Grupo Cibest SA (CIB) 2022 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Bancolombia's First Quarter 2022 Earnings Conference Call. My name is Chad, and I will be your operator for today's call. (Operator Instructions)

Please note that this conference is being recorded. Also, 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. Mauricio Rosillo, Chief Corporate Officer; Mr. Jose Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mr. Carlos Raad, Investor Relations Director; and Mr. Juan Pablo Espinosa, 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 our conference call for the first quarter 2022. Thanks for joining our call. The first quarter results were positive and maintained the momentum shown in the second half of 2021. This performance is supported by improving NII, strong loan growth, fee income and low provision charges. Despite uncertainty over the presidential elections in Colombia, and the Russia, Ukraine conflict and its impact in the disruption of the global supply chain, the Colombian economy began the year as one of the best performing economies in the region, mainly driven by the exposure to commodity prices and the domestic demand. The monetary adjustments continue to be guided by the need to offset the pressures on inflation driven by food prices. We expect the repo rate to close at 8.25% by year-end. Annual inflation is currently above 9% and we expect to gradually decline in the second half of this year, near to 7.6%.

Let me give you an overview of the bank's results of the first quarter of 2022. The loan book grew 1% compared with the previous quarter. Net fees declined 3% over the quarter due to seasonal factors, but grew 15% in the last 12 months. Core equity Tier 1 closed at 10.6% below last quarter due to the dividend payment approved in our shareholders meeting. Net income for the quarter was COP 1.7 trillion. Provision charges for the quarter were COP 267 billion, resulting in a cost of risk of 0.5%, explained by better macroeconomic forecast and a better performance of our customers. Our client base continues growing, reaching this quarter more than 25 million. We have been adding clients at a good pace over the last 2 years. In fact, the pace of growth of purchases by new cardholders in our 4 -- is 4x larger than those of old ones and already represents 15% of total purchases by individuals in both physical and online stores. This growth is reflected in the volume of transactions we are processing and in fee income. Finally, I want to give an update regarding Nequi. We have reached 11.5 million clients. The loan book continues growing at a solid pace, maintaining high NPS and activity indicators. The separation process continues to advance. We have already filed with the regulators the authorization to establish and operate a new company. We expect to obtain the operating license in the second half of this year. At this point, I want to turn the presentation to Juan Pablo Espinosa, who will further elaborate on the performance of the Colombian economy. Juan Pablo?

Thank you, Juan Carlos. Now please go to Slide #3 in the presentation. During the start of 2022, economic activity in Colombia remained strong thanks to a combination of our resilient private demand and the tailwinds coming from higher commodity prices, particularly oil and coal. Based on our real-time data, we calculate that between January and April, the economy grew 8.3% year-on-year, which is well above consensus safety. Despite this positive short-term performance, we still believe that as we move through the second half of the year, activity will gradually moderate. This will be the result of less supportive global conditions as well as the removal of policy stimulus, the stabilization of household spending and high political uncertainty. As a result, we are currently forecasting that in 2022, GDP will expand 4.7%, which is lower than the 5.1% average market estimate. The negative note in this economic balance is the increase in inflation, which moved from 5.6% at the end of 2022 to 9.3% (sic) [9.2%] year-on-year last month. This is the highest in more than 2 decades, and it reflects the continued pressure in producer costs, which is translating with great intensity to put prices.

It is also the result of an acceleration in core inflation due to the recovery in integrative demand, the annual increase of the minimum wage and the operational indexation mechanisms. Based on latest developments, we just revised our CPI forecast for the remainder of the year. For December 2022, we adjusted our expected inflation print from 6.8% to 7.6%. As a response to this challenging scenario, we anticipate that the Central Bank will advanced further in its process of policy normalization. We are now foreseeing that the current hiking cycle will lead to a terminal rate between 8.25% and 8.5%. This means that by the end of the year, the monetary policy stance will be in a mild contractionary territory. After this economic overview, let me turn the presentation back to Juan Carlos. Juan?

