenses distributed to the quarters. But fourth quarter usually is the one that we do all the accounting adjustments, and in this case, were reduction on expenses. We will try hard to normalize as much as we can the expenses through the year, so it can be forecast easily the expenses. But let me tell you that our focus now is, to work on one aspect, is to grow the expenses between 4% and 5%, so we can cost control. And let me emphasize that we have been working very hard on this cost control project. And the efforts during '18 is to make them sustainable through the different periods, not one-offs or one effect that is in one point but to make them a structural way in the bank operates.

We have to highlight another factor that is reflecting the fourth quarter, Tito, which is the provisions for long-term benefit plans. We have also to reduce those provisions because the headcounts dropped 1,000 employees. So you can imagine that in terms of provisions for bonus, for vacations, for different aspects, so we reduced also that level of provisions.

Our next question comes from Felipe Ikari from Itaú BBA.

I have a question regarding 2018 expectations. You indicated a 12% expansion in fees for 2018. In the fourth quarter, we saw an expansion in bancassurance fees by more than 20%. Do you expect this line to be the one driving fee growth for 2018? And you also mentioned earlier today that you expect to increase the products per client to 3.5. Could you give us a little bit more color on what are the initiatives being taken to increase cross-selling?

Regarding fee income growth, yes, bancassurance is showing a very solid trend in the last 3 years and the growth there, CAGR will be at around 25%, we are expecting the same. The reason why the number dropped in the Colombia operation during 2017 was because of the activity. The activity reduced -- you see that the GDP growth were only 1.7%. So that has impacted the transactional level of the operation. But how we will do it, the 10% to 12% that we are putting as a guidance. Because the economic activity will be much better in 2018, the second half of this year will be improved after elections, so we perceive that the number will be achievable.

Felipe, let me add something. Definitely, bancassurance is one focus and will continue driving the fee growth during '18 in Colombia, and particularly in Central America. It's a new line of business for those banks. And its improvement, it's very good. But it's not just bancassurance. Our focus on having new products to have a different offer for our customers on fee-related products is going to drive the growth of fees during '18. So it's not just bancassurance. Even though it's going to be a leader on fee growth, but it is -- all the products that we are presenting to our customers. And related to your question about the cross-selling index, we have a customer base of around 10.5 million customers. And we have a large base of customers with just one product basically or 2 products, basically one savings account and a debit card. And what we are doing is that we are designing new products for these large base of customers who transact with us on a very basic way to offer them products that can help them in their everyday lives, microloans, different offers in cards that are just designed for this kind of customers. So that is going to be the driver of the growth on cross-selling in our base clients.

Our follow-in question comes from Ernesto Gabilondo from Bank of America Merrill Lynch.

I have 3 from my side. The first one is how do you see the economy evolving in the political environment? How is government expenditure and internal demand in a presidential year? Can you share with us who are the candidates leading the polls? And what are the key proposals differentiating them? Secondly, how do you see the net interest income growth in 2018 with loan growth of 9%, 10% and NIM pressure of 10 basis points? And finally, we have seen cost of risk continues to be high. But as you mentioned, there are expectations it could come down in 2018. So I just want to know how much of the large corporates that were facing some problems are already provisioned.

Well, regarding the performance of the economy, we think that, as we mentioned at the start of the call, we're expecting a higher growth rate based, firstly, on the global conditions and the performance of the external sector, which we think that will add positively to growth. And most importantly, I think, is a recovery in internal demand, which has been lagging over the past few years. Why that? Because we are expecting a more dynamic private investment on the one hand. And we also think that private consumption is going to recover. This will be in a context in which the central government is reducing expenses. But at the same time, we are seeing a higher activity of local government. So overall, we think that the combination of private and public demand will add up to grow this year. And regarding the election process, well, I think that the impact of elections on the economy is mainly a confidence issue. So we think that once the electoral process is finished by mid this year, we are going to have a much positive confidence environment. And that will lead that recovery in internal demand to take full force.

