Bancolombia S.A. (NYSE:CIB) Q1 2024 Earnings Call Transcript

Bancolombia S.A. (NYSE:CIB) Q1 2024 Earnings Call Transcript May 10, 2024

Bancolombia S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to Bancolombia’s First Quarter 2024 Earnings Conference Call. My name is Daryl, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [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 address matters that involve risks and uncertainties.

Consequently, these 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 described in our reports filed with the SEC. With us today are Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Julian Mora, Chief Corporate Officer; Mr. Jose Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mrs. Catalina Toba, Investor Relations and Capital Markets Director; and Mrs.

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 results conference call. Please turn to slide 2. During the first quarter of the year, Colombia encounter economic challenges marked by elevated interest rates and reduced consumer confidence. Despite subsequent declines in inflation and interest rates, consumer demand and investments remain restrained. Nevertheless, by utilizing our commercial expertise and conducting comprehensive risk assessments, we accomplished a not notable 2.5% quarterly loan growth. However, this growth is offset by a 2.6% annual contraction resulting from the substantial appreciation of the peso by 17.3% during the quarter. Efforts to reduce credit deterioration resulted in a notable 24% decrease in provision expenses compared to the previous quarter.

Consequently, the cost of risks for the reporting period was recorded at 2%. Additionally, an 8% quarter-over-quarter reduction in operating expenses contributed to achieve a net income of COP1.7 trillion, representing an approximate 15% increase compared to the preceding quarter. However, it is worth noting that these figures still reflects a 3% decline year-over-year. Furthermore, the efficiency ratio decreased to 46%. ROE rebounded to 17%, and our capital position remains robust with a total solvency ratio of 12.3% and a core equity Tier 1 ratio of 10.4%. The Central American banks and offshore operations sustained their positive performance, contributing to the overall group’s results and diversification strategy. On the other hand, we believe that the declining trend on inflation in Colombia will solidify in the coming months.

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Q&A Session

Facilitating a gradual reduction in interest rates. This should stimulate a recovery in credit demand and alleviate the pressure on asset quality. We expect that there will be opportunities for credit growth in agribusiness, mining and public administration sectors because of the government’s advancement on public policy programs. This growth is expected to partially offset the slowdown that is being experienced in the construction, manufacturing and retail sectors. However, it is important to note that there are still concerns regarding the progress of regulatory changes in the health sector as well as the performance of the energy sector, which is currently facing challenges due to the El Nino phenomenon. It is important to acknowledge that our involvement in the health care industry is relatively small with our services reaching over 11,400 clients which constitutes only 1.6% of Bancolombian’s independent loan portfolio.

On the business development front, we are pleased to share the recent launch of Wenia, a Bancolombia’s investment in a digital asset company. Wenia is registered in Bermuda and has been granted a Class F license by the Bermuda Monetary Authority. By utilizing innovative technology, Wenia serves as a bridge between traditional financial system and the expanding digital economy. Initially Colombian residents will be able to engage in the buying, selling, converting, receiving and sending of digital assets such as Bitcoin, Ether and USBC in a swift and secure manner. This initiative aims to empower individuals, with an interest in the digital assets real to confidently diversify the investment portfolios. This innovative solution is framed within rigorous compliance, with regulatory standards and internal country policies including, know your customer, know your transaction and travel rule, ensuring comprehensive stewardship in confidence among all parties involved.

After these highlights of our first quarter results, I am pleased to introduce our Chief Economist, Laura Clavijo, who will provide further insights into the macroeconomic landscape. Laura?

Laura Clavijo: Thank you, Juan Carlos. Please go to Slide 3. Economic activity in Colombia is going through a phase of substantial weakness, that will continue for much of 2024, due to stagnated consumer demand and a significant fall in fixed investments. Consequently, our updated forecast incorporates a slight downward provision for some key macro variables. For 2024, we anticipate economic growth of just 0.6% in line with the previous year’s overall economic results. Inflation is expected to close at 5.7%, leading more margins for Central Bank interest rate cuts for an end of year repo rate of 8.75%. Indeed first quarter results suggest that even though the economy as a whole is still sluggish, as in the case of construction, retail and manufacturing, some sectors have managed to outperform a — uncertainty.

The agriculture sector for instance managed to grow 1.9% year-over-year during January, and 2.5% in February according to a leading economic indicator ISE. As farmers anticipated the drought season in the wake of an unpredictable El Nino to crops such as coffee, and cacao drives in the earlier months of the year Also the services sector, which includes public administration and entertainment, showed favorable activity expanding close to 5% during the first quarter. Furthermore, the economy has continued to benefit from receding inflation, which has managed to maintain a consistent downward trend closing at an annual rate of 7.36%, during March. This trend has been mainly led by declining food prices, registering just under 2% year-over-year and goods prices around 3% especially, imported goods that have eased thanks to the appreciation of the exchange rate.

