Grupo Cibest SA (CIB) 2022 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Bancolombia's Third Quarter 2022 Earnings Conference Call. My name is Ariel, and I will be your operator for today's call. (Operator Instructions) Please note that this conference call will include forward-looking statements, including statements related to our future performance, capital position, credit-related expenses and credit losses. All forward-looking statements, whether made in this conference call, in future filings, in press releases or verbally, addresses 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; Mrs. Catalina Talon, 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, everybody. Welcome to Bancolombia's Third Quarter Conference Call. In this quarter, we reported COP 1.6 trillion of net income. We are having a responsible growth across all segments, increasing revenue and producing positive operating leverage. The asset quality metrics of the bank remain strong, confirming an effective origination strategy. The countries in which we operate present a good performance, especially Colombia, which may grow at a rate of about 7% in 2022 and has contributed to the rapid expansion of the bank's portfolio during the year.

In recent months, however, we have seen a change in the trend of credit demand, particularly in retail, driven by influenced inflationary pressures and a high interest rate environment that is impacting the customers' payment capacity. Liquidity continues to be one of our focus areas, coupled with our capital structure and risk management. We hold a solid funding base that supports comfortably our needs to operate the business. We have increased the collection of deposits in the last year and also we have broadened the access to mid- and long-term financing from multilaterals and international banks, a that complements funding structure.

It is worth mentioning that this week ends the approval process by Congress of the tax reform that will allow the government to collect an additional COP 20 trillion to face its social expenditure program in 2023. This reform has a direct effect on financial institutions, imposing a sore challenge that increased the statutory tax rate from 35% to 40% from 2023 -- from 2023 to 2027. In general, this reform has focused on a greater contribution from high-income taxpayers as well as corporates from financial and energy sectors. Energy companies will have incremental tax associated with both oil and energy prices.

An important subtheme to follow in the government agenda will be the minimum wage increase that will be key for 2023 inflation development. Currently, it is being discussed by stakeholders and is based on the projected Consumer Price Index, CPI, growth above 12% for the end of the year. For the rest of the topics in the political agenda, we have not seen further progress. So we will be looking forward for new announcement through the end of the 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. Let me start by saying that the Colombian economy has continued to perform better than initially expected. Based on the still strong performance in the third quarter of the year, we anticipate a GDP growth of 7.8% in 2022, higher than our previous estimate and above the consensus forecast. This is due to the strength in private consumption and increase in terms of trade, thanks to oil and coal prices. In contrast, for 2023, we foresee a sharp moderation of growth to a rate of 0.9% in the central scenario as aggregate demand cools off in a context of higher interest rates, global deceleration and continued uncertainty.

We anticipate that next year, the best performing sectors will be public administration, Agriculture, Financial services and utilities. On the contrary, retail, manufacturing, mining and construction are expected to contract. The main risks for economic activity next year are: first, a sharp tightening of financial conditions caused by recent expressing markets. Second, a pronounced deterioration of households purchasing power as a result of persistent inflation. Third, a deterioration of labor markets caused by economic deceleration and higher salaries. And fourth, the spillover effects of a major moderation of the global economy.

On the front of interest rates and prices, we anticipate that reference rate will peak at the first quarter of 2023 to a level between 12% and 13%. This is consistent with an inflation close at 12.5% in 2022 and remaining well above the Central Bank's target range during 2023 and even in 2024. Our forecast for December 2023 is 7.5%. The main reason behind this prospect is that core inflation will remain under pressure because of peso depreciation, the operation of indexation mechanisms and salaries revisions. Under these circumstances, we do not see a space for a quick change in the monetary policy cycle. Actually, we anticipate mild repo rate cuts by the second half of 2023 to 11% from 10% in December next year.

This means that monetary policy will remain in contractionary mode during the foreseeable future. Regarding the exchange rate, in our basis scenario, we forecast an average yearly decorporate of COP 49.50 for 2023, offer up from COP 42.50 in 2022. This means that this factor supporting Colombian peso weakness, namely tight financial conditions, higher than peers' current account deficit and uncertainty regarding the reform agenda will remain relevant. This depreciation would stimulate nontraditional experts at the cost of exerting significant pressure on tradable inflation.