Ernesto, regarding the NII growth, yes, you are right. We are expecting to loan grow 9%. And assuming the comparison of the NIM 10 to 20 bps, the NII will grow at around 7%. How we are planning to maintain that growth? Again, the loan expectation growth for consumer in 2018 will be 15%. Meanwhile, the loan expectation for corporate will be at around 7.5%. Probably the economic activity of the second half will help out the corporate side. But that's the way we are designing the NII structure. Regarding the third question, cost of risk at around 2%, now how we are posted and how we are today, beginning of the year, I have to say that we have one of the highest level of provisioning for 90-day past due. You see that we have 164% beginning this year. What means for the -- during 2018, maybe we have to increase our provisions for corporate. But at the same time, we will see a decrease in provision on consumer side and SME side. So at the end of the day, when we talk about to maintain the same level of provisions in nominal terms, we are assuming that, assuming an increase on corporate but decrease on retail and SMEs. That's the reason why we are talking about, at the end of this year, 2% of cost of risk.

Our next question comes from Nicolas Riva from Citi.

José Humberto, my question is on your profitability. I mean, of course, you had a very good quarter, fourth quarter in '17 with some special items like, for example, in your operating expenses. Your reported ROE was about 16%. But again -- but you had the one-time tax refund of COP 86 billion. So the question is for this year, given the guidance that you provided for some line items like, for example, loan growth, net interest margin, and credit cost, what would be a realistic level of ROE for 2018?

Okay, thank you, Nicolas. Yes, we have a good quarter. And I have to say that we have a good year because if you see the 12 months in a row, that was a very positive. The way we are reaching the optimal of return on equity that we talked about 16% in 3, 4 years, the main driver will be efficiency level. Our return on equity this year will be in between 13% to 14%, assuming that we are optimizing the cost, growing only 4.5% and reaching an efficiency level of 48%. Obviously, one of the main drivers to gain return on equity is the cost of credit. The cost of credit for the medium term for Bancolombia will be at around 1.8%. And that will be 1.8% because we are growing in consumer more than corporate. It used to be 1.5% 5 or 6 years ago because we were more focused on corporate. So the new standard for Bancolombia for 3 years cost of credit will be 1.8%. If you do the math, assuming 1.8% of cost of credit and assuming an efficiency level of 46%, you will get a level of 15% to 16% in the medium-term range.

Our next question comes from Jorg Friedemann from Citibank.

I have 2 follow-ups. One, in terms of the equity income that we saw grew more than 400% in the quarter, more than 1,700% year-over-year. I understand that it comprises, among other things, Éxito. But I was doing some research about Éxito's performance in the fourth quarter. And it seems that it was not right. So just wondering, where is it coming from? And what is the recurring level for the next quarters? And my second question is just to understand the drop in personnel expenses despite not accompanied by a reduction in personnel, particularly in this quarter. So I understand that could have some actuarial changes. Just wondering if those are also related to lower tax rates in Colombia and if you could see a further adjustment in those actuarial metrics going forward.

Okay, regarding equity income, I have to clarify that we're not talking about Éxito. We are talking about our JV that we have with them with the name of Tuya. Yes, on equity income, you see a positive number. But again, the impairment of the company was COP 170 billion negative. So that is a reflection of the real momentum of the economy. Remember that Tuya is a credit card business, so the past due increased, the level of consumption decreased, so the interest rates were high. So that was the reason we're setting off the income statement from this impairment. Regarding the expenses, yes, it's not a reduction of the headcount in the fourth quarter. The reduction of headquarter has been taking place since 18 months ago. It is because the provisioning of these actuarial benefits, you made the calculation in the last quarter. So you realize that you have to have less provision because you have 1,000 less employees. That was the reason why you see the drop of the number. We don't understand the correlation between this impact and the tax rate. The tax rate that we have right now, it is 31%. And we expect to have a tax rate for 2018 at around 32%. The reason why the tax rate for the Colombia operation in 2017 were 31% is most of the net income comes from other geographies in which the statutory tax is below that, 25% for the Banistmo operation and 0% from our offshore operation. So we expect this year an statutory tax rate of around 32%.

Our next question comes from Domingos Falavina from JPMorgan.

I have actually also 2 questions. The first one is just to get an update from you. I understand there is a large exposure on the mass transportation system. And I just like to get an idea on how provisioned you are for those operators and what's the total exposure, just to see how it's tracking. And then I'll ask the second question.

