Grupo Cibest SA (CIB) 2024 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Banco Columbia's second quarter 2024 earnings conference call. My name is Christine, 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 risks 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. Julian Mora, Chief Corporate Officer; Mr. Mauricio Botero Wolf, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mrs. Catalina Toba, Investor Relations and Capital Markets Director, and Ms. Laura Clavijo, the Chief Economist.

I will now turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer. Mr. Juan Carlos, you may begin.

Good morning, and welcome to Banco Columbia's second quarter results conference call. Please turn to slide 2. As the year progresses, we continue to see modest economic growth across all the regions where we operate. Despite the low demand for credit, our quarterly results demonstrated strong operational performance, that sees a long growth of approximately 3% and maintained a stable net interest margin at 7.1%. This plus underpinned by our robust financial strategy that enable us to accelerate the reduction of interest expense, thereby fostering great origination and increasing our net interest income.

Nevertheless, our net income saw at 13.5% decline from the previous quarter and our return on equity fell to 15.6%. This was primarily due to an increase in provision charges by 23%, which we will discuss in more detail, along with our one-time impairment charge associated with the joint venture.

From a year-over-year base, net income remained relatively stable. Thanks to a slower rate of credit deterioration that contributed to improved asset quality and a stronger balance sheet coverage. Our capital ratios is stand firm with a target solvency ratio of 12.6% and a core equity Tier 1 ratio of 10.9%.

In other significant developments this quarter, I would like to draw your attention to a few key points. Firstly, the appointment of Mauricio Botero as the new Chief Financial Officer of Bancolombia, effective August 1, succeeding Jose Humberto Acosta Martin retirement.

Secondly, the initiation of our reduced rate mortgage loan program on slide 20. We signed to boost the housing and construction sector. And thirdly, the successful execution of a lot of liability management and a new Tier 2 issuance in the international markets, aimed at optimizing our capital and funding structure. We will explore in more detail later. I will now hand over the presentation to Laura Clavijo, our Chief Economist, who will provide a deeper analysis from the macro part. Laura?

Thank you, Juan Carlos. Now please let us turn to slide 3. The Colombian economy expanded at a better than expected pace of 0.7% during the first quarter of 2024 and has continued to show signs of an economic upswing during the following months, in line with improving macro conditions. Leading monthly indicators such as the ISE and Bancolombia have now passed, suggests the economy may have expanded somewhere between 2% and 3% during the second quarter.

Consequently, we have revised our growth forecast upward from 0.6% to 1.3% for 2024 and from 2.4% to 2.6% for the following year. Even though key economic drivers are still lagging, such as investment levels, household demand and credit conditions, some sectors are thriving and leading the path towards the recovery.

For example, the agriculture sector grew at an annual rate of 5.5% as the sector surpassed adverse weather conditions and has benefited from improving commodity prices and rising traditional exports. Moreover, the public sector, which contributes close to 15% of total GDP, has continued to thrive, expanding 5.3% during the first quarter of 2024 and had managed to bolster employment figures.

Nonetheless, this support emerging from the public sector may be hindered moving forward as fiscal pressure has escalated. Even though the medium-term fiscal outlook presented by the government sets a far more realistic setting, including lower expected tax collection, non-feasible additional revenues, higher interest payments and expenditure cuts worth COP20 billion, increasing debt levels and the fiscal deficit forecasted at 5.6% of GDP in 2024 compared to last year's 4.3% reflect the fiscal policy challenges that lie ahead.

Policy challenges are also being tackled on the monetary side, even though inflation has continued its descent to the 7.2% level as of June, bringing down inflation to the Central Bank's range of between 2% and 4% is proving to be quite difficult considering the indexation effect on services and housing prices. Hence, the Central Bank's cautious approach to easing its policy interest rate, which still stands high at 11.25% at the end of the first semester. We anticipate the Central Bank may begin to accelerate to 75 basis points cuts before year end, and low rates will continue defending boosting consumer demand.

Finally, in other events, Congress closed its legislature during June with the approval of the pension reform and the advancement of the labor reform. Furthermore, the government has announced its intention to press through its reform agenda during the remaining two years in office, including a failed health reform, public services and an economic recovery package, which may include tax amendments.

Now please let me turn it back to Juan Carlos Mora, who will present Bancolombia quarterly results.

Thank you, Laura. Please proceed to slide 4. Before we dive into the results of the quarter, I would like to highlight the strategic advantages that Bancolombia has cultivated. We remain competitive and capitalize on growth opportunities within the dynamic financial landscape.

At the core of the first value [Klabin] pillar, our comprehensive value proposition which merges both financial and non-financial business models, color towards diverse range of [business]. This is delivered through our universal banking model that currently serves over 20 million customers in Colombia. Our integrated complementary unsalable approach not only facilitates cross-selling opportunities and diversification, but also enables the bank to adapt to emerging market trends on in case our value proposition.

A prime example of our capabilities is the recent introduction of Puenia, our digital asset company that offers a gateway from traditional financial systems to the emerging digital assets economy. It position us at the forefront of financial innovation, providing a platform for learning and iteration.