Finally, on the fiscal side, we expect central government's deficit to reduce from 5.6% of GDP in 2022 to 4.8% of GDP in 2022. This figure is consistent with the fiscal rule and incorporates the additional revenues from the tax reform. Moreover, (inaudible) that the additional tax collection coming from this reform will be split between social programs, debt service and fiscal consolidation, we anticipate that the net impact of the reform on overall economic activity will be medicable. 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 present the loans and deposits performance. In the last 2 quarters, growth in the loan portfolio has been mainly driven by commercial loans, which entails lower risk and provides better coverage structure. In retail, the most dynamic segment has been personal loss. We are experiencing a slower growth explained by high inflation and high interest rates. This change in trend is reflected more sharply in products such as credit cards. In terms of our liability structure and given the environment operation rates after the first quarter, time deposits have grown at a faster pace than demand deposits, thus supporting our increasing funding mix.

Access to midterm funding from international banks was also key during the quarter to complement our overall funding structure. For the fourth quarter, I'm sure with throughout a good part of the first half of next year, time deposits will be relevant to maintain a stable funding structure and comply with the liquidity requirements. A couple of weeks ago, we carried out a sustainable bond issuance for COP 640 billion throughout the International Development Bank. This is a mechanism used for the first time by a Colombian Bank. On Slide 5, we see the growth breakdown. When we analyze the evolution of the loan portfolio and the deposit base, it is important to note that depreciation of the peso had a significant impact, not only in an annual basis, but also in the quarter.

The local currency depreciated almost 11% from the end of June to the end of September. So after excluding the FX effect, the actual loan and deposit growth was 3%. Year-over-year, the depreciation of the Colombian peso was 20%. So the real expansion in loans and deposits was 16%. On Slide 6, I want to provide some details on our preapproved origination strategy. The credit portfolio growth when excluding inflation has been around 15% year-over-year. Such performance is a result of a process that we began 5 years ago based on the analysis of the cash flow and expenses of our clients, we have been able to calculate the payment capacity and offer preapproved lines of credit with significant outcomes for the bank. -- leveraged on analytics, we have been able to implement this strategy broad based across all segments in the case of retail out of our customer base.

1.5 million have received an automatic customized offer in 2022. This process has led to a positive origination approach reflected in the 30-day past due loan ratio of 12 .7% lower when compared to a 5.6% of the whole consumer portfolio. On SMEs and corporate clients, we have also developed the capacity to pre-approve loans based not only on the financial statements, but also on the actual cash flows, allowing us to be more accurate on our offers. This explains why we are having a better risk profile than the prepandemic figures. Bear in mind that in 2022, we could experience a higher deterioration caused by inflationary pressures, higher interest rates and lower economic growth.

On Slide 7 and 8, we present the transactional performance of the bank as one of the key developments to highlight in the last few years, powered by the investments we made in technology, the modernization of the distribution network and the implementation of digital solutions. We continue experiencing an accelerated shift to digital channels coupled with an important demand for services in physical channels, increasing our footprint in banking agents that have partially absorbed the increased volume of transactions. We would like to share some of the figures that show our competitive advantage in the use of the different channels offered by the bank. First, a share of more than 70% in the Colombia mobile transaction market confirms our strong presence on the clients' everyday activities.

Second, an upward trend in digital engagement has led 76% of our customers to adopt at least one digital channel to execute their transactions. And third, banking agents account for 67% of the total in-person monetary transaction in Colombia and branches represents 32% of the total in-person monetary operations. This gives a sense of the size of our customer base and the impact in the economy as well as our widespread presence across regions. Moving to Slide 9, you can see an update on the technology transformation of the bank. First, we have made an important progress in the journey to cloud, allowing us to speed up our time to market, having more secure applications, accelerating innovation and reducing costs. We have now 63% of the technological components of the bank already in the cloud.

Second, Bancolombia has a 9.68% personnel turnover compared to the industry average of 20%. Today, 51% of IT is in-house and 49% is outsourced. Third, we have implemented the API strategy aimed to enable new business models such as banking as a service and open finance, connecting to new ecosystems and improving the customer experience. On Slide 10, we present our ESG update. We remain focused on reaching our 2030 goal of COP 500 trillion (inaudible) on the ESG criteria. We are getting closer to the goal of financing COP 103 trillion in 2022, reaching as of September are COP 91 trillion. This quarter, we were able to issue the first morning Latin America tied to sustainable indicators for an amount of COP 640 billion. And we received a credit line from Citibank for $100 million tied to sustainable goals. After this general update of the current situation of Bancolombia, now I want to turn the presentation to Jose Humberto Acosta, who will give additional details of our performance during the third quarter of 2023 -- 2022. Jose Humberto?