Given the scenario, the Central Bank accelerated the pace of interest rate cuts to 50 basis points during March and April. Thus far, policy interest rates have declined 150 basis points from its 2023 peak enabling the retail rate to defend to its current level of 11.75%. Going forward, we expect the Central Bank to continue a cautionary approach to monetary easing, given the upside risks that still prevail in bringing inflation back towards the target range of 3%. Indexation effects are tangible and potential hikes in gas and diesel prices are still on the table. Finally, in recent months much attention has been drawn to the fiscal outlook. Underwhelming economic activity has significantly impacted tax collection and other sources of revenue have suffered setbacks such as, those expected from lawsuit windfall gains and mining sector royalties.

Declining sources of revenue contrasts sharply the high levels of planned expenditure that the government has set out to meet social policy goals. As a result, the government expects to expand its fiscal deficit to 5.3% of GDP in 2024 from 4.3% in 2023, which implies testing the limits of compliance to the fiscal rule. In sum, the Colombian economy faces growth challenges but macro financial conditions are slowly improving and should help alleviate household budgets and lead to an uptick in demand during the second half of the year. Now please let me turn the presentation back to Juan Carlos, who will present Bancolombia’s quarterly performance

Juan Carlos Mora: Thank you, Laura. Before we move into the detailed quarterly results, I would like to present an overview of some initiatives aligned with our four value driving pillars. Through these pillars, we developed innovative solutions and develop exceptional capabilities that not only reinforce our market leadership but also laid the groundwork for sustained growth and profitability. Please proceed to Slide 4. As a part of our first and second strategic pillars that cover our integrated and client-centric solutions approach and our digital capabilities under a multichannel platform, I would like to share the recent launch of our enhanced value proposition to address SME’s merchant cash management and collection needs under a simple and innovative acquiring app operating by 1P, a payment platform subsidiary fully owned by Bancolombia.

We consider 1P a strategic channel due to its substantial market share potential in payment flows. Small and medium-sized enterprises are approximately 90% of Colombia’s total productive sector and lack of formal and cost effective cash management and acquiring services to facilitate their in-store and online sales. These services are inherently recurring and scalable, generating fee-based revenues that aims in diluting fixed cost and IT investments. With the introduction of a novel capabilities such as tap to phone and tailored solutions wont be fixed to complement rather than compete with the traditional acquiring and cash management services offered by the bank. Moreover, from a channel ecosystem perspective, it leveraged Neck’s substantial customer base, as these customers represent the end users of acquiring services provided by 1P to merchant.

In fact, 1P experienced an impressive growth of approximately 30% year-over-year in terms of clients, 33% in terms of revenues and 7% in terms of the number of transactions. We anticipate this positive trend to be further enhanced by the new value proposition, thereby contributing to the consolidated group performance. Furthermore, we envision 1P as a vehicle to capitalize on the open banking opportunities through an API connectivity, leveraging the bank’s progress in this domain. On Slide 5, under our fair value driving pillar of structural capabilities that create distinctive market advantages, I would like to examine the key factors behind the net interest margin performance in Colombia. These factors largely explain the bank’s superior results compared to its peers over the past almost two years and will provide tools to defend the margin in the current descending interest rate cycle.

Firstly, we offer a comprehensive portfolio of assets and liabilities with a range of diverse and complementary products that provide greater flexibility to manage rate and index gaps. Secondly, the diverse sources of counterparties of time deposits including retail, commercial and institutional clients facilitate the diversification of turners and indexes, thereby enabling the construction of an efficient pricing curve. Thirdly, the substantial volume of low cost and stable deposits which exceed a low sensitivity interest rate fluctuations serve as a reliable anchor ensuring the maintenance of highly competitive funding costs across buying interest rate cycles. Lastly, we have developed [indiscernible] model [ph] an experienced team that effectively utilizes comprehensive transactional data and market insights to strategically adjust the tenure and rate gaps of assets and liability.

These enable us to effectively manage duration risk and optimize the net interest margin throughout diverse interest rate cycles. For instance, as illustrated in the initial two upper pie charts, in 2021, when the interest rate hike cycle had recently started, we strategically adjusted our assets and liability structure to enhance our asset-sensitive position. These involve increasing the proportion of floating loans relative to flooring rate deposits with the objective of expanding our net interest margin, which subsequently materialized. However, in the current environment characterized by an interest rate cut cycle, we have been implementing adjustments to our liability structure to mitigate our asset-sensitive position. This involves a three-element strike.

