Grupo Cibest SA (CIB) 2018 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Bancolombia's Fourth Quarter 2018 Earnings Conference Call. My name is Anna, and I will be your operator for today's call. (Operator Instructions)

Please note that this conference is being recorded.

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 and services by our targeted clients; changes in business strategy; and various other factors that we describe in our files with SEC.

With us today, 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 call over to Mr. Juan Carlos Mora, Chief Executive Officer of Bancolombia. Mr. Juan Carlos, you may begin.

Good morning, everybody, and welcome to the conference call for Bancolombia's fourth quarter results.

I would like to start this call presenting the net income for 2018. During the year, we posted a COP 2.6 trillion net profit, a 1.7% increase versus the result of 2017. We consider this a very positive result, given the challenging economic environment in Colombia. During the fourth quarter, we generated COP 1 trillion in net income, a result that we consider very positive since we could maintain the NIM, keep expenses under control and most importantly, to reach a turning point in the credit cycle.

I would like to elaborate about the performance of the bank. In the last months of the year, we saw a change in the trends of some metrics of the business. We experienced a faster growth of the loan portfolio, which suggests that in 2019 the trend will continue and we'll reach high-single digits. This evolution is particular to Colombia, where we see an improving demand from corporates.

Another element that I want to highlight is the change in the credit cycle and the reduction in provision charges. The quarterly new past due loans formation was close to 0 and shows clear signals of a better situation among customers and better origination over the last 6 months. For 2019, we believe that the trend will continue and the stock of past due loans will decline.

Regarding provisions, we saw the peak in the third quarter '18. And the trend suggests that the cost of credit for 2019 will be around 2%. Higher provisions during the quarter and the year led to an increase in coverage. It went from 164% in '17 to 180% in 2018. Also, we continue our cost control program. And as a result, the expenses grew only 3.6%. We aim to continue improving the efficiency levels and the cost-to-income ratio will go down to around 48% in 2019, as the top line will grow faster.

Finally, I would like to highlight also some relevant achievements during '18. A 10% growth in our base of personal customers and SME, which represent 1 million new clients. 25% growth in the number of transactions performed by the Banking Colombia. The fastest growth occurred in Internet and mobile channels. We reached 9.5 million debit cards in Colombia, 11% growth. This card performed 43% of the debit card purchases in the country and have become the first line of fee revenue.

The consolidation of these trends observed in the fourth quarter '18, such as credit growth, quality improvement and efficiency gains lead us to believe that Bancolombia will have positive numbers in 2019. That will lead to a double-digit growth in net income.

Having said this, I want to ask José Humberto Acosta to elaborate on the main topics that are driving our business. José?

Thank you, Juan Carlos. For all of you following the presentation, let me remind you that at the end, you will find additional information that complements the bank's numbers and that might be useful.

I want to start this presentation making a reference to the very good performance of the core business during the last quarter, in particular, 2 facts explains this. One is the net interest income after provision charges, which increases 17% due to a positive change in the performance of the loan portfolio. The other factor is the 10% growth of net fees due to upgraded number of transactions. 3 one-offs impacted net income of the quarter. First, we conducted the annual appraisal of the investment that we do not consolidate. One of them is Tuya, which presented a significant increase of value of COP 174 billion due to the recovery of impairments done in 2017.

Second, the agreement to sell SURA AM -- a stake of SURA AM announced in December generates a pretax profit of COP 63 billion or a net profit of around $15 million, 1-5. The third one is the recovery of income taxes from previous periods, which was a result of clarification about certain Bancolombia tax positions. The impact for the year was COP 149 billion and for the quarter was COP 98 billion.

Now I want to elaborate about the results of the bank. On Slide #3, regarding loan growth, the portfolio started to show signals of recovery as the commercial loans grew at a faster pace than in the previous quarters in the Colombia operation. The Central America operations grew at around 2% when expressed in dollars. As a result, the annual growth reached 8%. The fastest pace was observed in Colombia with 7% growth and El Salvador with 6%.