Thank you, Domingos. We have been working on the mass transportation system exposure. Meanwhile, we have been doing provisions. Our coverage, in the case of Bogotá, is around 35%. In the case of Cali, it's around 65%. So we will be, as I mentioned, working on solving or helping to solve the situation on a more structural way, meanwhile, doing provisions. So we will keep going on that way. And let me tell you this, the forecast or the guidance that we're giving around the cost of credit includes the provision that we estimate we will need to make to cover those risks on a level that we will feel comfortable. So we won't expect any surprises from that front. It's included in the 2% guidance cost of credit that we are giving you.

Our next question comes from Alonso Garcia from Crédit Suisse.

My question is actually if you could provide some update on the competitive landscape in Colombia across segments and also in Central America. And second, related to that, how do you see your digital capabilities compared to your competitors in Colombia?

Regarding the landscape, the competition in Colombia, I have to say that it's rational. The top 5 banks today accounts more than 50% in the consumer market share and more than 70% in the corporate market share. I would say that we are gaining market share consistently because one of the key elements in doing banking in Colombia is how you will maintain a very solid structure of funding. In our case, we have made it the lowest cost of funding in Colombia because we have been using different ways to get that funding. We are touching the market on the DCM not only in international, also local. We shift our funding structure from time deposits to savings accounts. So I will say that the competition will be focused right now in maintaining funding cost under control and to provide to clients the best options for maintaining the loan portfolio, not only in corporates, also in consumer.

Our next question comes from Ricardo Sandoval from Davivienda Corredores.

I have just 2 questions. One is what is the reason for the increase in the equity method income? And the second is what boosted the increase in the other operational income? That are my 2 questions.

Thank you, Ricardo, for your question. We have been answering both questions in the previous participation of the analysts. And the equity method is basically because one of our investments that we have in Tuya, so we received a dividend from them. And the other operational, as I mentioned before, it is also because we received valuations from the companies in which we are invested in terms of real estate. Those are the explanations, that usually happens in the last quarter of every year.

More than real estate is the one investment on the real estate fund we call Fondo Inmobiliario Colombia in which we have a majority stake.

Our follow-in question comes from Rodrigo Sánchez from Ultraserfinco.

My first question is that some weeks ago, an article mentioned that Superfinanciera is going to design and implement a new indicator to measure the liquidity of the banking system in Colombia. And I understand that this indicator will measure the length of time that deposits remain in the institution. So could you please comment on what you know about this? What the minimum standard is? And where does Bancolombia stand in relation to this measure? And my second question is are you expecting additional cuts on the staff for 2018? And my last question is a follow-up on the massive transportation system. Could you tell us what your nominal exposure is and if you're expecting -- if you could tell us something about what your expectations are regarding the provisions for the year?

Rodrigo, could you repeat the last part of your question? We didn't catch that, the last part.

Yes. If you could tell us what your nominal exposure is for the massive transportation system. And if you're expecting additional provisions for the year, if you could give us a little bit more of color on that part, please.

Okay. Regarding your second question, Rodrigo, regarding the staff, it's not a plan to reduce the headcount. The plan in Bancolombia is to optimize the way we sell products, the way we operate. Maybe as a result of last year, where a reduction of branches, but we are not contemplating as a goal reducing headcount or reducing branches. Again, our goal is to maintain the high level of service with the structure that we are having. Probably this year, you see a very flat level in terms of the headcount unless the robotics or unless the digital banking reflects that we don't need to use some areas of the bank. But again, it's not a formal goal that we are having. Regarding your first question about liquidity, the way we manage the liquidity is we manage the liquidity individually in each operation. I mean, we don't have that cash pool. We have every single operation that they have, they're on liquidity business. Our pillars in the bank are basically based on 3 pillars: capital, risk and liquidity. Liquidity for us, it's extremely important. And we have today, on average, the capacity to maintain the bank at around 80 days with a comfortable level of liquidity. We don't have clear signal how we'll -- with the new regulation. When we have the new regulation, we will send you the message how we will manage that.