Thank you, Juan Carlos. Now turning to Slide 11. We provide a snapshot of provisions and asset quality. Our commitment to responsible growth remains under control. NPLs are still reflecting healthy balance sheets, both 30 and 90 days as a result of the positive clients' performance. And as Juan Carlos explained, based on the execution of a structured process of preapproved loans. Provision for credit losses were COP 1.2 trillion or 1.9% cost of risk for the quarter and 0.9% for the last 12 months. It is important to mention a one-off effect related to a real estate builder in client in Banistmo that represented an important provision expenses for the quarter. The coverage for this client is close to 60%, and the bank has a real estate warranties in place to secure the rest of the obligation. When discounting these one-offs in the quarter, the estimation for cost of risk would result in 1.5% or COP 102 Billion in provision charges. We must remark the charge-offs increased in this quarter at the hand of the credit release granted during the pandemic that have deteriorated gradually and caused the above-mentioned value. We should converge to an organized level of provisions in the upcoming quarters by credit deterioration under the current economic cycle. We estimate that the cost of risk for 2022 could be at around 1.6%.

On Slide 12, we present the breakdown of provisions during the quarter. A moderate sequential increase in provision expenses experienced since the second quarter is primarily driven by the consumer portfolio expansion in the last year. Additionally, a lower level of provisions releases associated to macroeconomic variables and overlays of credit under financial releases. Our allowances as a percentage of loans continues to be strong to face eventual deterioration, the coverage on 30-day past due loans is 154%. For the upcoming quarters, we expect to see an increase in trade deterioration and provision expenses for the most part in retail due to the challenging macroeconomic environment of inflation and high interest rates.

On Slide 13, we present the consolidated and stand-alone capital adequacy. Consolidated total solvency ratio stands at a level of 12.5%, while CET1 at a level of 10% under full Basel III for the third quarter. The reduction in the solvency ratio is explained in the first place by the depreciation of the local currency when converting the assets to a higher U.S. dollar rate. On the other hand, the organic growth of the loan portfolio in Colombia during the last 12 months contributed to higher risk-weighted assets as denominator for capital ratios. For year-end, our estimation for core equity Tier 1 is 10% area, considering for the fourth quarter, the credit demand, the forecasted earnings and the FX rate.

Slide #14 shows the asset sensitivity to interest rates. The monetary policy has continued its contractionary cycle in Colombia throughout the third quarter, generating an extending expansion on margins. On the deposit side, it is very relevant to highlight the 62% weight on fixed asset rates in an environment of volatility, helping to protect the margin of the bank in a rate hike cycle. On the asset side, the combination of 2 elements: the credit originations at higher rates in all loan categories. And on the commercial portfolio, a large share index to floating rates quickly runs into repricing.

On Slide 15, we present the liquidity position of the bank. The impact of the rate hike cycle in Colombia is evident in the funding cost. The Central Bank took its revenue rates from 3% in January to 10% at the end of September, triggering a sustained deposit repricing throughout 2022. We have been seeing an important growth of 25% in both consumer and wholesale deposits during the last 12 months that have balanced expansion in the loan book at the same pace. Here, I will highlight the composition of our funding structure as a competitive advantage as 56% is represented by demand deposits, which make our overall cost very competitive. Out of this share, 44% are represented by saving accounts at a very low interest. These volumes are possible, thanks to our leadership position in the system from a transactional point of view. Time deposits have increased more rapidly in the last quarter to help us compensate for longer-term needs. Finally, we have gradually increased our midterm funding with loans from international banks and multilateral institutions contributing to the consolidation of a more stable funding structure.

On Slide 16, we see the evolution of margins and net interest income. Rising interest rates have led to a sustained higher net interest margin after the second half of 2021. Net interest margin closed at a 7.2% level, expanding quarterly by 50 basis points following the hiking rate cycle in Colombia. Net interest income increased by 72% over the last 12 months, mainly due to the repricing on assets and at a lower extent, a larger credit portfolio. In the case of investments, the annualized net interest margin had an outstanding result, closing at 6.6% in the third Q, extending a positive trend during 2022. This expansion is largely explained by the valuation of debt securities following interest rate hikes and exchange rate fluctuations in the treasury portfolios. We expect the reference rate in Colombia to close at a level of 11.75% by year-end. Margins will not grow at the same pace going forward since we now face a higher increase in interest expenses as the repricing of deposits will offset growth in interest income faster. Given the results as of September, we expect to close the year with a NIM at around 6.8%.