Two factors impacted the loan portfolio growth in the fourth quarter. First, the seasonal effect during the last months of the year that present a more dynamic economic environment. As a result, corporate credit demand, which had been slow until December, picked up and the portfolio expanded. In the consumer front, we maintained the pace of expansion of the portfolio, which reached 18% -- 18.5% of the loan book, in line with our strategy to change the mix and improve margins. Second, the 9% depreciation of the pesos versus the dollar contributing also to the faster growth of the portfolio when expressed in pesos. After considering these signals of recovery, we are estimating a loan growth at around 7% in 2019, with Colombia growing at around 9%.

On Slide 4, we see the evolution of margins. Core margins remained stable during the quarter. Nevertheless, we had a positive impact in NII of around COP 120 billion due to the reduction of the stock of loans classified in Stage 3. This contributed to a 20 basis points pickup, the lending NIM. This part has the opposite effect in provision charges, which are COP 120 billion higher in the quarter. And as a result, it's neutral to the bottom line of the bank.

Isolated the impact, 2 factors explain the stability in NIM despite interest rates cuts in the first half of the last year. One is the change on -- in mix over the last year with consumer loan contributing to a higher asset yield. As you can see, consumer loans represent, again, 18% of the portfolio to date versus 16% 2 years ago. And the second factor is a reduction in funding cost through retail deposits and a reduction of cost of time deposits. We don't forecast big variations in margins during this year, and we are expecting a NIM at around 5.8% from 2019. The funding strategy for some geographies will be to replace long-term debt with client's deposits and promote checking and savings accounts.

In Slide 5, we present the provision charges. The 3 large corporate cases, the red bar in the chart represented COP 130 billion in charges during the quarter or 30 basis points of the reported cost of risk. As of December, they presented the following status: Electricaribe, we went from 84% coverage in September to 91% in December. In Ruta del Sol, we came from 26% in September to 34% in December. And in Consorcio Express, the massive transportation company in Bogotá, we came from 54% coverage in September to 57% in December. The blue bar, as we just mentioned, also includes COP 120 billion in charge associated with that reduction of the stock of clients classified in Stage 3, which increases the net interest income on provisions.

Additionally, as we do every fourth quarter, we updated the parameters and historical data to run the provisioning models. These adjustments caused a one-off charge of COP 140 billion, which are not directly related to any specific case. So taking out of these 3 components, the normalized provision cost was COP 600 billion, which indicated a clear improvement in the credit conditions of our portfolio.

The next Slide #6 shows the quality of the loan portfolio during the quarter. Past due loans ratio declined for both commercial and consumer loans for 30 and 90 days. The 90 days past due loan ratio went down to 3.08%, which shows an improvement of the loan portfolio across all segments, particularly in Colombia. Regarding the other countries, we do not see a major impact in the trends. Similarly, coverage is increasing for 30 and 90 days. The most important metric regarding the credit cycle is the amount of new past due loans generated during the quarter. The COP 4 billion indicated such strong recovery in the overall credit conditions of the portfolio, especially in the corporate and SME segments. We expect to maintain the recovery path in 2019, and we forecast the cost of credit to be at around 2%. This metric includes additional charges that we might require to increase the coverage of some corporate cases mentioned before.

Slide #7 shows the evolution of expenses and efficiency. The key point in 2018 was the annual growth in expenses of 3.6%. This is the result of our cost control initiatives and the process optimization.

We forecast to maintain this path in 2019. And as a result, cost-to-income will be at around 48%. As we can see in the Slide #8, the bank continues its strategy to increase capillarity and migrate to low-cost channels. The distribution of products and transaction cost are 2 of the largest cost of Bancolombia. Therefore, it is keep increase the operational leverage. The total number of transaction increased by 12% in 2018. Nevertheless, when we analyze each channel, we see an historical trend. The fast growth in banking agents and mobile and a reduction in physical branches. This is the shift that we are looking for. The outcome of our strategy is the reduction of the average cost per transaction and the capacity to grow faster than the market.