Thank you, Juan Pablo. Moving to Slide 4. I want to continue this presentation by explaining the loans and deposit performance. 2022 started with strong overall results for Bancolombia. This is supported in the continuous growth of the loan portfolio. Loan book grew 1% during the first quarter. But keep in mind that the Colombian pesos reevaluated 5.65% during the quarter. Excluding the FX impact, growth was 3%. Colombia and Guatemala were the operations that marked this growth. Although the 3 main segments where we operate perform well, the retail portfolio is the one that grows the most in relative terms in all the geographies. Deposits remained relatively stable due to the excess liquidity with which the market closed 2021.

However, we expect the time deposits to increase during the year to support the growth we are expecting. On Slide 5, I want to make assume in the commercial loans of Colombia. The commercial portfolio is our biggest segment, representing 65% of the Colombian loan book. Since the second half of 2021, this segment started showing a positive performance. And this was confirmed during the first quarter of this year, growing 2.4% compared with the previous quarter and 13% in the last 12 months. We have an asset-sensitive condition. And this is the segment that contributes the most to interest income since 97% of the loans are floating. The pace of the repricing of these loans has been very important for the bank's results.

I want to highlight that the NPLs of this segment was 2.8%, one of the lowest in the loan book. Moving to Slide 6. I am going to elaborate on -- in the evolution of digital sales and distribution channels. The way we interact with our clients has changed. Digital sales continue representing almost half of total sales. 1.1 million merchants have already adopted QR payments, and digital channels represent 85% of total transactions. We keep processing a high volume of transactions. 42% of total Colombian market internally monetized transaction and 67% of mobile ones. This has permitted us to maintain the fee income and improve our credit models. On Slide 7, we present our payment ecosystem. As I mentioned before, Bancolombia has more than 25 million clients. Our main goal with the payment ecosystem is that our clients can pay and receive payments with as many alternatives as possible, both in the online and physical channels.

Therefore, we have developed an ecosystem where our clients find traditional options such as payment gateways, credit and debit cards, but also contactless payments, digital wallets, QR codes among others. In Colombia, we are national leaders in credit and debit cards amount of transactions in QR codes and in the acquiring business with a 33% market share. Moving to Slide 8. I'm going to elaborate about Nequi. Nequi continues showing positive trends. We added 1.5 million clients this quarter, reaching 11.5 million, out of which 33% are using products that generate income.

We are focusing on our path to profitability, increasing deposits, transactions, average revenue and fees per user, and growing at a solid pace the loan book. In the last 2 quarters, Nequi's loan book has increased the average balance from COP 1.7 billion to COP 127 billion. On Slide 9, we present our ESG update. We remain focused on reaching our 2030 goal of COP 500 trillion disbursed under ESG criteria. For 2022, we have a COP 41 trillion goal. This quarter, we launched an investment platform that will develop solar energy generation and energy efficiency projects. The goal in the next 5 years is to reach an installed capacity of 160 megawatts. We also obtained a loan tied to sustainability objectives for $150 million granted by Bank of America. We are committed to disburse more than $2 billion in our sustainable line by 2024, almost multiplying by 3 the current balance and reducing the emissions of 12,900 tonnes of CO2. Finally, I want to share that MSCI upgraded our rating to AA. This means we are in the leader category of the global banking system.

Now I want to turn the presentation to Jose Acosta to give you additional details on our performance during the first quarter. Jose Humberto?