In [Colombia], our second volume driving pillar involves an interoperable multichannel platform designed to serve our customers sector efficiently through an ecosystem model. This platform has proven to be called the core tool for attracting new customers, especially those who are unbanked or underbanked by offering accessible money transfer services and convenient fashion, non-cash out of.

As a result, we have significantly funding our distribution reach and witness exponential growth in transaction volume. It has contributed to an increase in fee-based income and accumulation of low-cost, sticky deposits that bolster profitability.

For instance, [Nequi] has seen a remarkable 14 monthly transaction volume with a 20% increase quarter-over-quarter and a 70% increase year-over-year. This growth is driven by increase in our average monthly construction activity per user, which has grown nearly 15% quarter-over-quarter and [33%] year-over-year.

The Colombia's financial system advances to our great interoperability and Colombia is well positioned in the market with the technological and operational capabilities to further projects and integrate our financial services into new marketplace.

These will promote financial inclusion in case our proposition and improve the client experience. In the Columbia has been transitioning over the past decade into unseen therapy level market with real-time payment solutions like passenger PAC and ACH net and Colombia leads the market with the successful implementation of QR code technology, which is now used over [1.0 million] merchants across more than 1,100 municipalities, and by more than 3 million unique payers and currently accounts for approximately 90% of interoperable incoming payments.

These combined with our strong foothold in terms of functional domain and a solid customer base of over 20 million customers at Bancolombia are north of 20 million users at Safety, incent us with a unique opportunity to broaden the case, say, interoperable features for our payment infrastructure at fees, distribution and sales opportunity.

Now please turn to slide 5. Transition to our fair value driving pillar, I would like to discuss our recent transaction in the international capital markets. We serve as a testament to our it is in financial management. In early June, we capitalize on favorable market conditions to initiate a liability management transaction.

Our goal was to increase our Tier 2 capital to support continued growth and to mitigate short-term refinancing risk. The outcome to this strong interest in the Bank from international investors, which enabled us to issue the largest Tier 2 bond in the Colombian market today. We effectively leverage both internal and external resources to reduce interest expenses and provide investors with options for cash or long-term investments to satisfy the variety of needs.

I will now pass the presentation to Mauricio Botero, who will provide a detailed analysis of our results for the second quarter of 2024. Malaysia.

Thank you, Juan Carlos. Please go to slide 6. The contribution of the Central American operation to a consolidated books continues increasing, providing credit risk and currency diversification to our operations. Loan growth on the regional banks was mainly driven by an increase in commercial loans and supported by an 8% peso depreciation during the period, resulting a higher aggregate share of the offshore books relative to Colombia.

However, we're looking at each operation. We see mixed dynamics. [Manismo] recorded higher provision expenses as per lower growth prospects in Panama resulting in net income contraction quarterly, which implies on ROE of 5.5% in the period.

On the other hand, [manpower Ecolab] posted a 21.6% ROE on the back of growing interest revenue, coupled with a reduction on provision charges. Similarly, bank presented a strong quarterly performance as reflected on a sharp ROE rebound to 12.3%, driven by a growing NII and lower provision charges associated releases on corporate clients and progress made in controlling retail deterioration.

Putting all the net income contribution of Central America to the consolidated figures remained flat during the quarter, but decreased year-over-year, largely attributed to the lower average exchange rate in Colombia during the last 12 months.

Please go to slide 7, the loan portfolio grew 3% quarter-over-quarter, and notably we assume growth on an annual basis with that 2.7% expansion. Net of ForEx, however, growth on the quarter was low at 0.5%, yet higher on the year, reaching 3%.

Growth was mainly driven by commercial loans with a 3% quarter-over-quarter as we implement this special lines to stimulate demand or need to size companies and corporates, which in turn contributes to interest income generation with good asset quality.

Moreover, mortgage loans registered a notable expansion of 4.8% over the quarter and 7.4% over the year, fueled by the renewal of the social housing subsidy program in Colombia. This coupled with the recent launch of our cut rate program for certain mortgage loans should induce loan growth going forward. On the fleet side, consumer segment increased 1.9% quarter-over-quarter, we keep, as adjusted by ForEx represent a 0.6% drop with the restraint origination standards on unsecured loans.

Please go to slide 8. Growth on deposits outpaced loans growth posting a 5.3% growth over the quarter and almost 6% on an annual basis, largely explained by a prudent approach. So our liquidity in our [alco] strategies.

Time deposits grew the most with a 6.7% quarterly and 8.6% yearly, mainly explained by a pickup in term deposits with institutional clients and in digital short term time deposits with retail customers. Thus, in deposits reached at 37% share of our funding mix.

On the other hand, saving and checking accounts both grew over 4% in the quarter, maintaining a 39% in a 12% share, respectively, on the total funding mix, providing a non-core to the overall cost and stability to the funding structure.

All in all, cost of deposits decreased 35 basis points during the quarter, driven by a 73 basis points cost reduction on time deposits, outpacing the 50 basis points repo rate cuts carried out during the same period. Redeemed these very relevant as it provides our ability to adjust the time deposit maturity profile to our fast repricing and mitigate mean contraction going forward.

Please go to slide 9. Total interest income on loans and financial leases or they're contracted 0.4% on the quarter and 7.2% over the year, driven by the interest rates decline that affects income generation on new and existing loans as well as further contraction of the consumer portfolio, which has higher yields.