The next Slide #9 shows the outcome of our business strategy in the consumer and SME segments during 2018. We grew 10% our -- of our base of personal clients, which equates to more than 1 million new clients. Several products also grew in line with our commercial strategy. Credit and debit cards, in particular, are growing at high-single digits and the market share of billing and purchases in Colombia hit the record heights, 25% in credit cards and 43% in debit cards.

Finally, we wish to highlight our strategy to grow the consumer loan portfolio, which contributed to the loan portfolio mix that we want to have. Our expectations are based on the fact that the trends defining in the future of the banking operations are positive. Growth will remain in line with our forecast for all geographies reaching 7% for the year. Regarding margins, we will continue optimizing the funding structure and promoting retail loans in the portfolio mix in order to maintain the NIMs at a level of 5.8%. This should maintain a positive trend given the growing number of transactions in Colombia and the launching of new products in other geographies. We forecast 10% fee growth.

In 2019, we see a normalization of the cycle. The stock of past due loans is not growing as we forecast a cost of risk of 2%, which includes provision charges for our large corporate clients. Similarly, we do not forecast large PDL run-offs. And as a result, the 90-day past due loan ratio should be at around 2.7% at the end of this year. We will keep our cost control initiatives in order to have a normal growth of OpEx at around 3.5% and reach a cost-to-income at a level of 48% at the end of this year. With this combination, we forecast a return on equity of 12.5%.

After elaboration of these key topics, we want to open the line for questions. Thank you.

(Operator Instructions) And we have a question from Jason Mollin from Scotiabank.

Talking about this 12.5% ROE, let's call it, guidance -- soft guidance for 2019, how should we think about that versus that -- I'm imagining that's a recurring run rate because we're not going to have special case provisions or your -- you didn't mention any kind of one-off issues in that number. Where would you say the ROE was in 2018 kind of normalizing in a comparable basis? And an important part, I guess, of that 12.5% ROE would be what are you -- what is your outlook for taxes given the recent increase in the corporate tax rate for financial -- for banks in Colombia?

Okay. Thank you, Jason. Regarding taxes, we have not seen an incremental in tax. The statutory tax for 2019 will be 37%. And the last tax reform implies and the tax will be this year, 37%; next year, 35%; in 2021, 34%; and in 2022, 30%. Based on that consolidation of the statutory tax, we are contemplated to have the level of return on equity of -- at around 15% in 2020, assuming the normalization of cost of risk will be at the area of 1.8%. So again, this year, we are expecting 2%, but next year, cost of risk that, that will be the shift transition, the return on equity will be at a level of 15%.

Our next question is from [Giuliana Maya] from Davivienda Corredores.

I have a question regarding the SURA AM transactions. On -- the transaction is on and you received the resources. What are you planning to do with this capital?

Okay. Yes, we announced the sale of our stake in SURA AM in December.

SURA Asset Management.

SURA Asset Management. We announced a stake of 3.5% that we were shareholders. And that represent for us a net income for approximately COP 45 billion, which is not material in terms of the results of the bank.

Our next question is from Yuri Fernandes from JPMorgan.

I had a question on your cost of risk, the 2% number. I understood that this includes one-off provisions, let's say, the corporate cases. But does this number include reversals of those provisions? And how do you plan to treat the payment of Ruta del Sol that you received in January? Should that be like a reversal of provisions? Should we book that as NII? Just like -- and also if you can give some color if you expect to receive the missing 50% of that loan, just provide some color on that exposure.

Thank you, Yuri. Just to put in on nominal terms, our expectation of provisions in 2019 will be COP 3.5 trillion in provisions. That is contemplating increased provision in certain cases like, for example, in massive transportation system, we will get a level at around 75%, the year-end was 57% coverage. So we are contemplated that, and this including the 2% cost of risk. Also, remember that in the case of Electricaribe, at the end of this year, our level of provision was 93%. So also, we are contemplated just a marginal increase in provisioning. So again, assuming that we have to increase provisions in those clients, that's our expectation, the $3.5 trillion at the end of this year.