Thank you, Juan Carlos. Now turning to Slide 10, we give you a snapshot of provisions and asset quality. Credit reliefs are almost done with only 1% of the consolidated loan book under relief. During 2022, it will be key to follow the evolution of deterioration, restructured loans and charge-offs. Provision charges for the first quarter were COP 267 billion, mainly driven by charges associated with the retail segment. As a result of this reduction in the trend of provision charges due to a better performance of our clients and healthier new [businesses], allowances now represents 6.3% of total loans, coming 8.1% 12 months ago. Cost of risk for the quarter was 0.5% below our expectations, explained by 3 factors: better macroeconomic forecast, better performance of our customers and less provisions related to significant impaired clients. Although we continue with high levels of uncertainty by both locally and international factors, we want to update the guidance of cost of risk we gave last quarter of 1.8% from 2022, now to 1.5% with an upside risk. We continue with a high 90 days coverage level of 223% and with healthy asset quality metrics. We don't expect material changes during the year as we are seeing a good performance of [recent vintages]. On Slide 11, we present the consolidated and stand-alone capital adequacy. Consolidated total solvency ratio stands at a level of 13.5%, while CET1 at a level of 10.6% under full Basel III for the first quarter.

The reduction in the solvency ratios level compared to the previous quarter is due to the impact of discount dividends for 71% of profits that we create in our General Assembly last March. However, we have accumulated almost COP 1.7 trillion of new capital because of the strong results of the first quarter. We expect to close the year with the average level of 11.5% of core equity Tier 1 with the generation of profits in the upcoming quarters. Moving to Slide 12, we present the liquidity position of the bank. In a consolidated basis, we continue operating with sufficient levels of liquidity. On an annual basis, deposits are growing at a pace of 13%, in line with the annualized growth of the loan book of 12.9%. In the slide, you can appreciate that the cost of deposits in dollars decreased, and we expect that it will continue to decrease due to our strategy in Central America operations of increasing the balance in savings and checking accounts with implementation of digital products while the cost of deposits in pesos is increasing given the rate hikes of the Central Bank. Of the total funding structure, 84% corresponds to customer deposits, maintaining the loan-to-deposit ratio at a level of 99%.

On Slide 13 will present an overview of Colombia and Central America. In general terms, the positive trends in the balance sheet and the income statement are common in all geographies. I want to highlight some key aspects from the stand-alone operations. In Panama, during 2022, the key variable to follow will be the cost of risk. After the end of the relief program 6 months ago, the performance of the clients of Banistmo who are coming out of relief is better than expected. During the first quarter, the retail clients continue growing and mortgages had a positive dynamic. From the liability side, the growth in saving accounts is outstanding. As we are always facing a challenging fiscal and political situation, but Banco Agricola maintained its good operational metrics with a good performance of the loan book driven by retail and commercial clients.

And in Guatemala, we continue having a positive perspective with the economic activity of the country. That is reflected in the growth of the loan book, fee income and low provision charges. Finally, in Colombia, we must highlight a very good growth in the loan book in line with the economic cycle, a very good performance of the income because of the high transaction volumes and a high growth of interest income due to the expansion of margins. On Slide 14, we see the evolution of margins and net interest income. After the low provision charges, the margin expansion is the second most relevant variable in the positive results of the bank. Net interest margin reached 6% level with an expansion of 70 basis points when compared with the previous quarter. This is the result of the inflation and the interest rate increasing at a fast pace. The increase of the NII is mainly driven by these 3 drivers: the repricing of existing loans, mainly driven by the commercial segment; the growth of the loan book during the quarter with higher rates; and the funding cost is increasing at a slower pace, thanks to the funding structure.

As Juan Pablo mentioned, the reference rate will continue increasing, and this will continue to impact margins positively. Therefore, we expect to close the year with a NIM of around 6.5%. Slide 15 shows the evolution of expenses and efficiency. Operating expenses increased 22.4% in annual basis. The main drivers of this were: first, 17% of increase in administrative expenses due to the growth of expenses associated with the good performance of the renting business and a greater speed of execution of transformation and digitalization projects of this quarter compared with the first quarter of last year. Second, salaries and employees benefits increased 21% due to the salary annual adjustment and by a strategy of attracting and retaining talent. This talent retention focuses on the technology area where the growth of the plant is done by hiring professionals who were part of third-party providers, developing in-house talent. And third, an increase in employee bonuses compared to those of the first quarter of last year. Because you may recall that the first quarter of 2021, we were not contemplating such a relevant economic recovery process. Therefore, the bonus provision was adjusted in the middle of 2021.