Firstly, reducing the proportion of non-rate-sensitive liabilities; secondly, as relating the repricing of time deposits by increasing the share of time deposits with maturity occurring within the next 12 months; and thirdly, increasing the proportion of floating rate time deposits to capitalize on the interest rate reductions. The duration of assets and liabilities has changed significantly as reflected in the lower backhand side chart. In 2021, assets were repriced much faster than liabilities. However, currently the duration of liabilities has decreased to accelerate the repricing of time deposits while the duration of assets has increased to maintain higher billing loans for a longer period. As we progress throughout the current monetary expansionary cycle, we will continue to adjust the gaps between our assets and liabilities to mitigate our margin sensitivity to rate cuts.

However, we will remain vigilant and consider the potential impact of the next cycle. Finally on slide 6, under our four-value driving pillar, which is the culture of efficiency and productivity, I will review the expense control strategy we implemented at the beginning of the year. This strategy seeks to identify opportunities for efficiency enhancement and reduce recurring expenditures. The plan has a short, medium and long-term approach and covers an in-depth assessment in six key areas: technology, fixed assets, pre expenses, operational risk results, realignment and regulatory expense management. Each area has a dedicated team led by a senior management and a centralized governance oversight and control mechanism ensures alignment with our objective.

By way of illustration, we are presently evaluating the potential avenues to optimize cloud-based services, minimizing expenditure on credit and debit card fees, terminate real estate leases capitalize on resource realignment facilities by IT tools and implement comprehensive fraud mitigation measures. We will provide a periodic update on the progress made in each of these areas as we believe that the above-mentioned strategy will show yield the desired outcomes thereby ensuring engagement operational efficiency. Now, I would like to invite Jose Humberto Acosta to provide further information on our first quarter 2024 results. Jose?

Jose Humberto Acosta: Thank you, Juan Carlos. Please go to slide 7 to discuss results of our Central American operation. During the first quarter, the share of all banks in Central America grew quarter-over-quarter with respect to Colombia, driven mainly by a couple of large corporate loans. However, when analyzed on an annual basis such growth is offset by a 17% base appreciation. Banco Agricola and under strong quarter on the back of payrolls and commercial loans growth that increased its NII whereas Banistmo and Banco Agricola growth was mainly focused on commercial loans as consumer remains to do it so the NIMs contracted. Regarding asset quality, all banks are tending towards a slower pace of deterioration but posted MIC results in terms of cost of risk as Banistmo Hara provision release related to a parameter update whereas BancoAgricola returned to a normalized cost of risk after one-off accrued last quarter.

On the other hand, Agromercantil recorded a lower provision expense quarter-over-quarter, partially explained by seasonal effect and a lower growth on consumer loans. Banco Agricola recorded a return on equity of almost 18%, Banistmo of 9.5%, whereas, Banco Agromercantil returned to 10% annually. Despite the overall positive results of all banks, the net income contribution decreased year-over-year compared to that of Colombia also due to the peso appreciation. We remain cautious regarding the economic and political outlook of all three geographies, particularly with respect to Panama due to the more challenging fiscal performance and expectations around the new government recently elected. Please go to slide 8. Driven by an almost 4% quarter-over-quarter growth on commercial loans, the consolidated loan book resumed its growth but with a 2.5% quarter-over-quarter increase, despite still recording a 2.6% year-over-year contraction explained by the 17% peso appreciation that reduced the contribution of the loans denominated in US dollars.

Absent of the FX impact, the loan book would have grown 3.8% on a yearly basis. The growth on commercial loan is in part attributable to the good performance of the subsidiaries in Central America that originated a couple of large copper loans coupled with the delivery strategy to save market share growth on this segment in Colombia as lower interest expense incentivized demand. Also, it is worth to mention positive performance of the mortgage segment that accomplished a 1.9% growth in the quarter, signaling a slight recovery after several months of subdued demand and driven by social housing as per the establishment of the government subsidy program at the beginning of the year. On the flip side consumer segment continues contracted in a combination of reduced appetite and low demand given still high rates for these unsecured type loans.

Consistently with the above, the share of consumer loans added to commercial loans during the quarter, down to a 20.8% share of the total portfolio versus 22.1% a year ago. Please go to slide number nine. Despite the commented growth of the loan book, total deposits decreased 1.2% quarter-over-quarter as we used excess liquidity and reports to fund the loan growth and to prepare medium-term bank loans, which fell almost 10% quarter-over-quarter. Year-over-year deposits recorded a 2.5% drop, whereas, loans with banks and debt instruments contracted by more than 25% and 24%, respectively consistent with a weaker credit demand. In terms of products, time deposits grew the most with 1.5% quarter-over-quarter growth exclusively on digital time deposits, whereas, savings fell 2.2% and current account 3.2% as clients shifted again towards higher yielding instruments after the preferred year and liquid position.