On Slide 17, we present an overview of Colombia and Central America. In general terms, the trend in the lending business throughout the different geographies operated by Bancolombia was similar, a continued growth in the loan book and increase in interest income and a solid position in terms of capital and liquidity. In terms of asset quality, we see good trends, except from Banistmo that had some particular provision expenses impacting the bottom line. Banca Rico and El Salvador shows good loan and deposit dynamics, growing in each at the faster pace than the market in an annual basis, highlighting a positive performance of the Commercial segment. From the deposit side, the bank has experienced an important growth in saving accounts to balance short-term loan growth at a very low cost. In the same way, Banistmo presents the loan book growing at a level of 7% in an annual basis, driven by commercial outpacing the market average. Asset quality was impacted by a corporate case as well as some deterioration in retail demanding higher provisions expenses. Finally, BAM in Guatemala has shown a resilient loan originations through our -- the year with increasing margins. We are expecting to close the year with a growth of around 9% in U.S. dollars, where consumer portfolio will continue to lead the pace. We are managing liquidity in an effective way, increasing our credit lines with corresponding banks to balance our funding needs.

Slide 18 shows the evolution of expenses and efficiency. Operating expenses increased 14% on an annual basis. Recently, the faster pace of the local currency depreciation has implied a recalculation of our OpEx growth expectations, considering an important portion of our cost indexed to U.S. dollar, especially associated to technology components. In addition, there are 2 main factors explaining the growth experienced during the year. First, inflation rates in 2022 have pushed forward the increases in expenses to operate the business. And second, the performance-related compensation expenses provisions are higher in a year of growing earnings. We see good trends in the efficiency ratio, so we anticipate closing on a ratio of 44% to 45% for the full year as a result of revenues outpacing expenses growth on a yearly basis.

Slide 19 shows the evolution of fees. As of September of '22, net fees have increased 11% when compared to the same period of 2021. I would like to explain the main reasons that have contributed to such growth. First, fees from banking services, debit, credit cards and retail activity sustained a positive trend during the year, a higher volume of transactions and strong client engagement show a dynamic activity in the quarter. And second, bancassurance has improved as originations remain at high levels in 2022 and insurance claims have decreased contributing to the net result. We maintain our growth guidance for the full year at a 10% area.

Slide 20 shows the profitability metrics. Net income for the quarter was COP 1.6 trillion and delivered a return on equity of 19% and 20% for the last 12 months. The effective tax rate as of September is 31.4%. Our guidance for 2022 full year will be 31% area. We remain confident in our revenue expectations for 2022 as we experienced a consolidation of positive trends in the third quarter, driving growth and higher earnings when compared to last year. Now I want to turn the presentation to Juan Carlos for the closing remarks. Juan Carlos?

Thank you, Jose Humberto. The group results of this quarter have been a combined effect of the good operational performance of the bank and the positive development of the economies where we operate. For 2023, we see important challenges, considering a significant deceleration in GDP growth. It implies many challenges for us in the credit demand, a likely reduction on margins for the second half of next year, a potential pickup in the provision expenses that according to our estimate to reach 1.8% of cost of credit. In the same way, we are expecting a slower growth on fees linked to a less dynamic economic activity and tax expenses will be higher following the approval of the tax reform in Colombia. Finally, our guidance for expenses is closing 23%, slightly above inflation levels. We will continue to focus our efforts on developing the technological modernization of the bank and complete the digital transformation path of our business. Now I will open the line for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) our first question comes from Jason Mollin of Scotiabank. Please go ahead.