Despite the growth in expenses of this quarter, this was as expected. We are meeting our forecast by 99%, and we're maintaining a 11% growth guidance for the expenses this year. Slide 16 shows the evolution of fees. Net fees declined 3% over the quarter due to seasonal factors, but grew 15% in the last 12 months. The strong performance of fees is driven by: first, fees from debit, credit cards and merchants continues to have the strongest performance associated with the volume of transactions and a greater number of clients. Second, fees associated with the loan book growth as in the case of bancassurance. And third, fees associated with the capital market business as is the case of investment banking.

Slide 17 shows the profitability metrics. Net income for the quarter, COP 1.7 trillion, more than doubling the first quarter of 2021. This strong result is mainly explained by the combination of the following factors: positive loan book growth, margin expansion, high volume of transactions generating better fee income, better risk performance, expenses growing according to the budget and a solid capital structure growing according to the results of the bank. Now I want to turn the presentation to Juan Carlos for the closing remarks. Juan?

Thank you, Jose Humberto. Even though the levels of uncertainty that we are facing not only in Colombia with elections, but with the global geopolitical conflict, we are positive with this year results. I want to close the call updating our 2022 guidance. The loan book will grow between 9% and 11%. The cost-to-income ratio will be around 46%. Fees should grow 10%; and finally, with the ROE at the end of the year in the 17% area. After elaborating on these key topics, I want to open the line for questions.

(Operator Instructions) Ernesto Gabilondo from Bank of America is online with a question.

Congratulations on your strong quarterly results. I have 3 questions from my side. The first one is on the political landscape and the presidential elections that are taking place on May 29. We have seen that recently Petro has been talking to the press. I'm just wondering if he has been saying something about the financial sector in Colombia. So can you elaborate on what are some of his proposals? And then my second question is on loan growth and asset quality. Considering your history, what will be the level in which high interest rates and high inflation could start to affect the demand for loan growth? And what do you think would be the most affected products and those that could be more resilient? And then finally, the last question is on the ROE. You mentioned you're expecting 17% for the year. How do you see the long-term ROE of Bancolombia? Is it -- will it continue to be 17%?

Thank you, Ernesto. Let me start from your first question about the political landscape. We are close to half in Colombia, the first round. And you asked about the -- what are the proposals around the financial sector from Mr. Petro. It's difficult to tell because in his program, when you read, there are not many things that you could tell what he will do around the financial sector. And at least not radical proposals. He has been talking about that he wants to have stronger government banks that will lend to segments that are not subject to credit from the commercial banks. So I think it could -- that could be one of his actions is to have a stronger government, public banks directed to certain segments. Other than that, some comments about the costs around financial services and no more than that. So I think we need to wait and see how things will develop. Anyway, I think any effect will be after 2022. You mentioned loan growth and asset quality. I think the loan growth at this point is very healthy. We are growing close to 15% in any of -- on all of the lines of credit or all of the segments that we serve. Retail is the strongest one that could be affected a little bit. But we maintain our guidance that the loan growth for the year will be between 9% and 11%. Let me remind you that we think that inflation will go down, and by the end of the year, will be around 7.6%. Segments affected by inflation, probably mortgages. There is a portion of the mortgages that are -- act to the inflation. So that could have some effect on the loan growth of this segment that, by the way, has been growing in a very positive way for the last 4 years, even during the pandemic, that was the segment that grew more. And regarding your third question, ROE, we maintain our view that the long-term ROE for Bancolombia, it's around 15% -- between 15% and 17%. So that's our view for the long term for the bank.

The next question comes from Jason Mollin with Scotiabank.

