Bancolombia S.A. (NYSE:CIB) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Good morning, ladies and gentlemen and welcome to Bancolombia’s First Quarter 2023 Earnings Conference Call. My name is Ashia [ph] and I’ll 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 and future filings and press releases or verbally addressed matters that involve risks and uncertainties. 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; and Ms. Laura Clavijo, Chief Economist. I will now turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer. Mr. Juan Carlos, you may begin.

Juan Carlos Mora: Good morning and welcome to Bancolombia’s first quarter 2023 results conference call. The results for the quarter show an overall good performance. Net income was COP1.7 trillion, driven by the bank’s capacity to generate strong income on the loan and securities portfolios that offset higher operating costs on the back of peaking inflation, high interest rates and credit deterioration. As we will further elaborate after posting strong GDP growth in 2022, the countries in which we operate are now facing an economic slowdown. Particularly, Colombia is facing a deceleration in private consumption, adding pressures to an already challenging macro backdrop scenario with falling but still high deficits. The Central Bank in Colombia increased the reference rate up to 13.25% in its effort to control a peaking inflation that reached 13.3% as of March.

Given this macroeconomic scenario and the constant credit adjustment in risk appetite in some portfolios, the loan book growth moderated in the quarter, posting a 1% drop on gross loans. On top of this, the peso appreciated 3.4% during the period, reducing the contribution of U.S. dollar-denominated loans. Therefore, the loan book moderated its growth pace on a yearly basis to 20%. Deposits were flat quarter-over-quarter and increased 20% year-over-year, in line with the loan book performance. NIM was 7.2% with a slight 10% basis point drop quarter-over-quarter but expanding 120 basis points year-over-year as a result of our asset-sensitive condition on which we will further elaborate. Net provisions for credit losses for the quarter were COP2 trillion, equivalent to a cost of risk of 3.1% for the quarter.

This represents an increase of 17.5% quarter-over-quarter, driven mainly by consumer segment deterioration as households’ disposable income faces pressure on the back of high interest rates and persisting inflation. As expected, nonperforming loans reflect the rollover deterioration with a 2.7% 90 days NPL ratio. However, loan losses coverage remains strong at 218% for 90 days past due, while Basel III core equity Tier 1 ratio stood at 9.8% and total capital ratio at 12%, well above the minimum regulatory capital. OpEx decreased 4.6% quarter-over-quarter and grew 26% year-over-year, driven mainly by increases in wages and FX depreciation. Efficiency ratio for the quarter was 41%. All in all, higher income generation stemming out of the loan and securities portfolio contributed to offset the broad expense increase, posting an ROE of 17.7% for the quarter.

However, as discussed in our previous call, less favorable global and local macro conditions have moderated Colombia’s pace of growth after the strong rebound in the last 2 years after the pandemic. This, coupled with intensified political uncertainty, lead us to believe the economy will grow 0.6% during the year. It is still soon to assess other economic and social impacts arising from the government’s ambitious reforms, particularly those related to fiscal imbalances, labor cost and private consumption as well as the new cabinet policy decision making. We are following the situation closely as we continue committed to base our positions under a combined short-term long-term approach, confident on the strengths of Colombia’s financial system and a robust regulatory framework.

For further detail on the macro outlook, I will turn the presentation to Laura Clavijo, who was appointed as Bancolombia’s Chief Economist after the resignation of Juan Pablo Espinosa. Laura?

Laura Clavijo: Colombia experienced an impressive economic rebound following the significant impact of the COVID-19 pandemic. For the period comprising 2021 and 2022, the Colombian economy expanded at an average quarterly growth rate above 8% in real terms, spurred mainly by consumer demand, dynamic services sector and thriving activity in manufacturing. However, during the first months of 2023, economic activity has slowed significantly in response to higher inflation and rising interest rates. According to market forecast, GDP is expected to grow below 1% with our forecast set at 0.6% for this end of the year. For 2024, a moderate rebound is expected coming from a lower growth base with our estimates set at 1.6% of real GDP growth.

High inflation has been a persistent theme in the Colombian economic outlook for the past few years, much in line with global rising prices. Inflation in Colombia peaked at 13.3% year-over-year during March and fell to 12.8% during this past April in what is thought to be the beginning of a much anticipated downward trend. On the positive side, food prices increased at a much slower rate, enabling a drop from a 30-year peak of 27.8% in 2022 towards a lower level of 18.5% this past month of April. On the downside, there is an elevated risk of climate-related pressures to food prices for the second half of the year, in addition to sticky prices coming from regulated goods such as fuel and gas. Consequently, inflation is expected to fall to 9% this year and 4.8% in 2024, moving gradually closer but still far away from the Central Bank’s target range of 2% to 4%.