Hello, everyone. Good morning. Thank you for the presentation and the opportunity to ask a question. My question is really, if you can recap again, I definitely got a bunch of the numbers and the expectation for 2023. I guess with the economic growth, the slowdown in economic growth expected for next year, if you can just recap how you're thinking of loan and deposit growth in that construct, I guess, excluding FX, kind of a ex-FX impact and of particular interest, I just wanted to understand better the tax reform impact. You mentioned that the -- I guess, the marginal tax rate will increase to -- from 35% to 40%. How is the additional surcharge working in for banks going forward? If you can kind of comment on the outlook and the taxes as well... Thank you,

Thank you, Jay. 2023, we'll have a different performance or the performance of the economy better is going to be quite different. Particularly in Colombia, what we are seeing is that GDP growth should be around 1% could be a little bit less than that. So it's a big change from the economic activity that we are having this year in which we expect the GDP and in growing at around 7.8%. So that creates different conditions. So in that context, we expect that loan portfolio will grow much less and will be around 5% growth on loan portfolio. It's important to have in mind that we have been growing at a very good pace during this year. So that loan origination that we already have on our books will produce results during the next year and the interest rates and the margin has been expanding. So we will benefit from that stock that we already have on our books. We will not grow much next year, but we will benefit, as I said, from the stock that we already have with a very healthy margin. We expect the cost of risk to increase or to normalize better, and we expect to be around 1.8%, which is in line with the long-term cost of risk of the bank. Other than that, it's a year with less growth in which we will not push hard on growth on the loan portfolio, but we will benefit from a good margin and cost of risk, and we think is going to be under control. Regarding the tax reform, -- as you mentioned, there is a surcharge for financial institutions, not just for banks of 5% that goes until 2027. At the beginning, it was presented as indefinitely. Now it ends in 2027, which is good and benefit our tax structure and deferral of taxes. What -- how it works is that the statutory rate that will be applied for -- in Colombia will be 40% for the -- on the income tax on the income and the income and we are calculating that, that is going to have an effect on our effective consolidated tax rate of 2% increase, moving from 33% that we expect to end this year as an effective tax rate for 2022, moving to 35% in 2023, and that will go on until 2027, as I said, Jason.

Thank you for the colour, appreciate it.

Thank you, Jason.

Our next question comes from Andres Soto with Santander. Please go ahead.

Thank you, Juan Carlos (inaudible) for the presentation. My question is when I look at the outlook that you described for Colombia in 2023, it doesn't seem that there are a lot of reasons to imagine that long-term yields are going to be lower than they currently are. They are at 13%. And when I look at the number that you expect for next year, it doesn't seem that the ROE is going to be much higher than that level. So my question really is, what else can you do to deliver ROEs in excess of your cost of equity, not just for 2023, but more rather towards the long-term ones interest rate and your margins are normalized...

Thank you, Andres. 2023, in 2023, we will benefit from a margin and net interest margin that is going to benefit our results. And as I mentioned, the stock in the loan book is going to be higher. So we will have an income coming from interest rates that will benefit the results of the bank. And those incomes are going to grow probably more or in the same line of expenses. So we will benefit from that. Cost of risk is going to be normalized. So what we expect is to be above the cost of equity during 2023. And going forward, the next year, we think that, that trend is going to consolidate. Our efficiency will probably improve. And the other income or fee income, for example, is going to have a significant impact and a positive impact. And the results coming from the banks outside Colombia in the years to come are going also to help since we will consolidate our strategy on those countries. So we clearly expect to be above the cost of equity in the years to come. It's important to highlight the cost of equity at this moment is pretty high due to the macro environment and the geopolitical situation in general and higher interest rates. When that normalized, we will also probably normalize the net interest margin, and that will allow us to deliver an ROE above the cost of risk and risk.

Thank you Juan Carlos.

Thank you.

Our next question comes from Ernesto Gabilondo of Bank of America. Please go ahead.

Good morning, Juan Carlos and Jose Humberto. Good morning to everyone, and thank you for your presentation. My first question is on the regulatory framework. I remember during Petros campaign, we heard some proposals about the democratization of the financial services and a more active role from state-owned banks. So just wondering if there is something new on these proposals? Or is there potentially new proposed sales that could be related to the banking sector? And then my second question is on your expectations for fees, fees growth next year, considering that you're expecting a softer pace in long road. Thank you.