Year-over-year time deposits grew 2.8% where we are saving fell 4% and current account 10%. From the funding mix perspective, banks maintained its stake, whereas, current accounts and loans with banks due to time deposits that increased to 36%. Provided the central bank rate cut and the lower pressure to secured funding, the cost of funding dropped to 5.3% in the quarter. However, it’s important to highlight that with regards to time deposits we were able to cut the weighted average rate by 219 basis points, exceeding the accumulated sensor bank rate sort of 100 basis points as of March. A proof of our ability to adjust our time deposits maturing profile to secure a fast repricing as discussed earlier. Please go to slide 10. Total interest income on loans and financial leases contracted 4.1% quarter-over-quarter, driven by the lower rates applicable on credit originations and on the repricing of the loan book coupled with the reduction in the consumer loan share that yield higher than commercial loan.

Moreover there was a 5.7% quarter-over-quarter decrease in interest and valuations on financial instruments driven by lower income valuation on the test portfolio. Thus, total interest income and valuation of financial instruments fell 4% quarter-over-quarter and 3% year-over-year consistent with the interest rate sub and portfolio performance. Furthermore, interest expense fell 7.3% quarter-over-quarter and 2.1% year-over-year, given the contraction of deposits, the prepayment of medium-term loans, the reduction in debt instruments and the ability to growth rates, on time deposits to a larger extent when compared to the Central Bank’s policy. However, despite the effort on interest expense reduction, NII fell 1.5% quarter-over-quarter and 3.7% year-over-year, mainly attributable to the drop of interest and valuation of financial instruments.

Thus, NIM fell 14 basis points quarter-over-quarter to 7.1% on the back of the 77 basis points lower NIM of investments, whereas the lending NIM only contracted four basis points because of our margin protection strategies in place the SKUs earlier. Going forward, our NIM will benefit especially from the repricing dynamic of the 67% of total term deposits that will become due in the next 12 months. Please go to Slide 11. Net fee income decreased 2.4% quarter-over-quarter, due to seasonal effects as transactions increased on a year-end as a result. The income ratio fell to 18%. Year-over-year net fee income was flat, as the expenses growth outpaced fee income growth due to the higher third-party provider costs and processing charges. When breaking down by products credit and debit cards, payments and collections and banking service fee income fell quarter-over-quarter, as per lower volume of transactions in the first quarter, while posting roll rates year-over-year.

On the flip side, fee income related to Bancassurance fell 27% quarter-over-quarter and 2.3% year-over-year, driven by a smaller share of income as the claims ratio has increased coupled with a lower volume of policies issued hitting the contraction in personal loans. Regarding other sources of operating income the fleet leasing operation reduced 2.3% quarter-over-quarter, as per lower demand, but still cost, interesting 10% growth year-over-year. Please go to Slide 12, and an overview of the asset quality. Net provision expense for the quarter was COP 1.3 trillion an almost 24% drop quarter-over-quarter and 36% year-over-year. Consequently the quarterly cost of risk fell from 2.7% to 2% whereas the annual will drop to 2.6% cost of risk. The explanation of this sharp drop in net provisions is threefold.

First, there was a COP 213 billion reduction on consumer loans given the slower pace of deterioration in Colombia, as we will further elaborate. Second, an COP 198 billion release mainly attributable to the update of macroeconomic inputs which incorporate the downward part of the interest rate which is the main variable associated to consumer loans performance as well as a release related to a parameter update in Banistmo. And third, a COP 34.6 billion release on a large exposure segment, given prepayments of several past due loans. On the other hand, a COP 55 billion provision expense was accrued on SMEs due to an increase in past loans as expected. Thus, despite the better performance of consumer loans in Colombia, new past due loans increased quarter-over-quarter as shown on the upper left-hand side graph, related to commercial loans in Colombia and Banistmo, Personal loans in Banco Agromercantil and mortgages in Banistmo.

Moreover, charge-offs for the quarter were COP 1.5 billion, below the charge-off amount on the last two quarters as the stock of past due loans on consumer loans is lower and these typically are written-off faster than commercial loan. In terms of asset quality, past due loans exceeded our quarterly and annual deterioration in terms of 30-day past due loans as per the increase in new past due loans. On the flip side, the 90-day past due loans ratio remained flat quarter-over-quarter, albeit increasing on a yearly basis as the pace of rollover has subsided provided had recollections and refinancing agreements. On the other hand provided the decrease in net provision charges in the quarter both the 30 and 90-day past due loans coverage ratio fell to 111% and 170% respectively, although still proving a strong coverage to the balance sheet.