Even though inflation in Colombia remains a concern, subsiding core inflation may serve as a potential backdrop to halt further interest rate hikes. The Central Bank’s reference rate saw at the beginning of May, what could be its final rate increase of 25 basis points, reaching 13.25%, thus accumulating a 1,150 basis point increase since late 2021 when rates started to increase. Increasing interest rates have begun to pressure households and the financial sector’s loan portfolio has deteriorated accordingly, especially in the consumer segment. Considering the economic slowdown, we anticipate the Central Bank will begin its cycle of interest rate cuts in the second semester of this year. On the fiscal side, higher-than-expected oil revenue and additional tax collection from 2022’s budget reforms will help the Central Bank’s deficit to fall from the 7% to 8% level of the COVID years to around 4.4% of GDP in 2023, thus, enabling the government to meet fiscal rule targets and at the same time, increase social spending.

Overall, the economic outlook for Colombia remains cautiously stable with moderating inflation and expected interest rate stability amid an economic slowdown. Consumer confidence has dwindled to an all-time low amidst these economic challenges, political shifts and social unrest. The left wing government of Gustavo Petro, has proposed significant changes to the Status Pro economic model through an ambitious agenda, including tax, health, pension and labor market reforms. More recently, a wide cabinet overhaul included the exit of Finance Minister Ocampo. This has set a new political scene in an attempt to advance in the approval of the reform agenda. Incoming Minister Bonilla, a close adviser to Petro, has announced continuity to former Minister Ocampo’s agenda of prudent macroeconomic policy and fiscal sustainability.

We will continue to closely monitor economic indicators, changing market conditions and the political environment. Now please let me turn back the presentation to Juan Carlos, who will present Bancolombia’s quarterly performance.

Juan Carlos Mora: Thank you, Laura. Moving to Slide number 4. I want to call your attention on a set of distinctive capabilities that result on our capacity to generate transactional volume which in turn are based on our strong client growth and our digital evolution. Two relevant avenues of growth, of which we shared relevant metrics in our previous call. In this opportunity, I will refer to the merits of this capacity and its threefold contribution on first, deposits and fee income generation; second, balance sheet structure and NIM performance; and third, cash flow data that fits our risk models. In the following slides, I will further elaborate on each of these elements that allow us to adjust to economic cycles, preserving income generation and balance sheet protection to deliver short- and long-term profitability.

In Slide number 5, you can see the strong growth correlation in terms of number of clients, transactional volume and size of our deposits. However, the curve of transactions is clearly steeper outpacing the others. This is not a coincidence. As in the last years, we have been investing in developing a broad, robust and interoperable ecosystem, an engine that engages more clients, increases overall transactional volume and fees and thus attracts more deposits. In the last years, these efforts have been mainly focused on our digital platforms and products, such that as December 2022, Bancolombia processed around 74% of the market’s mobile digital transactions and around 45% of the online banking transactions. As an example, Nequi today has more than 1.4 million active users per day and close to 10.2 million active users per month.

Moving to Slide number 6. The most interesting edge of our digital strategy with the evolution of products and channels is that we have been able to attract former unbanked and underbanked individuals that seek for low value transfer and cash-out solutions. This, in turn, results in highly diversified, low amount, low-cost and sticky deposits that come mainly through savings accounts. Even as a portion of these deposits have shift towards time deposits in the last quarters, seeking for higher rates, savings accounts remain highly relevant due to its scale, representing a 52% stake in the overall funding mix and thus serve it as one of the key elements for the net interest margin performance. By nature, savings accounts are stable cash management-related deposits tied to fixed rates.

In Colombia, 4 years ago, they accounted for 25% of the total funding mix and they have been growing steadily, reaching today at 52%. Thus, in the upper left graph, you can see the cost advantage that savings accounts represent to us today due to its significant contribution in terms of volume and low cost relative to the total funding mix. Now from a balance sheet perspective, this funding structure clearly contrasts with that of the loans as approximately 2/3 are tied to flowing rates, allowing the bank to depreciate a large portion of the portfolio upon interest rate variations. In other words, as we have discussed previously, we have an asset-sensitive condition that coupled with a stable low-cost funding base explains the bank’s capability to capture a higher margin even as interest expenses goes up as shown in the bottom left and right graphs.