Ernesto. Regarding your first question on the regulatory environment or regulatory framework. And regarding the plans of the Petro government on the banking sector. There is not much additional information at this point. As you know, there have been 3 months after the inauguration. And what the Minister of Finance has said is that they are organizing what they call the holding of the public banks in a way that they give the direction of the different banks to the different ministers. And I -- what I expect is that those banks are going to play a role that is going to complement the commercial private banks, meaning that they will probably focus more on financial inclusion. They have mentioned that they want to do more or give more access to credit to people in the rural areas of Colombia. And that will -- I think that will focus on that. At this point, what I see is more that, that public banking or government banking is going to complement what we do in the private sector. Good to remember that we -- and I'm talking that the whole banking sector in Colombia has a great coverage. We have been doing a very good job on giving access to financial services to many Colombians. The banking penetration now in Colombia is close to 91% coming from 70%. And financial services are now available for any Colombia in a very easy way and in a way that access is -- that's 2 basic financial products. Credit is other matter, and there are more room to the government banks to play a role. So at this point, that's what I see. And I don't see, at this point, additional regulation for commercial banks in that regard. And related to fees, your second question, we have been working on the strategy since probably 3 or 4 years ago to diversify our sources of fees. -- in Colombia and in the other geographies. And I think now we have a diversified source of fees, a very broad client base, particularly in Colombia. We have now more than 22 million customers in Colombia that allow us to have -- or to reach them with additional services. So we will see the fees growing around inflation or above inflation and continue being an important part of our income. I don't know, Jose Humberto, do you want to complement something about the next question about fees?

No, that is very clear. And you have to take into consideration our -- our weight in terms of transactional. So that's supporting that pace is that the fees could be both a little bit of inflation. So we are going to reach potentially a level of 20% income ratio in the next coming years.

Perfect. Thank you very much Juan Carlos and also Jose Humberto. Just a last question on NIM, I just want to double check your guidance for next year. So should we think it should be stable for the full year and seeing a NIM expansion in the first half and potentially NIM pressure in the second half if we start to see anything cycle? Did I understand it correctly?

You are correct, Ernesto. That's what is -- we will see is going to happen. We will have probably some additional expansion during the first semester of the year and then some contraction. And what we are expecting is that the NIM should be around 6.5% for 2023 at Most.

Perfect, thank you very much.

Thank you.

Our next question comes from Tito Labarta of Goldman Sachs. Please go ahead.

A couple of questions. First, how do you think just in terms of asset quality, I mean, it's been holding up fairly well, but slowing economy, high inflation, high rates. Any concerns, any particular segments where you may be seeing issues already? Or how do you think about the evolution of that? And second question, in terms of capital return, given high ROE that you've had, how are you thinking about dividend payout from here? Thank you.

Thank you, Tito. Regarding your first question on the segments that we will see probably will be impacted for -- for our economic conditions that will be different from the year. And you mentioned them very well, high inflation and high interest rates and low growth. We expect that the segment that is going to be impacted the most is the retail credit, consumer credit, particularly credit cards will have an impact. But what we see is we can manage the increase in the cost of risk that we are seeing in that segment. We have been very careful on the origination side. Let me remind you that we are in a strategy or developing a strategy. We have pretty approved lines of credit. So we are proactive and we monitor the -- permanently, the conditions -- the economic condition of those clients. So we can react quick and be proactive on when we see that the risk is increasing. So definitely will be an increase in risk, particularly in those segments. Some SMEs, small SMEs could be impacted also mainly because the cost of interest will be higher and that (inaudible) to affect them. But overall, that will mean that the cost of risk for the full year on a consolidated basis will be around 1.8%, very much in line with our long-term expectation about cost of risk. And regarding capital, we have been growing at a very healthy pace above 25% in our loan book. So that is consuming capital, and we are very well aware of that. Remember that last year, we declared that our dividend policy will be that we will calculate a Tier 1 gold level. And with that level, we will deduct the dividend payout. So we will apply that policy with a target of 11% or around 11% Tier 1 target. And that is what we are going to propose our Board of Directors and to the shareholders' meeting that we have a target of Tier 1. And then with that, we calculate the dividends that we are -- that we will declare. So -- with that, I will pass to Jose Humberto to complement my answer and about the ROE you ask.

That is very clear, Juan. I just want to compliment -- there are additional main drivers for a healthy return on equity for the next coming years. The first one is the fee income growth at a very healthy pace, as we mentioned in the previous question. The second one is, you can see a rate in consumer loans bigger. Right now, we have at around 24% of our loans in consumer that provide us a very good NII and NIM. And third, as we mentioned in this page, our funding structure primarily comes from our clients will support the ROE, but the answers are very clear.

Thanks Juan Carlos, Jose Humberto, that's very clear. One quick follow-up. Just on the capital returns, given with the stock trading below book value, would you consider any buyback at these loans?