Now from an expected loss perspective Stage 1 slightly increase provided the growth on loans during the quarter, whereas Stage 2 and Stage 3 remained flat quarter-over-quarter as the net result of less consumer loans reaching 90-day past due and the transition of some commercial loans from Stage 3 into Stage 2 given its better performance. The combined coverage of Stage 2 and 3 loans increased three basis points to a level of 40%. Going forward, we envision a decrease in loan deterioration on the back of interest rate cuts that alleviate pressure on debtor’s cash flows. However, we do expect higher delinquencies on SMEs as construction, manufacturing, and retail continue to perform for poorly. Moving to Slide number 13, I will further discuss on credit quality in Colombia.

As we anticipated, there has been a dividend reduction in loan deterioration in the consumer segment in Colombia provided all the measures taken to increase collections and adjust credit appetite. As shown on the upper left chart, there was indeed a negative past due loans delta quarter-over-quarter as new vintages are performing better. When broken down by product, personal loans which hold a 9.4% share of total loans on Bancolombia’s standalone book and 20% of loans in Stage 2 and 3 reduced the most in terms of new past due loans. On the flip side, auto loans, credit cards, and payroll loans registered a higher past due loans due to a seasonal effect as individuals typically have access to extra cash in year-end allowing them to catch up with their installment.

But most importantly, cost of risk fell across all products, except for creditors given the modern recent interest rate update, which forecast a descending pact that alleviates debt-to-cash flows coupled with the better performance of the BMDs. In the case of credit cards, the increase of cost of risk was attributed to the fact that the quarter end date fell in Holy week and some collections were recorded days after. Based on the adjustments introduced to the consumer risk model that have resulted in better performing new winners in Colombia, we continue to visibly increasing the volume of new originations confident that as rates go down, asset quality metrics will improve. In terms of overall asset quality, we continue performing with the average of 90-day past due loans amongst the largest peers.

Please go to Slide number 14. Operating expenses contracted 8.1% quarter-over-quarter due to a seasonal effect related to a year-end additional expenses in IT, advertisement, and cash transportation and consequently, there was a lower VAT provision. Thus administrative expenses dropped 13% and the personnel expenses that aggregate salaries benefits and the compensation plan remained flat, despite the 12.3% average salary increase for employees in Colombia, which was somehow compensated with lower increase in Central America Bank. Now, from an annual perspective and in line with the lower pace of growth exhibited since the second half of 2023, year-over-year total expenses grew 3.5%, significantly below inflation, driven by part by stringent cost control and second by the 17% peso appreciation during the period.

Administrative expenses grew 5.4%, mainly because of non-income taxes and IT-related services devoted mainly to the journey to the cloud and business transformation, whereas personal expenses grew below 1% despite the annual wage increase in Colombia, what reaffirms the efficiency gains. Consistently, cost-to-income ratio for the period fell to 46.2%. Please go to Slide 15. Net income for the quarter was COP 1.7 trillion, equivalent to a 15% increase quarter over quarter, driven by the 24% drop in net provisions and 8% reduction on operating expenses that more than offset the contraction on the net interest income. On a yearly basis, however, the net income fell 3% year over year on the back of long-ruled contraction, lower income generation, high credit and operating expenses.

Return on equity for the quarter increased to 17.4%, which if adjusted for goodwill, results in a return of tangible equity of 21.8%. That shows a strong profitability of the operation isolated of goodwill-related. Now, please go to Slide 16 to discuss the evolution of capital generation. Shareholders’ equity fell 4.2%, quarter over quarter provided the pesos 3.4 trillion dividend payout approved in our General Assembly in March. Year over year, it contracted 1.2%, driven to some extent by the peso appreciation during the period. On the other hand, core equity tier 1 ratio ended at a level of 10.4%, implying 100 basis point reduction, whereas on a yearly basis, it increased 7 basis points on the back of organic capital generation. Consistently, total capital adequacy ratio was 12.3%, equivalent to 110 basis points, quarter over quarter reduction, and 30 basis points increased year over year.

During the remainder of the year, income generation will offset the dividend payout to reach the CET1 target of 11% area for the year-end. With this, I will hand over the presentation to Juan Carlos for some final remarks. Juan?

Juan Carlos Mora: Thank you, Jose Humberto. Please proceed to slide 17 to review the evolution of our sustainability strategy. In Q1, we increased disbursements under a business with purpose strategy by COP 10.2 trillion, bringing the total to COP 151 trillion since 2020. These loans support small-scale agribusiness ventures, green buildings, and mobility projects, decarbonization plans, and gender-related initiatives. Over the past year, as a part of the Climate Finance Leadership Initiative, we have been actively engaging in meetings with representatives from both the private and public sectors. These discussions have focused on our collective contributions to climate action and clean energy transition strategies. The culmination of this work will be formally presented at the upcoming COP 16 conference.