Consequently, total interest income, including loans and investments, fell 1.7% over the quarter and 1.4% over the year. However, our ability to outpace the repo rate cost on our time deposits and reduce overall interest expense resulted in a decrease in interest expense of 4.6% quarter-over-quarter and 9.3% year-over-year.

As a matter of fact, interest expense reduction compensated for the declining yields on loans. So NI resumed its growth, reaching COP5.2 trillion in the quarter, equivalent to a 0.5% increase over the quarter and 5.1% over the year, as you can see mean remained flat during the quarter at 7.1%. Going forward, we will continue managing the sensitivity and maturity profile of our assets and liabilities to mitigate mean contraction. For example, securing a fast repricing of total time deposits out of which 68% will mature in the next 12 months.

Please go to slide 10. Fee income grew 11.2% quarter-over-quarter and 10.2% year-over-year, mainly explained by bank assurance that to resume its growth dynamics, posting a notable 37.3% increase for the period and 12.4% year-over-year. Similarly, payments and collections increased close to 10% quarterly and annually. Additionally, credit and debit card fee income increased 1.5% quarter-over-quarter and 5.8% year-over-year, driven by a higher volume of cards and transactions.

On the fleet side, the expenses grew 22% over the quarter and 19% over the year, outpacing fee income growth explained by the increase of both credit card processing charges and correspondent banking fees. That's a net income increase, 2.9% in the quarter and 3.2% on an annual basis, resulting from a fee income ratio of 20.1% as compared to the 18% registered in the previous quarter.

Please go to slide 11. As shown in the upper left chart, there was a significant reduction on five year loan formation compared to the previous quarters, mainly explained by this lower pace of consumer loans deterioration in Colombia as we will further elaborate. These, coupled with an increase in charge-offs of the quarter, denotes our efforts and commitment to preserve a healthy balance sheet.

On top of that, net provisions for the quarter were COP1.6 trillion, a 23% increase over the quarter, yet at ['22] dropped year-over-year, reflecting the better performance of new vintages under tighter origination standards an enhance collection process.

The three main factors behind the provision charge performance in the quarter were first, COP213 billion charge in SMEs back on our COP153 billion charge in companies from constructions and health sectors. And third, a COP34 billion charge on certain clients on the large exposures segment given on expected deterioration. On the flip side, there was a COP237 billion provision release associated to macro variables as a downward trend in interest rates positively impacts consumer loans.

Regarding asset quality, the 30 days past-due loans ratio decreased to 5.2% on the quarter, driven by the consumer loans with a slight increase in coverage reaching 112%, whereas the 90 days past due loan ratio slightly increased to 3.4%, explained by five new loans rollover. It's thus reducing coverage to 169%, but it's still providing an ample question.

From an expected loss perspective, we highlight this stability accomplished in stage two loans provided all measures taken to contain defaults. Moreover, the combined coverage for stage two and stage three loans remain steady at 40%. We remain confident that as interest rates continue its downward path, the pace of loan deterioration we tend to normalize, but we do expect higher delinquencies on SMEs associated to a weak performance of construction, manufacturing and retail sectors.

Please go to slide 12. The consumer portfolio in Colombia posted a COP210 billion reduction on new past-due loans quarter-over-quarter. Given the slower pace of defaults and higher recoveries, pushing down the deterioration during the quarter to 7.8%. We highlight the improvement in personal loans that account for almost 48% of the consumer loan portfolio in Colombia as reflected in each 90 days past due balance, and it is stage two and stage three share, which have declined for two consecutive quarters. Thus, the overall consumer segment posted a lower 90 days past due loan ratio of 5.4% and its cost of risk dropped from 8.9% to 8.7%.

Given the better performance of new vintages and the visibility provided by our trade models, we continue increasing gradually loan originations on a specific line niches under a more conservative approach, which coupled with better macro conditions going forward should contribute to restore asset quality while increasing the loan portfolio profitability.

Please go to slide number 13. Operating expenses grew 3.4% quarter-over-quarter and 3.7% year-over-year, notably lower than the inflation rate in Colombia during the period. These reflect the stringent cost control and efficiency program discussed on our last conference call, coupled with a lower average exchange rate that reduced overall operating expenses denominated in US dollars. Besides personnel expenses only grew 1% quarter-over-quarter and decreased 0.4% year-over-year. In both cases, below the annual wage increase in Colombia, which certainly reflects efficiency gains.

On the other hand, our administrative expenses grew 5.2% quarter-over-quarter and 6.8% on a yearly basis, mainly driven by local taxes in IT and licensing expenses directed to the business transformation and migration to the cloud. We remain highly committed to cost reduction and efficiency gains. While we continue evolving our business transformation underway, however, the result of expense growth outpacing operating income growth, increased the efficiency ratio to 48.8% during the quarter.

Please go to slide 14. Net income for the quarter was COP1.4 trillion, 13% below the previous quarter, mainly attributed to lower net interest income, higher provision charges in a one-off impairment charge on a joint venture on a yearly basis. However, the bottom line remained relatively flat as lower net interest income generation was offset by a much lower cost of risk.