We are not allowed to do buybacks in Colombia Tito.

Ah okay, thanks.

Thank you.

Our next question comes from Carlos Gomez of HSBC. Please go ahead.

Hello Juan Carlos and Jose Humberto. Two questions from me. The first one refers to Banistmo. You have this very large case of the real estate developer. Could you give a bit more detail in terms of the size, what coverage you think is appropriate so you have 60% now? Where do you want to go? What are your expectations of recovery? And when do you think that the situation will be resolved -- our understanding is that the interactor is currently -- is current it is pain. When do you think you would have to obviously declare nonperforming? And when do you think that the situation can be resolved one way or another? And second, a follow-up on the capital issue. I mean, just a little bit more clear, you mentioned that your target is 11% Tier 1. You are now at 10% the expectation is that the peso might depreciate even more from where we are today? Is there room for a dividend in calendar 2023? Or you might have to reserve to preserve all the capital? Thank you.

Thank you, Carlos. Let me take your first question, and Jose Humberto will take the second after I do some initial comments. Regarding Banistmo and the corporate client that you mentioned, we reserve around $50 million for that client. The total outstanding of that client is $250 million. So now with this additional provision, the coverage level now it's at 56%. It's good to have in mind that we have the assets and the asset -- it's -- the value of the asset, exceeds the outstanding of the debt. The -- at this moment, that client is in the process of -- we are working with that client, restructuring the debt. So they are not paying at this moment because we are in that process. That's why we reserved an additional amount. But with that level of coverage that I mentioned, 56% with the assets that we have which we feel comfortable that the level of coverage between the provisions that we have already on our books and the value of the asset, we feel comfortable that give us comfort on how the situation at Banistmo is at this moment. We will continue evolving on the restructuration process with the client. That will take some time, but we expect to have the situation clear probably by the end of the year. So at that point, we will know exactly what the evolution or how the evolution of this client will be. Regarding your question, if there is room for dividends with the target of 11%. Yes, they are. Remember that we targeted an 11% Tier 1 for the end of the year. Loan growth during the year will be much, much less than this year. So we will not consume capital from that side, and we accumulate capital. So that will allow us to have a very good balance between our dividend policy and the level of capital in which we feel comfortable, which is our target, which is that 11%. I don't know, Jose, if you want to complement the second point that Carlos mentioned.

Yes, Juan. There are 2 reasons. The first one, why we get the 10% was loan growth, as Juan mentioned, we don't think that the fourth quarter, we are going to have the same trend in the loan growth. That explains why we did at the end of the year, the level of Tier 1 will increase. And the second reason is FX. Remember that accumulated last 12 months till September, FX devaluation was 20%. We don't foresee at the same level of devaluation for the fourth quarter. So because of these 2 reasons, we believe that we will exceed the 11% Tier 1 ratio at the end of the year.

So do you think you will exceed 11% at the end of 2022?

Yes. So for '23 and we will have in our room for dividend for 2022 -- the first quarter of 2022.

Again...

Yes...

No, go ahead. Go ahead.

Okay. Okay.

No, please.

So there are... So yes, we are going to reach both -- we are going to reach at around a level of 11% at the end of the year. So we will have enough space for exceeding and to have a dividend payout. So we are not -- right now, we don't know exactly the number, but we are going to make the calculations regarding the amount of capital that we need that will be 11% area, (inaudible). The consumer capital for the last quarter for the fourth quarter will be less than the consumer capital that we see in the first 3 quarters.

Okay. To summarize. So you think you will be at or could be close to 11% by the end of 2022. And then you will be above 11% by the end of 2023?

No... Let me clarify that. Okay. We -- at this moment, we are at a level of 10% of Tier 1 capital. We accumulate some capital during the fourth quarter of 2022 because the loan growth is going to be less during that quarter. So we accumulate some capital there, but it's not going to reach 11%. Then we have -- we will calculate the target of Tier 1, which will be 11%. And then with that, we will propose the dividend to the shareholder meeting shareholder meeting, and that would allow us to have a dividend policy and to have dividends next year based on the results of 2022 and reached the level of 11% since the loan growth during 2023 is going to be, as I mentioned before, around 5%. So it's going to be a growth that we will not consume capital and we will accumulate capital during 2023. Is that clear, Carlos?