And regarding mass transportation systems, as you know, there are several in Colombia. We have an exposure in some of them. Particularly as I mentioned, in the case of Cali, the improvement is clear and we have a coverage there around 65% on provisions. And we expect to do some additional but not much provisions. In the case of Bogotá, we are concentrated in probably 1 or 2 of the operators in which we feel more comfortable with that operators. The solution, it's advancing and we think that there are going to be improvements during this year. Meanwhile, as I mentioned, we'll have a coverage of around 35% of our total exposure and we will continue improving that exposure, meanwhile, working on having to have a structural solution for the mass transportation system, which has to come because it's how, at the end, Bogotá operates and moves all the citizens. So we are positive or we are confident that this work is going to pay out. And meanwhile, we will be covering on a very conservative way the exposure we have on those systems.

Our next question comes from [Rodrigo Torres] from (inaudible) Analytics.

I have 3 questions. The first one, can you give us, please, a little more color on the spending cuts in Central America? You mentioned $100 million. So I want to have more info about that. The second question is what other clients -- corporate clients could affect the level of operations this year? And the third question is you said that you're going to concentrate on more consumer clients, right, more than corporates. So I want to know if that could imply that you will not finance, for example, more projects like 4G or infrastructure projects in Colombia.

Thank you, [Rodrigo]. Regarding spending cuts on the international operation or efficiency, remember that efficiency is a function of 2: of the income and of the expenses. Just to give you an idea, in our operation in Guatemala, we are expecting to optimize the level of branches. So in that book, we will focus on expenses. But in Banistmo, we are focusing right now to increase the loan portfolio in corporates and retail business. That implies that, that will help us the NII in the Banistmo operation. So it's a combination. And in 2017, the upside were because expenses were almost negative in the 3 operations. But this year, obviously we will have this year the benefit because of the income statement.

In the case of our exposure with corporates, as I mentioned before, we will keep working on the solution of those big corporates. And the provisions we expect to make on those customers are already included in our guidance. In the case of increasing our mix on consumer loans, we are clear that, that's going to help our NIM. And we are very confident that it's not going to increase our risk profile. So I think we will -- we are reaching a level in which we feel comfortable. So now it's maintaining that mix, which is going to help the developing of our strategy and the numbers that we are providing to you.

Let me remind you, [Rodrigo], that we are planning to grow this year on corporate, 7.5%, which is a lot of money. It's being on the business in the region. And in consumer, 15%. That means also that we are not concentrated, we are diversificating the loan portfolio.

And regarding your question about our participation on infrastructure projects, I want to be very clear that we are analyzing every project. We look in the -- on the numbers and see what are the risks. And we will be participating in the projects that we consider that have a reasonable risk-return. So we will keep analyzing projects. We will keep participating, but being clear that we will participate in the projects that we feel that the risk-return equation is good for the bank.

Our next question comes from Andrés Duarte from Corficolombiana.

I wanted to know if -- I mean, do you have an estimate on the amount of loans whose conditions were modified without being restructured using or applying the regulation that was issued back in October? That's the first question. And the second question is what's your forecast or what are you forecasting for the year's end in asset quality measures?

Andrés, the regulation regarding the -- how are we restructuring clients was applied. And the final result was an increase on provisions. So that is also one factor that accounted from part of the cost of risk increase in 2017. So we applied that regulation. And it was -- the final effect was an increase on provisions. And it was applied to around 28,000 customers.

It affects the Colombian balance sheet, but it doesn't apply for the consolidated basis balance sheet.

That's an important remark. It's -- it affected the numbers we present under the Colombian regulation but not on a consolidated basis.

We have no further questions at this time. I'd like to turn the call over to CEO, Mr. Mora, for final remarks.

I would like to thank you for your interest on Bancolombia and for participating in this conference call. We saw ahead a year that is going to be a one in which we consolidate some of these strategies that we have been implementing during the last year. It's going to be -- there are going to be challenges related to the cost of risk. We are aware of that. And we are working hard to really, really assess the risk that the bank has and working on being sure that the risk profile that we have on our books is the one that we want to have. So the focus will be continuing on the line of working on efficiency, which is key for us and is the basis of our results and focusing on cost of risk. Again, thank you very much for your participation. And we hope to see you in the conference call in which we will present the results of the first quarter of '18. Have a good day. Thank you so much.

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