So for us, the contribution of higher transactional volume that drags along low-cost and sticky deposits has been and will be key to deliver NIM performance and long-term profitability. Moving to Slide 7. I want to elaborate on the last of the 3 elements of our competitive advantage based on transactional volume which is the access to information that we use to feed our risk models. As we evolve in digital products, channels and transactions and generate more deposits and fees, we also capture a byproduct which is data on cash flows and thus, a good site on clients’ payment capacity. There has been the key element behind our customer segment growth strategy started back in 2014 as the data input allowed us to anticipate and adjust our appetite on different credit cycles.

In other words, to expand or to contract origination and other measures based on the payment capacity tracker. That’s why since mid-2022, we anticipated with several measures based on the cash flows and responsible income assessment of our clients, some of which have been: one, a decrease in risk appetite to individuals without credit history. Second, a gradual adjustment on risk appetite to low-income individuals and third, further stressing disposal income estimates. As a result, you can see in the chart that a total preapproved disbursements have dropped consistently since mid-2022 and we will continue to adjust our policies and collection decisions based on these insights. In Slide number 8, I want to comment on our ESG strategy. From a business perspective, I’m glad to say that we continue making progress in our loan origination target as we disbursed COP6.5 trillion aligned with our business target for the quarter, reaching an aggregate of COP109 trillion since 2020.

That is 21% of the 2030 goal. From a strategic perspective, I want to share with you the framework we designed as a road map to leverage our purpose of promoting sustainable development to achieve everyone’s well-being in addition to the organization’s annual ESG performance measures. We have identified 3 main ESG goals for which we are generating actions: climate change, biodiversity and circular economy. Based on this framework during the first quarter, we continued working in our alignment and adherence to Net-Zero Banking Alliance, Net Zero Banking Managers initiative, UNEP’s responsible banking principles, the climate finance leadership initiative and defense [ph]. We also partnered with Ellen MacArthur Foundation to advance in our circular economy strategy.

And finally, we are aligning to task force on nature-related financial disclosure and we have reported our progress in CDP Forest and have signed the financial sector deforestation action where we work to reduce deforestation from our investment and lending portfolios by 2025 in the following sectors: palm oil, soybean, parlor [ph] for beef and leather, pulp and paper and rubber. We are very satisfied with the progress made on every one of these initiatives which serves as a testimony of our commitment to our ESG strategy. As a matter of fact, our ESG performance is permanently assessed and runs with high scores on the Dow Jones Sustainability Index, the carbon disclosure project and MSCI, just to name a few. After this general business update, I want to turn now the presentation to Jose Humberto Acosta, who will further elaborate on our first quarter results.

Jose Humberto?

Jose Humberto Acosta: Thank you, Juan Carlos. Moving to Slide number 9, you can see the evolution of loans and deposits for segment during the period. The consolidated loan book dropped almost 1% quarter-over-quarter, consistent with the drop in all segments, mainly in commercial which went down 1.2% affected by less originations in Colombia and some prepayments [indiscernible]. Consumer loans also fell 0.8%, reflecting the consequences of the economic cycle and risk appetite adjustments discussed earlier. The result for this quarter was also affected by a 3.4% peso appreciation. Net of FX, the loan book was flat quarter-over-quarter. However, on a year-over-year basis, the aggregate loan book still expanded at 20% as was the case for all segments, except for consumer that expanded slightly below at a level of 19%.

Compared to the last quarter, yearly expansion of 22%, this pace of growth reflects some moderation due to the lower demand and less risk appetite. On the other hand, total deposit performance during the quarter was aligned to that of loans. That is, they were flat on the quarter. However, time deposits grew almost 12% gaining share on the total deposit mix as savings dropped 6.2%. This is due to the higher interest rate environment and thus, we expect further shifting towards time deposits in the following quarters. Moving to Slide 10, we present a brief snapshot of the Central America operation performance. As of March of 2023, Banistmo, Banco Agricola and BAM represented 29% of the total loan portfolio, in line with the past quarter. Despite our metrics are affected by FX on each period, in general terms, most banks have increased their share at a consolidated level and show similar trends as to Colombia in the last quarters in terms of loans and deposits growth, the income generation, good NIM performance and efficiency gains.