All things considered, the ROE for the quarter was 15.3%, which if adjusted for goodwill resulting a return on tangible equity of 20.5%, that shows the strong profitability of the operation isolated of goodwill related costs.

Now please go to slide 15. Shareholder's equity increased 7.5% quarter-over-quarter and 7.3% year-over-year, mainly driven by net income generation, coupled with ForEx depreciation. Core Equity Tier 1 ratio ended at 10.98%, up 53 basis points quarterly explained by organic capital generation after accounting for the annual dividend payout decrease in the first quarter. Consistently, total capital adequacy ratio stood at 12.6%, equivalent to a growth of 23 basis points over the quarter and 6 basis points over the year.

With this, I will hand over the presentation back to Juan Carlos for the final remarks. Carlos.

Thank you, Mauricio. Please proceed to slide 16.

As a part of our business with -- strategy, we have successfully originated COP21 trillion during 2024, contributing to us cumulative total of COP162 trillion since the year 2020. In our commitment to environmental matters, we have carried out climate related assessments with clients in demand for steel and manufacturing sector.

These initiative is aimed at ensuring third climate strategies are in alignment with our own. We are also proud to announce the release of the fourth edition of our principles for responsible banking reports. This publication, which has received limited assurance from PWC, highlight our dedication for sustainability.

Please go to slide 18. Last, I will share our guidance for the year end 2024 based on the current data on our updated macroeconomic forecast. We expect loan growth of 8%, broken down in a 4.3% growth from the Peso [denominated] loans and 7.7% in the dollar denominated loans. I mean to close around 6.8%, cost of risk between 2.2% and 2.4%, efficiency ratio in the 50% area, ROE between 14% and 15% on core equity Tier 1 between 11% and 11.5%.

Now we will take any questions you may have. Thanks.

Thank you. We will now begin the question and answer session. (Operator Instructions)

Ernesto Gabilondo, Bank of America.

Thank you. Hi, good morning, Juan Carlos. Welcome, Mauricio and good morning to all of your team. Thanks for the opportunity. My first question will be on your name expectations. So you're expecting an interest rate of around 8.75% in '24 and 6% in the next year. So where should we see the means normalizing in the next coming years?

And my second question is on your effective tax rate. We noticed it came at a 20% during the second quarter. So how should we think about the effective tax rate for these and next year? And the last question is on [Nequi]. We see you already have an important number of active clients. So just wondering if you can share a little bit of your recent strategies to monetize those clients and how do you see Nequi at break-even and also, well, you can provide some key target ratios for Nequi in the next years or when do you think you can start providing those indicators? Thank you.

Okay. Thank you, Ernesto. Let me address your questions. Your first, I will have a comment on the tax -- effective tax rate. And on that, I will ask Mauricio to give you more color. And then I'm going also to answer your question or your question or your comments about Nequi. So let's start with the with the [Pyme].

We know that in Colombia, we have had a monetary policy that is at this moment, fight inflation and inflation has been kind of persistent to go down. So at the end, our Pyme will depend on how the monetary policy will behave. And we are expecting, of course, the lower expectations on two additional reviews of the interest rate from the Colombian Central Bank and due to the inflation news that were released yesterday, probably we will see probably dated rate will go down around 125 basis points to 150 basis points.

So with that, we expect our margin to be around 6.8% by the end of this year. And that will depend mainly on the speed of the transmission of the monetary policy and if the Central Bank is going to decrease the rate 25 basis points or 50 basis points in each of its meetings this year.

So for next year, we expect the inflation to keep going down. And still we don't see that the grade the inflation sorry, will be in the bank [Republica] target. So the monetary policy will continue trying to control inflation. So with that, we expect that our needs for 2025, we'll be around 6.5%. So that will decrease our net interest income, but also that will be related to the cost of risk if you see the results.

Regarding the -- your second question, the effective tax rate. I'm going to make a comment and then we go back and after I answer the question about Nequi to at the effective tax rate. So the -- our expectation is that the effective tax rate for the year will be between [26%] and [28%] and that's it, in line with our past guidance, the quarter was around 25% and Mauricio will explain that later, resulting regarding Nequi, Nequi now has more than 20 million clients, around 14% of them are active customers on our path to monetization sees It's going well.

We are improving or we are in the possible monetization is definitely through to credit, and we are monthly by monthly improving our credit performance. So with that will take a little bit a while. We -- I think that our profitability will be by the end of '25 beginning of '26, but it will depend on how fast we can go on the credit side.

We need to be careful and we will be measuring how the clients are performing so far, a financial we are doing we are doing well. So those are our -- the transactions are there. We have now a lot of information about our clients. They are transacting through Nequi. So that's going to help us a lot of known declines on with that, we'll be able to for the credit lines.

Mauricio, let's go back to the second question about the effective tax rate, please.

Yeah, hi, Ernesto. To understand the tax rate we used for the second quarter, it's important to understand that that the aggregated tax rate among all the different segments, businesses and geographies in which we participate, it was 25% as Juan Carlos mentioned, but there was a one-off reversal of provision for taxes from the previous year.

If you normalize that, you get the 25% and that's why it was 20% and the guidance should continue to be between 26% and 28% for this year and the coming year.