And Yuri, let me elaborate a little bit on your question. We are expecting a cost of credit of around 2%, as you mentioned. And that's taking into consideration the additional provisioning that we need to do on those corporate customers. We don't include the reversal of any of those provision. It's not included there. And related to your question about Ruta del Sol, those -- we are -- with this particular case, we received a payment, as you mentioned. It's already included on the outstanding debt. And we are in conversations and there are some -- also some legal procedures around this case that we think will lead to additional payments in the future. Meanwhile, we have a coverage of 34% in that case, and we think that it's enough due to the situation of this particular client at this point.

Our next question is from Thiago Batista from Itaú.

I would like to ask about loan growth. You mentioned during the call that you expect high single-digit growth for 2019. But can you give us a sense of the growth you are expecting for each of your segments?

Okay, Thiago. Thank you. Yes, we are expecting on the upper side of the loan growth the consumer loans that would be in the area of 11% to 12%. In the middle of the range will be the mortgage business, especially in Colombia, the loan growth will be at around 10%. And on the lower part will be commercial, which includes corporations and SMEs, and the loan growth will be 8% to 9%. I have -- we have to highlight that this trend would be particularly different in commercial loans because the commercial loan grew last year was weak, was below 6%. So that's the key driver of loan growth this year, the commercial loans.

Our next question is from Sebastián Gallego from CrediCorp Capital.

I have two questions. The first one, you didn't say much during the call about Panama. Can you elaborate on the results of Panama, and what you're expecting going forward? And the second question is related to capital and particularly to Basel III. Can you provide any more color on any progress regarding Basel III? And what you expect going forward on timings on -- regarding Basel III?

Thank you, Sebastián. Yes, regarding the Banistmo operation, to put some context, remember that the GDP growth for the country has been dropping, and the number at the end was on the low 3% of GDP, and that impact our business in that operation. We -- the loan growth was close to 0. And we are expecting for this year to gain some traction and to begin to grow in between 5% to 6%. What happened with Banistmo is they have been doing a big effort in efficiency as they did -- and they are right now at the area of the 52% efficiency level. So we expect that Banistmo in 2019 will help and provide to the Panama on a consolidated basis with loan growth, with lower levels of expenses and in fee income growth as verticals we have replicated the same products in Panama. That's the situation with Banistmo.

Sebastián, let me summarize what José Humberto said. We are happy with the trend. We have some challenges coming from the macro of the country, which is not bad at all, but it's slowing down a little bit. Efficiency of the bank is around -- of Banistmo is around 50%, which is very good for us. The ROE is in the low double digits, still we have a way to go, but we are happy with the trend again. We have challenges related to loan growth in 2019 and also fee growth, but we are happy with the trend in Panama.

Regarding your second question, Sebastián, on Basel III, we made calculations assuming the change of risk weighted and just to give you a precise number of our density, because of the change of risk-weighted asset, we come from 76% to 65%. So if you do the math, that implies that beginning next year under Basel III, probably our Tier 1 will increase in between 100 and 150 basis points.

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

Sorry, I joined late to the call. So can you provide, again, your guidance for the year? And then 2 questions. The one -- the first one is in terms of expenses. How much room do you see to maintain low single-digit growth in this line? Can you provide more details on your digital channel strategy to maintain those levels? And then the final question is a follow-up in terms of Basel III. So what will be the time line for this and if you're expecting lower risk-weighted assets while implementing Basel III?

Okay, Ernesto. Four questions there. First answer is Basel III. That will be implemented in January 1, and that will be implemented in -- during 4 years increasing the buffers, but fully implemented in Tier 1 in January 1. And the implementation the result will be a higher level of Tier 1 because of the change of the risk weighted. Regarding your second question or your first question, the guidance. Again, loan growth at around 7%. NIM that will be at the area of 5.8%. Fee income growth that would be on a level of 10%. Cost of risk, which is well in line for your models could be at around 2%. The level of past due for 90 days that would be at a level of 2.7%. Regarding your second question, expenses. I will say that this is one of our flagship. The way we are controlling the expenses and we expect to be of the area of inflation. And this year, again, 2019, we're expecting 3.5%. And this is supported basically because of the cost control initiatives. Regarding your question, the digital channel. In digital channel, we are doing very interesting things. There are many clients that are using digital channels. We are in Colombia. For example, out of the 10 million clients and we have, 4 million on out of -- 4 million is using digital channels. There the Internet is more than 70% of the transactions on a daily basis. So we are moving the clients to use those channels. And also, this is interesting because the things that we are doing in Colombia, we are replicating in our other geographies. So you will expect the same trend in our operations in Banistmo, in Guatemala and in El Salvador.