We are also pleased to announce that we have been voted as the company with the highest ESG responsibility for the fifth consecutive year. This recognition is based on the findings of a survey conducted among 80,000 respondents, encompassing ethical conduct, transparency, corporate governance practice, and environmental commitment. Finally, in the area of social impact, we are pleased to introduce La Casa de la Plata, an innovative online platform designed to foster financial well-being among our valued customers. This comprehensive platform provides a wealth of financial education resources and interactive tools, empowering individuals to make informed and responsible financial decisions. Last, on Slide 18, I will share our guidance for the end of 2024 based on the current data and our updated macroeconomic forecast as shown on the left-hand side, for which I want to highlight the variation in terms of the exchange rate as it imposes changes to dollar-denominated accounts when expressed in pesos.

We expect a total loan growth of 8%, broken down in 4.1% growth on peso-denominated loans and 8.5% in dollar-denominated loans. We keep our 6.8% guidance with regards to net interest margin adjust our cost of risk from 2.4% to 2.6% as Vintages continues performing better, adjusted efficiency ratio to 15% area and maintain our ROE forecast around 14% and core equity Tier 1 ratio of 11% area. With this, we conclude the review of our first quarter results. We will be happy to address now any questions you may have. Thank you.

Operator: Thank you. We will now begin a question-and-answer session. [Operator Instructions] Our first questions come from the line of Ernesto Gabilondo with Bank of America.

Ernesto Gabilondo: Thank you. Hi. Good morning, Juan Carlos and Jose Humberto and good morning everyone. Thanks for the opportunity to ask — to take questions and well, I have 3 from my side. My first one will be on NIMs. So in your presentation, you were saying that you did some adjustments to your balance sheet. So what would be your current sensitivity in Colombian pesos and in basis points for every change of 100 basis points in interest rates and how much NIM pressure can we expect for this year? And what will be the levels that you will see for NIMs on a normalized levels? My second question is on market-related revenues. We saw there was some pressure in this line during the quarter. So I just wanted to see how are you expecting this line to behave in the next quarters?

And the last question is on NEC. We started to see stronger fee income generation. We continue to see a larger number of active clients. So can you please share if you have like some specific targets for NEC in terms of number of clients, revenues or profitability within Bancolombia?

Juan Carlos Mora: Thank you, Ernesto. I am going to start addressing your third question, and I’m going to ask Jose Humberto to give you some color on the first two questions. And also, I am going to ask Laura to give you — to give a color about her view on the — on how the interest rates are going to behave according to our view. So we can have the framework to address your question about the NIM. So let me start with your NEC question. NEC continues to develop its business plan. It’s continued growing in terms of number of clients and number of active customers. We currently have close to 9 million customers, of which around 13.5%, 5 million customers are active, meaning that they interact with NEC at least once a month doing a monetary transaction.

So we have the client base and the activity of those clients continue to increase and fee generation of NEC continues in performing very well. Regarding your question of our targets at the level of customers that we have, we are not expecting to continue the same pace of growth — so we have a target of around 22 million customers in the — for 2025. But with 19 million, we have a big enough base to have those revenues that we are expecting. We continue as I said with new products. We launched this year a platform to receive remittances. So fee generation in Nequi continues to increase. So we are happy with the performance of Nequi how the clients are using the platform. But still we need to wait a little for Nequi to reach the point in which it’s profitable.

So we expect that to be in 2025 by the end of 2025. With this I’m going to ask Laura to give us her view on interest rates and then Jose Hamberto will address your question regarding sensitivity and the market-related revenue. Laura, please?

Laura Clavijo: Thank you, Juan Carlos. Yes, indeed what our — our revised forecast suggests for the Central Bank policy rate, we revised giving an additional space of an additional 50 basis points during this year. We’ve seen how during March and April the Central Bank cut 50 basis points and we expect it may accelerate to the levels of 75 basis points somewhere early in the third quarter. This in line with how we’re seeing inflation coming down. The most recent number and inflation for April shows another decline still a little bit of pressure on food prices but we believe the phenomenon the climate effect of phenomenon El Nino will end to some extent its impact on inflation in April and May. So we are seeing a declining inflation coming to a much more comfortable level that make a way to additional rate cuts.