Thanks, and thank you so much. Just a follow up in terms of your Pyme expectations. So in the first half, I think Pyme we're at around 7.1% and you're expecting that for the full year or in the second half of the Pyme, should we go into 6.8%. So there will be pressure of 30 basis points for the year.

And then for next year, you're saying it will be around 6.6%. So that will be only in pressure of 20 basis points. So I just wanted to double check these numbers with you.

Mauricio, please state, I have missed this question.

You need to understand the sensitivity that we have in the net interest margin to the movement in the repo rate. So for every 100 basis points decrease in the repo rate, we would have an impact of 10 basis points in the net interest margin. So it will all depend on the velocity of the decrease in interest rates from the Central Bank, it would make sense to look at the second half at 6.8% and according to a velocity, you may see that interest margin moving from 6.8% to the 6.5% area during 2025, but it won't be from the beginning of the year, it would depend on the velocity of the Central Bank to decrease interest rates.

Okay, perfect. Thank you very much, Mauricio.

Thank you, Ernesto.

Tito Labarta, Goldman Sachs.

Hi, good morning, everyone. Thank you for the call and taking my question. My question is on your provisioning on new provisions increased in the quarter, although asset quality look better, the tone on the call in general sounds a bit more optimistic and you did lower the guidance a little bit on the cost of risk.

Just to think about and want to understand the increase in the quarter a little bit more specifically, given the somewhat better trend overall that you're seeing and thinking maybe a little bit more longer term, you're still well above your historical cost of risk. Do you think you can get back to those levels where you expect a better GDP growth next year. How do you think your cost of risk and can continue to evolve into 2025? Thank you.

Thank you, Tito. If you compare second quarter with the first quarter, you will see some additional cost of risk but we -- overall, and that's because the first quarter of the year was abnormally low. What we see is the trend of better asset quality on their behavior in the second quarter was better than in the first quarter.

Now that's why we our guidance is for cost of risk for the end of the year, it's between 2.2% and 2.4% Band previous guidance was 2.5%. So what we are seeing is a better behavior on the consumer loans. Some deterioration on SMEs. But all in all, we expect on improvement on cost of risk for the next half of the year.

And regarding your question about 2025, we expect a better performance in terms of GDP overall. On top of that, we all suspect a better cost of risk and a more normalized as we mentioned in the past, our normalized cost of risk was around 2025 to be between 2 and 2.2, which is stores at a normalized cost of risk.

That's very clear and congrats.

Thank you.

Yuri Fernandes, JP Morgan.

Hey, guys. Good morning and congrats on the quarter. I have a question regarding your guidance and your ROE. You're increasing this a little bit. But when you look to the metrics and then we move to the first half like you had ROE -- the first quarter, these are we was higher than they were in maybe some one-time events on impairments.

My question is, can we see higher ROE or is this a one-off tax rate normalization, a headwind or margin pressure? And just trying to understand it were not to be too conservative on the ROE here and what can -- maybe make the are we to be we see your guidance is it's taxes, expenses includes the margin normalization? Just trying to get some color on this. Thank you.

Thank you, Yuri. First semester was -- it was a good semester and it actually was better than we were expecting. Regarding the second semester on what we expect by year end, and if we will be able to deliver a higher ROE, that basically will depend on antitrust quite our views on two main variables, the speed of interest rate changes or it, as I mentioned, if the Central Bank we'll produce 25 basis points or 50 basis points and the effect on our Pyme.

So that 6.8% Pyme suppose -- a more aggressive reduction on interest rates. So there could be an upside possibility. And the other main variable is cost of risk and we are seeing the cost of risk improving. So to your question, our past guidance of ROE was around 14%.

Now we are saying 14%, 15%. Is there an upside possibility regarding, I mean, it will depend on how at the end interest rates will behave and the economy -- Colombian economy will perform. We -- pardon couple of past months, a good, a surprise, positive surprise regarding economic activity in Colombia. If that continues, I think we could deliver a little bit higher ROE yearly.

For second one, Mauricio, if I may a second one were a strategic is structural. Like one of the good things about the Bancolombia is the funding right? Like the funding cost and the franchise. And now in Colombia, we have the newcomers and like we discussed a lot of new banking here and they are offering 30% yields on the quantity of [Oboz].

Is there a problem for funding costs in Colombia at some point and all probably going to be they are too small, but like Q2, Q3, five years from now, how do you see players offering above benchmark rate from liabilities impacting the dynamics like on competition for the industry?

Because maybe it's not a direct impact for Bancolombia, but some peers of you will start offering higher yields to attract deposits and in all likelihood and the entire industry funding cost moves up. So not a question for the quarter, but more of how you see players offering yields above benchmark rates and how this can be a threat for your funding costs? Thank you.

Yes, Yuri, definitely competent -- competition is tougher now. There are new players that are more active now, as far as you mentioned, they are offering rates in savings accounts that are high. One of our advantages is that we have a lower funding cost and a presence in all parts of the country.

So as a result and it that is going to affect our acquisition in the future. Definitely will lead to the need to adjust our strategy and our strengths, but it probably still has (technical difficulty) the cash, cash-in and cash-out on our presence in -- we through physical channels. It's also important.