That is clear. And if I can go back to the corporate default in Panama. Is this a company-specific issue? Or should we worry about other developers in Panama?

No, it's a company-specific issue. It's a client that it has been with us for some time now. So it's very specific is related with that particular client. It's not something to worry about Panama in general, Carlos.

Our next question comes from Julian Ausique of Davivienda.

My question. I would like to go back one more time about the (inaudible). And the other question is regarding the tax reform in the change that they can reform half of the pervasion of the Colombian company abroad. I don't know if you have, if there is an impact from the operation in Panama, Guatemala and Durras regard the tax reform in Colombia. And the other one is if you have any expectations in money and how much you will have to pay additionally and due to the increasing in the tax in Colombia.

Thank you, Julian. Let me see if I get your questions right because the quality of the sound wasn't very good. So you ask what is going to be the impact of the tax reform from the income that we get from the operations outside Colombia. And we don't see any particular impact. The impact is going to be, as we mentioned, in the surcharge of 5% on income tax in Colombia. So that's why we have since we have a statutory rate of 40% for 0 beginning 2023. Our (inaudible) tax rate is going to be around 35% because we -- on a consolidated basis, we have there the operations of geographies. I don't know, Jose, if you have any additional comments regarding Julian's question?

The return on equity for 2023 that you asked (inaudible) is we -- potentially, we are going to reach valuable of return equity of around 19%, meaning that we will be above cost of equity and cost of equity this year is around 15%. So potential cost of equity will increase next year. So at the end of the day, we will be above cost of equity in 2023.

Okay, and about NIM, what's the expectation for 2023 in the new term As we mentioned before, the NIM, we expect NIM to expand a little bit more during the beginning of the year, first quarter probably and probably into the first semester and then it will contract. We expect the end 2023 with a NIM of around 6.5%.

Thank you very much

thank you.

Our next question comes from Yuri Fernandes of JPMorgan.

Hi guys... sorry, can you hear me?

Yes Yuri, go ahead.

I had one question regarding like the capital structure, dividends. I guess the Tier 1 is slightly lower now, and you have been decompounding this. But my question is, can you keep that level of payout? Can you refresh us here regarding the minimum Tier 1 for the bank? How you see dividends for 2023?

Thank you, Yuri. As we mentioned before, we have our dividend policy based on our core Tier 1 target. That target is around 11%. So that will allow us to propose a dividend that will be I mean we don't know the amount yet, but it's going to be a dividend that will be, I think, first, we'll meet that criteria of the 11% and will allow us to have the capital structure that we are looking for and also have a payout that is good for the market. I don't know, Jose, if you want to complement this answer.

Yes, we are going to try again up in March, when we are going to see the dividend payout, we -- the first thing that we do is to calculate the optimal level of Tier 1 during the 2023, assuming the business plan that we are having. Based on that, -- we believe that in March, we have space to announce a dividend, assuming that 11% on average of Tier 1 that we're going to maintain during 2023. So recap. At the end of 2022, potentially the Tier 1 will be at around 10% area as we mentioned in the script. But during the 2023, the generation of capital, we are going to reach at the end of 2023, the 11%, assuming a dividend policy, our dividend payout that we have announced in March. I don't know if that is key.

No that's very clear, thank you very much.

Thank you, Yuri.

Our next question comes from Alonso Garcia of Credit Suisse.

It's actually just a follow-up on a previous question. I think you mentioned ROE for 2023 around 19%. Is that -- if that is the case, what are you expecting for this year report to 22

Thank you, Alonso. Jose Humberto, could you take the Alonso's question please?

Yes, we are expecting at the end of this year, a return on equity of 20%, as you said, in next year

This concludes the question-and-answer session. I would like to turn the call back over to Juan Carlos Mora for any closing remarks.

Thank you, everybody, for participating in Bancolombia's Third Quarter Results Conference Call. We are expecting to end this year 2022 with results in line of what we have seen so far. 2023 will be a year with different challenges with an economic environment different than the one we had had during 2022. But we, at Bancolombia feel that we are very well prepared to manage what is coming in 2023. The the structure of the bank, the digital transformation, what we are doing on our strategy with the customer base that we have, I think, allow us to manage a year in which we -- as I said, we will have different challenges, but we feel prepared to manage them. So again, thank you very much for participating in today's call, and we expect to see you in our next conference call in which we will present the full result for the year 2022. Thank you very much, and have a good day.

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