My question, given you've addressed some of the other issues, is on the expense side, with total operating expenses up over -- a little over 22%, personnel up almost 30%. You gave some explanations there about attracting and maintaining employees -- high-quality employees and especially on the IT side and hiring from third-party vendors. Can you give us a sense of how -- and you talked about the guidance for the year. But if you can just talk about how we should think about that. I mean, could we see more of that? It seems like the ability to retain and attract talent is indeed getting more difficult. So is this something that -- a trend that we should expect going forward?

Thank you, Jason. Let me give you some details, and I pass your question to Jose Humberto for additional information. As you mentioned, expenses are growing around 22%. And let me say that is in line with our forecast. So we are not away of the numbers that we were expecting for the first quarter. It's good to have in mind that we are comparing a year, and I'm referring to 2021, in which the first quarter was not normal. So the base that we are using to compare expenses, it has some effects. So that's 1 part. That's from -- just from the numbers. Regarding what you mentioned about retaining talent, that's a challenge I think for every company nowadays. We have in place a program to retain and to attract talent, but we don't foresee that, that's going to deviate the numbers that we are expecting for the end of the year. So we maintain our view that the expenses at the end of the year will grow around 10%. So with that, I will ask Jose Humberto, if he could give additional details.

Thank you, Juan Carlos. Good morning, Jason. That's very clear. It's a cyclical situation comparing with the first Q of last year. Yes, we don't have any particular surprise regarding expenses because it is under control. We are optimistic about to get a level of 10% to 11%. And the most relevant is we are -- we've done numbers. And with the net income that we are forecasting, we are going to get a level of efficiency between 46% to 47% at the end of next year.

The next question comes from Olavo Arthuzo with UBS.

I have basically 2 topics. Mainly for me, for us to understand this target for the ROE of 17% for the year. But basically talking about the asset quality and the NII trend, I just wanted to understand from the first topic about the asset quality. The increase in the 90-day NPL ratio in the quarter, and then considering the new PDLs above COP 1 trillion, which is similar to the first Q of the last year. And if we put this trend aside well below average cost of risk, I just wanted to understand for the next quarters -- the next 3 quarters, the dynamics for the NPL ratio, along with the cost of risk trends inherent to it. And the second topic that I wanted to understand, especially talking about the next quarter, it's about the NII trends because I wanted to understand if you could give us some more color what caused the strong NII expansion in the quarter? And what is the expectations along with the following quarters? I would appreciate it.

Thank you, Olavo. Let me take your first question, and I pass your second one regarding the NIM to Jose Humberto. Let me say that during 2020 and 2021, we have an abnormal situation regarding provisions and regarding the cost of risk. What I mean with this is that during that period, we accumulated provisions since the uncertainty was very high. Now that we are seeing how the economy is developing and how different to say that we are going back to what we consider is a normal risk situation. But we accumulated provision. So we now are in a phase in which we go to a normalized state. And -- but going forward, which is your question, we have provisions that are covering the risk that we have in our balance sheet, and that also covers write-offs. And what we expect in the future is a more normalized behavior or performance of NPLs. That should be -- should generate cost of risk more close to 1.5%, could be a little bit lower during this year.

But going forward, 2023, I think we will be going to a level of around 1.5% cost of risk and a more normalized situation after what we saw during 2020 and 2021. So that's what we expect right now. With this, let me pass your second question to Jose Humberto.

Yes, expansion of the NIM, there is a strong correlation between the Central Bank interest rates and the expansion of the line in our case. Remember that we came from 3% in December of interest rate from the Central Bank to 6% at the end of this quarter. So that is meaning that there will be a huge impact of NII. What is going to happen, assuming what Juan Pablo mentioned at the beginning of the presentation that interest rates will go up to 8.25%, assuming that, that hike will occur in the next coming 3 months. We are expecting in the second quarter and maybe in July, an extra expansion of NIM. We don't expect that the trend will be the same for the second half of the year. We are going to expect a stabilization of the NIM. Short answer. Our expectations of NIM will be to touch the level of 6.5% area at the end of the year. The challenge will be 2023, and that situation, we are going to see how the inflation and interest rates behave. But meanwhile, we are talking about a very important expansion of NIM in the first half of this year.