So overall, we will need to adjust our strategy. We don't think that is going to affect materially, our cost of funds, but we need to keep an eye on the development of those competitors and how they behave. So far the players are offering a higher for high interest rates for savings accounts. Are the new commerce comments on the fintechs, mainly not the traditional players.

We will see we need to adjust a little bit the our strategy. And at the end, if the cost of funds increases that will also -- we need to see if we are able to transfer that through to the economy, through the interest rate we charge to our to our customers.

So that is something that we need to take an eye on and see how it develops. And as you said, that will probably come in '25 by the end of '25 or '26, we will see the effect of that strategy from some competitors.

No, super clear. Thank you very much, guys, and congrats again. Thank you.

Thank you, yuri.

Brian Flores, Citi.

Hi. Congratulations on the quarter. I wanted to ask on two things. One is maybe seizing the opportunity of follow up on Yuri's question, you have a very strong franchise in terms of credit control. You have a 30% market share in terms of value of transactions on us. As Yuri was mentioning, you have a new entrant that is accelerating in this segment up, as you mentioned in the call, appears to be in a very risky segment at this point in time, right.

So how is your strategy in terms of preparing to defend this market share? Or would you be willing to open space in terms of market share, given the current market conditions, I think maybe yours, but this question is more focused on the asset side more than on the funding side that you covered with Yuri's answer.

And then my second question is in your presentation in the first quarter, you opened the duration of your assets and liabilities, and we saw that you have around for 590 days duration liability, which was already reducing around 530 days in assets. Can you elaborate a bit on where it is now and where is this gap, there is some mismatch between those as of the second quarter, it would be very, very helpful. Thank you.

Yeah, thank you, Brian. I will take your first question, and then I will ask Mauricio to address your second question. It's definitely the competitive landscape is changing in Colombia as I mentioned. There are new players. It's a sign to enter an unbiased market, which is understandable. What I see is that if you do the math, 30% interest rates on savings accounts with a maximum rate around 29%, we dont' have much room there to take a risk. So what they -- what could happen is that players are going trying to buy market, but it's not a sustainable strategy in terms of how can that last?

So we have -- as I as you mentioned, a strong franchise, we have a diversified client base. We have a very strong, and very wide distribution network in terms of branches and in terms of banking agents. So we are going to leverage that start and the other point that is important and different to other markets besides the maximum interest rate that we could charge, it's that there is a transaction fee in Colombia which promotes the use of cash.

So that also is something that we need to take into account. As I mentioned, we need to prepare for different conditions, and we think that we have all the tools to expand our market share, and we will need to adjust our strategies regarding those new competitors and new players that are entering into the market. Mauricio could you address Brian's second question, please?

Yeah, hi, Brian. Our strategy has been very focused on the deposit mix. The -- how to keep a low cost of funding, it's based on the deposit mix. So as you can see, both the interest income from loans and interest expenses from deposits, both of them decreased by the interest expense from deposits decreased a little faster, defending the NII.

So in terms of duration, well, we're having a repricing strategy for time deposits as 2/3 of the time deposits have a maturity of one year or less. So that that allows us to reprice our time deposits and keep the savings and checking accounts. We have healthy growth figures. So all in all we keep on having a low cost of funding, which allows us to have resilience net interest margin.

Perfect. Just a quick follow-up. So in terms of the magnitude of the sensitivity, I know maybe the days are now not being disclosed. Do we think it's a bit more again on the passive side of the balance sheet or is it more March now one neutral just to get a big picture ideas? Thank you.

Mauricio, could you take that, please?

Brian. I'm sorry. Could you repeat your question, please?

Sure, Mauricio, no worries. So basically, the -- in the second -- in the fourth quarter, we saw the gap right? Already contracting, I think in the first quarter, it was around 56 days negative, basically on the duration of the liability side of this asset duration gap between assets and liabilities was minus 66 days. Should we think that as of the second quarter, is this a similar level, since it's closer to zero or just a big picture idea would be helpful.

Okay. Thank you. You can have a projection of a similar duration in terms of assets and liabilities. We are working very actively with the Alco committee trying to hedge the different rates. But overall the structure between assets and liabilities should continue to be very similar to the one we had in the previous quarters.

Thank you.

Thank you, Brian.

Andres Soto, Santander.

Good morning, Mauricio, Juan Carlos, thank you for the presentation. I have a question regarding then the numbers that you are commenting on the 2025 outlook. You have mentioned margins around 6.5%. So that will imply a 30 basis points compression versus the one that you are expecting for 2024. And you are guiding for a cost of risk that is 20 basis points below the range that you are providing for 2024 with that we will assume some ROE compression.

And next year, I would like to confirm it, if that's your view or you're expecting some efficiency improvement to offset that ROE compression. And if you can give us what is your preliminary outlook for ROE next year?

Thank you, Andres. As you mentioned, our guidance for 2025 regarding 6.5% and that's because interest rates will go down. Also, as I mentioned in my previous answer, that viable, meaning net interest margin and the cost of risk will be key.

So what we expect is a lower a lower cost of risk between 2% and 2.4%, -- 2.2%. I'm sorry, with that we our expectations regarding NIM are in the 14% area, we would expect some efficiency -- efficiencies in terms of expenses of operating expenses. We expect to have less pressure from from inflation during 2025. So with all of that, our expectations of Pyme's around 14% between 17.5% and 14% for [2025].