But I think it’s important to take into consideration the upside risks in inflation. We still have some announcements from government regarding a diesel hike. We see with some uncertainty they’re going to be able to do those much needed price hikes as well as gasoline prices which have been more pressured in terms of kind of international oil prices and how that reflects an additional deficit. So we still see some upside risk and inflation there. And the other thing factor to take into consideration of course is how the Fed is going to move in terms of their own rate reductions if they are to occur in 2024. So it’s something to take into consideration given kind of this outlook on interest rates and we maintain that the Central Bank will have a somewhat cautionary approach which is favored again by repeating inflation.

I think I believe our interest rates have been coming down in the loan portfolio since almost 12 months ago. So that’s something to take into consideration not only kind of the policy rate and how that will have a lag but also how loan portfolio interest rates have been coming down since the peak in March of last year.

Jose Humberto Acosta: Ernesto regarding your first two questions, I would say that the sensitivity right now it between 20 basis points to 30 basis points for every 100 that the Central Bank interest rates move. Remember that our structural balance sheet almost 70% of our loan book is floating. Meanwhile on the deposit base we have more than 50% floating as well. The other point that I have to highlight is the fact that we have been in advance very aggressive reducing interest rate from the time deposits at around 200 basis points in the for three months. Meanwhile interest rates from the central bank reduced 100. So we have been prepared for the second half. What is going to happen at next where are going to feel some pressure for NIM the second half again because our expect — our expectations is through interest rate from Central Bank to be at a level of 8.75 at the end of the year.

Summarizing that means the compression of the NIM of around 20 basis points. Related market what is going with the market especially with our securities portfolio high level of volatility remember that we are forecasting NIM structural NIM of around 2% because of the investment portfolio. So, we are expecting a normalization of that NIM during the second half of the year.

Ernesto Gabilondo: Super helpful. Thank you very much, Juan Carlos, Jose Humberto and Laura.

Operator: Thank you. Our next questions come from the line of Yuri Fernandes with JPMorgan. Please proceed with your question.

Yuri Fernandes: Hi guys. Thank you very much for the opportunity of asking question and congrats on the quarter. I have a follow-up question actually on asset quality and provisions. And I think Jose Hamberto already discussed this in the presentation. But when we look to the provisions, they were much lower because, mostly on updating the expected loss models, right? Like, when we look to the 30 days as the loans, we still see a high new past day formation, even considering that write-offs were lower this quarter like there was a lower signal mark, gain some other lines on the 30 days. So I would like to ask you, if you are seeing this is [indiscernible] first quarter, sometimes there’s seasonality and 30 days will start to improve.

And we are pretty comfortable with this lower coverage ratio that you are seeing on the 30 days. I know your coverage or 90 days is higher than the 30 days, but trying to understand more the short-term delinquency to try to take your lower cost of risk guidance versus our worsening 30-days. That’s my first question. And going to your guidance, I got that your ROEs are unchanged at 14% despite a lower cost of risk. I think, it’s higher efficiency ratio. But can you comment on that? Like, why aren’t ROEs higher for the full year, given you have almost 18% ROE in the first quarter. Cannot we see I don’t know upside risk for these 14% of our guidance we have for the full year. thank you.

Jose Humberto Acosta: Thank you, Yuri for your questions. Let me add your first point regarding the cost of risk and asset quality. Let me start by saying that, the quarter was a good quarter regarding asset quality and kind of so price is on the positive side. But we need to read carefully that quarter. As you mentioned, past due loans, 30-day past due loans ended higher. That’s something that we need to take into consideration, but it’s controlling in the sense that the end of the month was Sunday at the end of Easter week. So it’s something that is — and many people didn’t pay that — the loans that week, but the week after, but we need to be careful on the development of what is going to happen in April. But the quarter was good.

We — on that sense, we are — our guidance is that the cost of risk could improve during the year, but I want to highlight something. This is a year with high volatility in which we need to be very careful regarding how the Colombian economy particularly is going to behave. So we have — on the consumer side, we see a good performance. Provisions are lower than we were expecting and that’s because we started changing our origination process at the end of 2022. And during all 2023, we have a tighter consumer loan origination. What we need to be careful is how SMEs are going to perform during this year. We are looking very careful how those — that particular segment is going to behave. So, let me summarize, better quarter than expected in terms of cost of risk that could lead to a better year, but we are not very — we are not sure that that’s going to be the way the year is going to behave, mainly because of — we are not clear, how SMEs are going to perform during the year.

With that let me go to – so we still – we think that we can have a better than we expected at the beginning of the year cost of risk that we – our guidance was 2.6%. That’s what we are saying that we can move to 2.4% but there is a lot of uncertainty regarding that. Expenses, the quarter was very good, mainly because of some measures that we took but also because the devaluation or revaluation of the peso better. So that helped us. In past quarters, devaluation of the peso affected us in this quarter revaluation was in favor of our expense. Still due to the performance of the interest income, we believe that efficiency is going to be – the efficiency ratio is going to be close to 50%, which is a deterioration of our index or the figure that we had at the end of 2023.