Okay. Thank you, Jose. I believe the topic related to the NII is very, very clear. I just wanted to make a small follow-up on the asset size. So you are telling that the costs of risk are expected to gradually increase throughout the next quarter. Okay. And about the NPL ratio trend for these because I wanted to understand at what levels for the NPL coverage ratio, we should work for this year. And if you give some more color about this metric as well for the next year, it will be very helpful.

Yes, Jose Humberto.

Basically, what happened (inaudible) is there were 3 one-offs that impact the level of cost of risk. 0.5% obviously is not the standard of the bank. What you are going to see in the next coming 3 quarters, you're going to see a real deterioration and increasing in the level of party loans. So that's the reason why Juan is mentioning that at the end of the year, we are going to be in the area of 1.2 to 1.5. Regarding NPLs, you are seeing right now -- if I may say, the optimal level of party loans, if you compare to pre-COVID; and third, what is happening right now with the strong coverage that we are having in 30 and 90 days, it is because some clients that there is no (inaudible), we are having some provisions. And if the economy is performing well in the next coming quarters, maybe the level of coverage at the end of the year will be up for 30 days, at around 130%; and for 90 days, we are going to be at the 180% area.

Let me just add, Olavo, those levels that Jose Humberto mentioned are the levels that we had before COVID. So we reached a level of 180 or 170, 180 on a 30-day basis. And now we are returning to 130, 135 level, which is our long-term level. So what we are doing is returning to a coverage level that we consider is the long-term coverage ratio.

The next question comes from Alonso Garcia with Credit Suisse.

My first question is a follow-up on cost of risk. For next year, I think you mentioned 1.5%. Could you please confirm that? And also comment on what level of cost of risk you see is sustainable for the bank going forward? And my second question is on taxes, what levels you are assuming for this year and next year? And if there is any proposal or any potential candidate that indicates a meaningful change to your effective tax rate in Colombia in the coming years?

Thank you, Alonso. As we mentioned, the cost of risk that we are adding right now, we consider it not what the normalized cost of risk is. It's too low. And as I explained before, is because all the provisions that we did during COVID. So I confirm that the cost of risk for Bancolombia in the coming quarters, meaning the end of 2022 and 2023 should be around 1.5%. There is inflation that is going to have some effect on the cost of risk. So we consider that level of cost of risk. And we are adding -- additionally, we are adding more retail loans to our book. So that could have an effect on the midterm on the cost of risk. And regarding your question -- the second question around -- about taxes. We are estimating an effective tax rate for 2022 of around 34%. Remember that we have an additional tax for financial institutions that we are taking into consideration. So the mix that we have right now, it's 34%. Moving forward, it's difficult to tell if we will have an additional taxes or not. As I mentioned, we already have an extra tax that no other industries have in Colombia. So I don't foresee that an additional tax could affect tax in the future. But we don't -- we really don't know. I don't know if Jose Humberto wants to add some thing.

The only 1 reason why taxation today is 31%, and we are closing with the 34% is because net income mainly comes from Colombia, which we have the highest level of statutory tax.

The next question comes from Andres Soto with Santander.

And congratulations on the results. My first question is regarding margins. I was positively surprised by the expansion that we saw this year on your margin on loans. And I'm wondering if you cannot update us on what is the sensitivity of your margins to interest rates? Is there anything that has changed in the bank structure that is allowing for faster repricing or faster expansion in margins? Or there are any one-off elements that we should not consider when we look in the results ahead.

Thank you, Andres. As you mentioned, the margin expanded in a considered way in the first quarter, reaching a level that we were expecting more for the middle end of the year. That's because of the interest rate increases that the Banco de la Republica has made during the end of the last year and the beginning of this year that is impacting the interest rates and our ability to maintain the funding cost low. So that is having an impact on the NIM, a very positive impact. That we expect that margin to maintain those levels or even increase more during this year. Jose Humberto could give you additional information regarding the margins, Andres.