That's very clear. And Carlos, and so maintaining your cost of risk expectations specifically for this year, your guidance implies that for the second half of the year, you're going to be at around 2.2%, 2.6%. When I look at your number in the second quarter, excluding the provision releases that you guys conducted, our cost of risk is significantly higher than that level at -- almost 2.9%.

So how confident are you on these ROE, sorry, cost of risk improvement in the second half of the year. And if you can comment, we have discuss a bit about the performance, Colombia, but we see that a continued deterioration in Panama, and you expect this performance to continue and what have been the drivers for the Panama deterioration?

Ye, Andres. If you see the behavior of the second quarter in terms of provisions, in terms of how the loan book to from general, we see an improvement. It's more regarding -- perhaps a specific situation for the quarter, if you normalize, the cost of risk for the quarter is 2.5%. With that and they are behaving from behavior that we are seeing in the different books, we could expect at a lower -- cost of risk.

So yes, so to your question, yes, we are expecting an improvement for the -- in the second semester. That's because we have seen a better performance on the Colombian economy that we were expecting at the beginning of the year, even after the first quarter.

Regarding your second part or the second part of your question, Panama yeah, we see a higher cost of risk in Panama, but -- and that's mainly on the consumer side. We don't expect an additional deterioration but is going to impact the results of the year, overall.

So we don't need to expect an additional a level of deterioration, but it's going to continue on at similar levels. And because of that, ROE for manageable. It will be a below 10% for the year from now on. But we expect that situation for Panama improves during 2025.

Remember that Panama was especially affected by the pandemic and some measures coming from the supervisors regarding statements. And still we are seeing some effects on that, but that's particularly on the consumer side and some of the mortgages. But we expect that to improve in 2025.

Thank you, Juan Carlos. And maybe as a follow-up to that you have presented in this release of the tangible, ROE, which is significantly higher than you reported ROE and a lot of that is affected by the goodwill from the Panama acquisition. Have you guys considered do a write off of that goodwill that you still have it on your balance sheet?

We always are exploring different alternatives and options. So far, we are not -- we don't have a decision by itself without we always have in mind and look for opportunity. But as of today, we don't have any decision regarding that goodwill, Andres?

Thank you, Juan Carlos, and congratulations on the results.

Thank you, Andres.

Nicolas Riva, Bank of America.

Thank you very much, Juan Carlos and Mauricio for the chance. Like I said, before, I think it was very useful that both credit analyst, equity analyst firm kind of asking this call. So with that, I have two questions on your Tier two capital.

The first one, looking at the change quarter-on-quarter, so it declined by $226 million. You did the buyback on the 27, you bought back $283 million, I believe they compute 80% of Tier 2 capital. So that would explain the buyback of the 27, would explain the $226 million decline in your Tier 2, However, it looks like and included the $800 million rates that you need by issuing the 2034.

So I want to confirm that the $800 million new Tier 2 capital has not been included in your capital ratios at the end of June. And in that case, that will increase, I believe your capital ratios by 110 basis points, which means data pro forma your total capital would be [13.7] rather than [12.6]. If you can confirm that that's my first question.

And then my second question, you have the call option on the December 29, I know the decision has not been made yet, but if you can maybe just talk about your thoughts regarding that call option. I would assume that calling the 29 without any capital replacement is not an official possibility. Because in that case, you would lose, I believe, 80 basis points of capital, which is all the capital you raised by issuing the 2034 net of buying back some of the 27. But again, if you can discuss your thoughts regarding capital ratios now, including the issuance of the 2034 and any early thoughts regarding the call option on the December 29. Thanks.

Thank you, Nicolas, for your questions. I'm going to ask Mauricio to take them.

Hi, Nicolas. Let me take the first question, You are right, we do an account in the solvency ratio for the second quarter, we account for the $800 million bond issuance. And that's because by the close of the second quarter, we haven't received the approval of the Superintendency of Colombia to get capital credit for debt issuance, but we already feel we did. We did receive it on July. And the pro forma figure is exactly what you just mentioned.

It would have added 117 basis points. So if you normalize that our solvency ratio would have been a 13.7% and not bid 12.6% that you see. And we're going to be able to see the updated figures for the third quarter. So for the second question, you need to take into account that the 27 are decreasing their capital credit.

So but by the end of this year, the capital credit would amount to 56%. So according to that, we're going to have an open window to make up our mind in terms of the call option, but one different thing from the previous situation in which we then called the bond is that markets are open. We just did a nascent markets are open. We're able to replace capital if we want to.

But the other thing to take into account is that our long-term guidance for Tier 2 is between 1.5% and 2% in Tier 2 and as of today, as we just mentioned, a Tier 2 after accounting for the recent issuance moved from 1.6% to 2.7%. So that can give you a big picture of where we are standing in terms of the call option coming in the next few months.

Thanks for that, Mauricio. Maybe just one follow up. So your total capital we said 12.6% at the end of June, it's going to increase to 13.7%, my including the $800 million and the 2034, but then you're going to have the 20% of face out of the 207 by the end of the year.