A good example of this positive evolution is BAM which has been growing steadily in a higher risk adjusted returns in consumer segment on the back of Guatemala’s better economic performance. We continue working on tapping growth opportunities and implementing cost control initiatives to boost profitability in all geographies. Now moving to Slide 11, I will elaborate on liquidity. The total funding mix changed again during the quarter as savings and checking accounts kept yielding to time deposits that grew 12%, consistent with the preference towards higher interest-bearing deposits. As a result, time deposits reached up 34% in the total deposit mix, whereas savings to 38% and checking accounts 13%. Overall, deposits still represent an 85% share of the total funding mix, in line with the last quarter.

As a result of the larger portion of time deposits, the cost of funding grew but the 5.27% remains significantly below the 13% prevailing reference rate during the quarter. This certainly reflects our cost advantage based on the strength in saving accounts. So even when interest rates have risen significantly since the third quarter of 2021, our overall cost of funding has increased substantially less. Going forward, we do not foresee funding pressures and we are running comfortably in our short- and long-term regulatory liquidity ratios as reflected on the liquidity coverage ratio and net stable funding ratio on the bottom left graph. And finally, I want to take this opportunity to comment on our investment portfolio structure and its composition.

As of March, our investment representing roughly 9% of our total assets and had a duration at around 14 months reflecting our nature of a commercial bank, whereby our securities portfolio is composed of mandatory investments and high-quality assets for liquidity management purposes. Therefore, 21% are debt securities issued by the Colombian government and 49% of foreign governments, of which U.S. treasury bills represent at around 30% of the total portfolio. From an accounting perspective, 46% of the portfolio is registered as a tradable securities changed through P&L. And the remaining 54% is made up of mandatory investments and corporate bonds, out of which 27% are registered as available for sale change to through other comprehensive income and 26% as a held to maturity.

In Slide number 12, we provide a snapshot of fees. In the first quarter, net fee income decreased almost 2% compared to the fourth quarter explained mainly by lower credit and debit card usage and bancassurance sales due to the seasonal effects. Consequently, fee expenses also decreased 12% in the period and thus fee income ratio increased to almost 20%. Year-over-year, net fee income increased 9% of which Colombia provided the largest contribution driven by higher volume of transactions coupled with growth in clients. Going forward, we expect net fee income to grow at around 9% in 2023. Moving into Slide 13. I will walk you through NII and NIM performance. Despite the slight reduction in the loan book during the quarter, interest income grew 10% and 90% year-over-year, whereas interest expenses grew 26% during the quarter and an impressive 224% year-over-year driven by the significant increase in interest rates as per the contractionary monetary policy.

However, as per its asset-sensitive condition, NII still grew 0.1% quarter-over-quarter and almost 45% year-over-year. NIM slightly dropped to 7.2%, down 10 basis points quarter-over-quarter but expanded 120 bps year-over-year, explained mainly by the bank’s capacity to capture more interest income as rates rise. Going forward, we have been preparing our balance sheet against cuts in interest rates. As an example, 60% of our time deposits mature in the next 12 months will provide us strong margin protection. Moving on to Slide number 14, we present the evolution of provisions and asset quality. As discussed before, the combination of high inflation and interest rates has harmed household disposable income and payment capacity, mainly in lower income population, a segment now posting higher NPLs. Going forward, higher unemployment can also add to the deterioration.

Hence, net provision for credit losses for the quarter were COP2 trillion, equivalent to a cost of risk of 3.1%. This represents an increase of 17.5% quarter-over-quarter, mainly driven by an increase of COP470 billion in consumer segment for which we will provide more details on the next slide. There were also provision charges for specific commercial loans, mainly for 2 non-sector-related clients in Colombia, increasing provisions in COP123 billion compared to fourth quarter. Other than that, corporates and SMEs are performing well in general in all geographies. As a matter of fact, Banistmo reduced its provision expense in 52% as it had anticipated charge in the past last quarter. The 90 days past due loan ratio for the quarter was 2.7%, up from 2.2% in the fourth quarter, reflecting higher positive rollovers in consumer and a specific real estate corporate client in Banistmo that became due in January, reaching the 90-day past due.

Bear in mind that as per last quarter, provisioning collateral in place, this loan is 100% covered. Moreover, our allowance as a percentage of loans remains strong and represents 219% coverage on a 90-day past due loans. Moving to Slide number 15. I would like to share some further detail on credit quality for Colombia, where the loan deterioration focus has been. First, it’s important to mention that today, 87% of our total loan book is currently in Stage 1. That is 1.3 percentage points higher than 1 year ago. The 13% remaining balance is component of the Stage 2 and 3 loans which represent the current and potential NPLs, all of which have a coverage of almost 40%. Deterioration during the quarter has occurred mainly in consumer segment which holds a 15% balance in Stage 2 and 3, a 90-day past due loans ratio of around 4% and consequently a cost of risk of 13%, notably an outlier compared to commercial and mortgage that are performing well.