Thank you, Juan Carlos. Hi, Andres. Yes, regarding NIM, as Juan mentioned, sensitivity in our case has changed a lot in the last 2 years, basically because of the way we are funding right now. Savings accounts and checking accounts right now, the weight -- the relative weight is high. So we are able to maintain. On the asset side, for the Colombia, for example, 95% of the loan portfolio -- commercial loan portfolio is floating, but on the liability side, less than 50%. So the sensitivity right now could be at around 30 to 40 basis points for every 100 that the Central Bank changed interest rate.

Perfect. My second question is regarding the long-term ROE guidance that you -- Juan Carlos mentioned is you're calling for in between 15% and 17%. I'm curious what has changed in your view versus the one that you gave us just 6 months ago. I remember I asked this same question during your Investor Day, and you said 14%. Now this is significantly higher. I'm curious if what has changed is the interest rate environment. It is a more optimistic view on your structural cost of risk? Or it is anything related to an efficiency target over the new term?

Yes, all of the above. What we are seeing is our mix of loans, it's given us a NIM that is better than the one that we were considering in the past. Also, there is a very positive trend on the acquisition of new clients. We were -- we highlighted the number of clients that we have now; it's important. So that allow us to be positive on fees, also on the expansion of the volume of loans that we have. So if you see there is a mix of factors that allow us to be more optimistic on our ROE, so it's NIM. It's better fees of income. Also, the cost of risk, we updated, it's still is 1.5, but we were considered a higher number in the past. So as I mentioned, it's a mix of different factors. Jose Humberto will add additional information, Andres.

Andres, there is another factor that's the definition of the optimal capital of the bank. Remember that a quarter ago, we were talking about that the optimal level of Tier 1 ratio would be [7.5%] on average. So that definition maintains the optimal level of capital. So that would be also a consequence of increasing the level of return on equity.

That's very clear. Congratulations, again. .

Thank you, Andres.

The next question comes from Tito Labarta with Goldman Sachs.

Sorry, another follow-up on your margin and a little bit on the ROE as well. But you mentioned 6.5% by year-end. But just to understand, that 6.5% is for the full year, which, if I'm correct on that, that would imply that you should be above the 6.5% in the coming quarters. Or did I miss -- or is it 6.5% would be the highest level on a quarterly basis? Just to understand that. And then I guess following up on that, if interest rates stay at this level. I don't know when you expect rates to come down, if you expect that to happen already in '23 or maybe 24? Will that margin remain elevated maybe throughout next year, which is also why the ROE guidance can be higher and maybe you could probably stay above a 15% ROE even in 2023, of course, depending on what rates do. So -- or in other words, when do rates come down? And when does that impact the margin? If you can give any color on that.

Okay. Thank you, Tito. Let me give you some information and I pass the question to Jose Humberto. What we expect is that the rates are going to peak this year and will start going down during 2023. So the margin expansion is going to be during 2022 and part of 2023. And I could say that a normalization of the margin will occur in '23. So we will have an expansion reaching 6.5%. And Jose Humberto will elaborate on that. And regarding your question, if that is an average or the end of the year or what is the number. And that's why we are forecasting or saying that -- or our guidance regarding ROEs that will be more around 15% to 17% because there will be some normalization of the margin which is going to expand. But later, 2023, will compress as we reach the peak of the rates and then start to go down. Juan Pablo, our Chief Economist, is considering -- and his teams are considering that the rates will reach a peak of 8.25, and then we start going down to 7.75 in 2023. And then will further in 2024 will further go down. Jose Humberto, could you give more information around margins?