And are you providing guidance in terms of net income growth?

Yes. The guidance is double-digit income growth. And more specific guidance will be, the return on equity could be at around 12.5% at the end of this year.

We have a question from Mark Lien from Lazard.

You shared with us new customers you've acquired in the past year. Could you just provide some granularity on how these customers were acquired? And also maybe share with us what you expect the rate of customer acquisition going forward?

Thank you, Mark, for your question. Yes, we are very happy with the result and the acquisition of new customers. As you mentioned, we are new -- 1 million net new customers, around 800,000 where persons, individuals and around 200,000s SMEs. The strategy, it's basically we are adding new functionalities on our relation with the customers. Digital is a key part of this strategy. And many of the customers can enroll and acquire products now with Bancolombia through the digital channels, so that has been key. And also our digital strategy-related mobile banking. We have 2 platforms that are growing really at a very good pace. In the case of Ahorro a la Mano, we have now 1.3 million customers to just remind you that platform, it's just mobile platform. And it's targeting low-income individuals to do basic banking, but for us, is the door to enter to the financial world. We also have another digital platform, we call it Nequi, it's more -- it's targeting young adults that's starting doing their business and their transactions. And that also has been very successful. Today, we have close to 900,000 customers on that platform. And also, on the traditional banking, we are also offering additional features. And the other key element on acquiring customers, it's analytics. We are doing -- or performing an analysis that allow us to target new customers in a very precise way.

We have a question from Natalia Corfield from JPMorgan.

I have 2 questions. The first one is related to the coverage levels that you just mentioned about company Ruta del Sol and Electricaribe in mass transportation. I would like to know if this is related to a Colombian GAAP or if this is IFRS? And also connected to this, it would be good to refresh if your capitalization, the number of 13.47%, is this taking into account IFRS? Or is it based on Colombian GAAP? Those are my 2 questions.

Thank you, Natalia. All the numbers that you are seeing are under full IFRS. So it is contemplated all the regulation.

Of 57% for the mega -- for the -- for instance, the mass transportation companies, this is based on IFRS, not Colombian GAAP?

Exactly, it's IFRS, which is tougher in terms of provisioning level. And the capital level that you are seeing is also under IFRS contemplated all the risk-weighted assets as well.

Our next question is from Andres Soto from Santander.

My question is regarding net interest margin. If I understood correctly, you guys are expecting stable NIM for 2019. I would like to understand what is the assumption that you are making there in terms of Central Bank rate in general terms in terms of the rate of your loans? And how this plays out in a context of some credit growth acceleration that probably is going to put some pressures on the funding side?

Thank you, Andres. We are going to transfer it to Juan Pablo to answer the view of the interest rates in Colombia.

Yes. So basically, in terms of monetary policy, we are expecting for this year a very mild upward moving the reference rate of around 50 basis points. And that -- those movements will be more probably be happening in the second half of the year. The reason for that is that the economy is recovering, but it's still below -- growing below potential. And secondly, there are some price pressures on the economy, but they are very controlled. So we expect that inflation will be around the target range of the Central Bank. So that lead us to think that the Central Bank will be moving towards more neutral stance on monetary policy, which is consistent to -- with what I just mentioned of 50 basis points increase in the second half of the year.