Do you have a target because so the minimum capital requirement total is 11.5%, right? So that means that pro forma with the 2034, you would be around 200 basis points above the minimum requirement. Do you have a target for the total -- for the total capital or for the buffer over the minimum requirements?

Our target has always been around 11.5% in Tier 1, but a unit it takes into account that's our target for year end. As we have a seasonality in terms of Tier 1 after declaring the dividend payment that we'll always do during the first quarter, capital decreases as we did in the first quarter of this year.

And after that, we organically accumulate capital with retained earnings, as you can see in a very positive manner for the second quarter. So you're going to see a Tier 1 increasing above 11.5% by year end and if that's the case, we're going to be okay, especially according with the loan growth we're seeing. So we believe we're very confident in terms of capital, both Tier 1 and Tier 2.

Okay. So roughly 11.5% roughly target for CET1 plus 150 basis points, 200 basis points Tier 1. So your target for total capital would be 13% to 17.5% kind of over the cycle roughly, which is roughly like 150 basis points or a minimum requirements. Okay. Thanks very much, Mauricio.

Thank you.

Thank you, Nicolas.

[Jitendra] Singh, HSBC.

Hi. Thank you for taking my question. So my call got struck. So apologies if you have already answered my question. So the first one was on impairment costs with JV in Q2. So can you elaborate why the bank decided to record impairment losses on JV? And what is your outlook on the remaining good investments in your portfolio?

And second, I just wanted to get your sense on liquidity. How has been the banks or the financial systems liquidity position to evolve since the issues faced last year. I can you just give me the numbers like what is your current set of ratio currently versus last year? Thank you.

Thank you. If I understand your question right, it's -- and you correct me, it's about it's about the joint venture impairment. It's that correct. And then the second one about liquidity, I am correct?

Yes. that's it.

Okay. Thank you very much. Okay. the -- regarding your first question, we have an impairment of around $75 million regarding our investment in [Puja], as you may know, Puja is company that we have with Exito a retailer is a joint venture fund. And that business, particularly in Colombia, has been affected, so often because of the behavior of interest rates. So we have an impairment, as I mentioned, close to $75 million during the quarter regarding that investment.

So that's the joint venture that just -- that's for four years. That's a one-off for this for this quarter or we don't expect in terms of valuation additional effects of that [Alpha] business. So that's regarding the impairment. I will pass your second question to Mauricio.

In terms of liquidity, I would say -- I would say that we are very comfortable. Our ratio is around continues to be around 115 in both US dollars and Colombian pesos. We're very comfortable in terms of liquidity and our funding strategies are reflective of that.

Thank you.

Thank you.

Julien Ausique, Davivienda.

Hi, everyone, and thank you for taking my question. And my question is regarding as well as the cost of risk, I would like to understand why you have the expectation and I know you already mentioned some and explanations of the evolution of cost of risk. But I would like to understand why this reduction, if we have seen an upward trend of the SMEs deterioration during the quarter.

So I would like to understand why you reduced the cost of risk estimation and what is the expectation of deterioration of SMEs for the second part of the year. Thank you.

Thank you, Julian, for your question. Cost of risk, what we have seen it's a better performance on the retail part of the business. Consumer loans are behaving better since we starting to change our policies a bit last year at the of the third quarter. So we see the effect now that the vintages are behaving better.

Regarding -- and we mentioned that we have seen some deterioration on SMEs but let me remind you that SMEs are around 11% of our total loan book. So that part of the businesses is limited and the effect on the total cost of risk is not that are important.

So overall, we see a better performance on the retail business, we have some deterioration in SMEs but is relatively small part of our portfolio. And we are also seeing a good performance in terms of some corporates and the economy is performing better in the last quarter and there are some expectations that's continuing. So with all of that, and that's why we expect with that our cost of risk should be around 2.4%, 2.3% to 2.4% with that.

Okay. And just a follow up. You write in the report that you released yesterday, you mentioned that the construction and telco segments had a deterioration in the corporate segment like you are seeing something especially in those sectors or is just like the common behavior of those sectors during these parts of the year?

Yeah, we mentioned that we are seeing some deterioration on construction on current sectors also. Additionally, with a deterioration on the retail business. I'm not factoring, but that said, they are behaving fairly aligned with our expectations.

So and particularly on the construction segment, we have been working with that Brian's now for almost nine months, so helping them. So we think that we can manage that deterioration and we also have included some provisions already for those segments.

In terms of the whole sector, our Exposition, it's limited there. So we don't see a big public impact of the sector. On the retail businesses, we see some deterioration but as in the second semester, it performs better for that sector. We will see some deterioration, but not nothing that affects materially our projections and in terms of cost of risk.

Does that complete your question?

Yeah, thank you.

Yeah. Thank you.

Thank you. We have no further questions at this time now. I now would like to turn the floor back over to Mr. Juan Carlos Mora for closing comments.

Thank you, everybody, for participating in our second quarter results conference call. As we mentioned, we had a good first semester. We will have some challenges ahead for the second quarter, but we expect that our behavior or the heavier of the economy and Bancolombia's behavior, will be in line with our expectations and we could deliver what we were discussing during this call. So again, thank you. Thank you very much for participating in this conference call. And we hope to see you in our third-quarter conference call results. Have a good day, everybody.

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