Thank you, Juan. Hi, Tito. Yes. 6.5% is for the whole year, Tito. Again, we are expecting, I don't know, how many hikes but to increase to 2.25% more from the Central Bank. So the expansion will be on average will be 6.5%. Regarding 2023, we are expecting that the interest rates from the Central Bank is coming from 8.5 -- 8.25 to 7.75 based on the assumption of inflation. So that means that you are going to see maybe the same level of NIM, a slight compression of the NIM, but all depends of the structure of funding that we will have at that time. Remember that in the last 3 years, we have been dealing with interest rates coming down, and we -- defend the margin because of the structure of funding. So again, we are expecting to reduce a little bit the margin next year because Central Bank interest rate is coming down at least 50 basis points.

So just to make sure I'm clear on that. So the 6.5% is the average for the year. So that would be on a quarterly basis, if you could probably surpass that.

Yes.

And then -- Okay. Perfect. And then just for next year, that reduction also, yes, I mean, you'll start to come down next year, but average rate would actually be higher in '23, given where you started in '22. So maybe very modest reduction in '23, the real reduction happens really more in '24, if I read that correctly?

That's correct, Tito.

The next question comes from Yuri Fernandes with JPMorgan.

Congrats on the good results. I have a question regarding El Salvador. Like given like the level we are seeing for the sovereign there, how this can impact your operations? Do you see any kind of impairment on your Banco Agricola operations to anticipate anything on that front? That's one. And also a follow-up on Tito's and previous questions regarding rates and margins. At what level of rates could we start to see a headwind for asset quality, right? Because you know like the impact on growth and deceleration in volumes. But I guess rates going to above 8%. Aren't you concerned that we could start seeing a worsening asset quality for corporates, like is this part of your 1.5% cost of risk and guidance, how that can affect your expected loss models. So just checking, like if we are wrong here, like inflation globally remains more resilient and rates keep moving up to 9, 10, how do you see asset quality here? What is the level that it becomes a headwind and not a tailwind?

Thank you, Yuri. Regarding your first question, in Salvador, we are seeing a situation in which Banco Agricola, our bank there, it's having very good results. The loan book is growing, NPLs are low. Cost of risk is very -- it's a level that we feel very comfortable. So on that one side, the bank is performing very well and very good results. We are adding new digital products. The demand for those products is very active. So we have 1 operation that is running. On the other side, we see a fiscal situation of the country that it's -- and I think that -- it's a situation that we need to take into account, and you mentioned the sovereigns. We in our forecast, we are considering impairment of some part of the debt or sovereigns that we have in Salvador. Just I want to mention that what we have is short-term, local (inaudible) and we don't have a position on euro bonds or other instruments. So yes, we are considering the risk, and we are introducing that consideration into the -- into our numbers. Asset quality, yes, when we talk about the cost of risk of 1.5% while we are taking into consideration that there will be some deterioration due to the increase in interest rates and inflation. So in our numbers, what we introduced was an effect due to, as I mentioned, higher interest rates and the effect that could have on our numbers. But let me say what we see is an effect on 2023, not a material effect in 2022. So we are considering that effect in our numbers. I don't know if Jose Humberto would like to add something else.

Yes, Juan Carlos. We will touch the highest level in the second quarter. And that's the reason why, Yuri, we are -- update our forecasting of loan growth for the second half of the year. We are not expecting -- we are expecting a cooldown of the level of consumer loans for the second half of the year. That's the reason why we have been growing at a pace of 12%, but we are expecting to grow for the whole year 9% to 11%.

Perfect. Congrats, again.

Thank you, Yuri.

Sorry, we are running out of time. Thus, this concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Juan Carlos Mora, for any closing remarks.

We would like to thank you, all of you for attending this call. We are very happy with the results that we are getting so far. And what we foresee for the rest of the year, it's a positive results. As we mentioned, NIM will continue being in a very good level for us. And also what we are achieving on new customers and on the dynamic of the bank, we feel very comfortable that we can have a very strong 2022. We hope to see you or hear from you on our call in which we will report the results for our second quarter of 2022. Thank you very much, and have a very good day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.