Thank you, Juan Pablo. How we are going to maintain the NIM? And let's divide it in 2 different scenarios. In the Colombian scenario, as Juan mentioned, we are expecting a hike of 50 in the second half of this year. Meanwhile, we are replacing some of the most expense -- the highest level of interest rate of time deposits and bonds. We are replacing pro-rata bonds and that it's finalizing this year. So that will help us to sustain the cost of funding at a level that we have projected. In the U.S. dollar work, it is still opposite. You see that the interest rates came up, so we were -- we had the opportunity to expand the NIM, especially in El Salvador, and we are seeing something of that in Guatemala. So if you combine both effects of the U.S. dollar and local currency, we were able to sustain that NIM. Again, replacing part of the funds that came from bonds, going to the cheaper way to funding, checking accounts and savings accounts.

Our next question is from Carlos Rodríguez from Ultraserfinco.

Just a follow-up on Panama. I mean, I just want to know your expectations for the country and did you have a worry at some point, because we have seen some deceleration in some sectors. And if you're worried of the provision, the current operation in that country?

As Juan mentioned in the previous question, we are seeing very positive trends in the Banistmo operation. We are implementing products. We are implementing new ways to do business there. So we are seeing for the next coming years, a loan growth positive. And on the funding side, we have a strong customer base as well. So we don't foresee any specific concern. Obviously, all depends of the performance of the country, of the GDP. But again, we are forecasting a much better performance the next 2, 3 years. To date, as Juan mentioned, the return on equity of the operation is -- it's a double-digit on the lowest. And we are expecting to reach a level of 13% in the next 2, 3 years of return on equity.

And my second question is regarding the cost of funding. What is the number that in the bottom, we can see in the midterm? As you previously said that you are replacing the bonds and the deposit with the checking and saving accounts. I mean, currently, we have 3.1%. Do you have any number or guidance that you could share with us?

Yes. If your question is that average cost of funding, that would be almost at the same level with ups and downs, and the down is, we are replacing the bonds there since we are moving forward to checking accounts. So the net balance is -- we will maintain the same cost of funding that we are having to date. And you can see that on the final pages of the presentation. And the funding cost closing the year is 3.1%. We are expecting to be in the area of 3% to 3.2% at the end of 2019.

Our next question is from Carlos Gomez from HSBC.

Yes. Sorry, I was mute. You mentioned that you may get an additional 100 basis points in Tier 1 capital after the implementation of Basel III. We wonder how this will lead -- how you see capital going forward? If you start to generate more, will you increase the dividend payout or would you contemplate acquisitions? And if so, where?

Yes. The level that we are reaching next year, as you mentioned, increasing 100 basis points. In our forecast, we believe that this is enough capital for the next coming years. We have not contemplated any particular change in our dividend policy because, again, you have to consider also loan growth in the next coming years. And implementation also, we take 4 years in terms of the buffers. So we have to have also a buffer for the buffers for the next coming 4 years.

Okay. So you are ruling out any acquisitions for the time being?

Sorry?

You are ruling out you are not contemplating acquisitions for the time being?

I'm sorry, Carlos. In previous conference calls, we have been sending a clear message. And right now, our focus is to improve international operations because you know that there is a -- down the road, an improving in NIMs, in return on equities. And in Colombia, we have to optimize the momentum of the economy and to take advantage gaining some competition. So we are not contemplated any particular acquisition.

Our last question is from Jason Mollin from Scotiabank.

My question has been answered.

We have no further questions at this time. Thank you, ladies and gentlemen. I will now turn back the presentation to Mr. Mora, Chief Executive Officer of Bancolombia, for final remarks.

Thank you. I just want to summarize, we have very good results in '18 in -- on a tough environment, and we are positive about the 2019. We think that the trends lead us to believe that '18 is going to be the year in which we consolidate the strategies that we have been implementing in the last 2 years. The pace that we have seen in the past and it's in -- during this year, confirm that view. So we expect that this year, as I said, is going to be very positive. Thank you again for your interest in this conference call. And we expect to see you on the next conference call for the first quarter '18 (sic) ['19]. Thank you very much. Have a good day.

This concludes today's conference. Thank you for participating. You may now disconnect.