And within consumer segment, personal loans showed the highest deterioration amongst all other products with a 4.7% 90-day past due loans ratio and 15% cost of risk. As opposite of this, credit card represents a 90-day NPL ratio of 3.1% below the overall segment’s metric. All in all, we consider the recent deterioration as part of the preapproved loans strategy implemented several years ago to penetrate consumer segment for which we feel comfortable considering our balance sheet coverage and a credit policy. Moving into Slide number 16, we present operating expenses and efficiency ratio. Operating expenses grew 26% year-over-year in addition to inflation and FX, the main contributors to these growth first, higher taxes related to transactions and deposits as per last year fiscal reform.

Second, higher IT expenses as a function of a higher volume of transactions. And third, higher personnel expenses which were impacted by the annual wage increase. Net of FX, the annual growth would have been around 20%. The cost-to-income ratio was 41% as a result of the income performance and the cost control initiatives in which we continue making progress. A good example is our journey to cloud which we are shifting from fixed to variable folks. In the long term, we expect a more sustainable ratio of 45% on the back of normalized income generation. On Slide 17, you can see our profitability metrics. Net income for the quarter was COP1.7 trillion, up 4.5% compared to last quarter on the back of a strong income generation and cost dilution.

Return on equity was 17.7% which if adjusted for goodwill, results in a return of tangible equity of 23.3%. The effective tax rate for the quarter was 25% and we forecast a tax rate of 32% for the year as per last year fiscal reform. And finally, on Slide 18, we present a snapshot of the bank’s capital. Shareholders’ equity grew 22% year-over-year. Meanwhile, assets grew 20%, those reflecting the bank’s capacity to generate capital to positive growth whilst observing a sound balance sheet. Moreover, Basel III total capital adequacy ratio stood at 12.1% on a consolidated basis for the quarter with a CET1 of 9.8%. Year-over-year, there was a CET1 generation of 262 basis points and a total of 251 basis points [ph] reduction, mainly associated with the strong organic growth and significant peso depreciation that increased the value in pesos of dollars denominated loans and the goodwill.

During the remainder of the year, income generation will offset the COP3.4 trillion dividend payout and so our CET1 target remains in 11% area for the year-end. Now, I will hand over the presentation back to Juan Carlos for some final remarks. Juan?

Juan Carlos Mora: Thank you, Jose Humberto. As we discussed in our past call, 2023 is proving to be a complex year with an evident economic slowdown, persistent fundamental imbalances and political uncertainty. However, we are confident that our balance sheet strength and a well-articulated set of competitive advantages equip us to handle these complexities and pursue on our long-term strategy. We will remain very close to our clients, providing proactive solutions to alleviate their cash flows and offset further loan deterioration. Given the current context for year-end, we forecast a loan growth of around 5%. Cost of risk between 2.2% and 2.4%, NIM of around 6.5%, for equity Tier 1 of 11% and ROE of 18%. In the midterm, we expect NIM of around 5.5% and ROE of 15%. With this, we conclude our first quarter results conference call. We now invite you to ask any questions you may have.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ernesto Gabilondo with Bank of America. I’m sorry. The first question comes from Yuri Fernandes with JPMorgan.

Operator: The next question comes from Ernesto Gabilondo with Bank of America.

Operator: The next question comes from Carlos Gomez with HSBC. Please go ahead. The next question comes from Julian Ausique with Davivienda Corredores.

Operator: The next question comes from Carlos Gomez with HSBC.

Operator: The next question comes from Tito Labarta with Goldman Sachs.

Operator: The next question comes from Andres Soto with Santander.

Operator: [Operator Instructions] We have no further questions at this time. I would like to hand the call over to Mr. Juan Carlos Mora for closing remarks. Please go ahead.

Juan Carlos Mora: Thank you, everybody, for participating in the presentation of the Bancolombia’s results for the first quarter 2023. As we mentioned, this is a challenging year in terms of economic performance of Colombia mainly. The other countries in which we operate look good in terms of performance. So asset quality will be the focus of our actions. And we know that the results of the bank will depend very much on that front. We will see the evolution and we hope to see you on our conference call for the second quarter 2023. Thank you very much, everybody and have a good day.

Operator: This concludes today’s conference call. Thank you for participating. You may disconnect.