With all of that still, the ROE, we think that we could be probably on the 14 – higher 14 product close to 15% ROE with a lot of uncertainty that’s why we prefer to stay closer to the 14% guidance and waiting for the development of the year view.

Yuri Fernandes: So quickly if I may, just a follow-up on asset quality. The impression I have is that the situation is still a little bit uncertain on the credit cycle in Colombia for sure it’s improving but maybe it’s improving faster for you than other peers. Do you agree with that statement like from these moving parts?

Juan Carlos Mora: Completely. Completely. The economic environment is uncertain. GDP growth in Colombia is going to be close to 1%, which is low. So there is a lot of uncertainty as you mentioned. So I completely agree with your statement Yuri.

Yuri Fernandes: Okay. No, perfect. Thanks very much.

Juan Carlos Mora: Thank you.

Operator: Thank you. Our next question is coming from the line of Julian Ausique with Davivienda Corredores. Please proceed with your questions.

Julian Ausique: Hi, everyone and thank you for taking my question. I have two questions and the first one is regarding again the efficiency, and I know I already explained but I can’t get it. I have sorry interference in my call. So I would like to understand why you’re expecting a deterioration from the efficiency rate from the first 14% or 45% as you report to 50%. My other question is regarding the NIM. I would like to understand why widening of the loans they deteriorated a little bit even with the better performance of the cost of funding like why are you – what are you seeing in terms of collecting or the income firmed loans. And the third question is regarding the ROE. I would like to know, I know you have the – your guidance is 14% but like the – I think because I think that I’ve heard is that the 14% is like the base case scenario but which will be the best scenario and maybe the worse scenario or maybe the 14% is also the worst scenario in terms of the ROE.

Thank you.

Juan Carlos Mora: Thank you, Julian. Sound quality was poor. So I’m going to try to address your – what I understood of your question and all your questions. I’m going to start for the last one regarding ROE. And regarding the answer that we gave Yuri. There is a lot of uncertainty of the performance of the economy, particularly in Colombia, how interest rates are going to behave. So why – that’s why we prepare to give a guidance of 14%, which is the base guidance. It could be an upside. And we could reach 15%, one-five, ROE. But with the uncertainty that there is on the Colombian economy we prefer to say on the 14%. Regarding NIM, we also elaborated on how we expect the interest rates to behave. And we are managing our cost of funds.

But at the end the Central Bank is probably going to reduce the reference rate of around 300 basis points, but the effect — we will see the full effect of those reductions in 2025. Some at the end of the year, at the last quarter of the year, but mainly we can manage our cost of funds and the interest income in a way that we just expect a reduction to 6.8% of our net interest margin. So we will see probably the full effect of the — main part of the effect of interest rate reduction during 2025. Regarding efficiency with the increase in — with inflation that we are having still in Colombia, inflation is around 7%. So the cost will continue to increase, labor cost increase in a very important manner during the last three years. So managing the cost is a priority for us.

But still because of the statistical or the comparison of figures, we still think that our efficiency ratio will be closer to 50%. I’m going to ask Jose Hamberto something to add to these comments.

Jose Humberto Acosta: Thank you, Juan. Just to highlight the part regarding your second question, why did it compress a little bit in the first Q, there is a combination of two factors. First, the reduction on savings accounts because obviously people shift from savings accounts to time deposits. So we increased a little bit more time deposits. But the good news is 67% of the time deposits is less than a year. So the repricing of the liability will be at the same pace of the repricing of the assets. That’s the main reason why you see more contraction of the NIM this first quarter.

Operator: Thank you. Our next questions come from the line of Andres Soto with Santander. Please proceed with your question.

Andres Soto: Good morning, Jose Humberto and Juan Carlos. Thank you so much for the presentation. My first question is related to expenses. Juan Carlos, you were mentioning about this plan with medium-term targets for efficiency improvement. I understand this is going to be — 2024 is going to be a challenging year, because of the indexation of inflation in Colombia. But looking forward, what we can expect in terms of expenses and efficiency you are currently running at a cost to assets of 4.4%. Do you have any number in mind of what could be attainable over the medium-term based on this plan?

Juan Carlos Mora: Thank you, Andreas. As you mentioned 2024 is a challenging year regarding the expenses, we still maintain our mid-term target of 45% efficiency ratio. I think, it’s achievable. Now, I mean the first quarter and last year, we will help because of income. Net interest income, because of higher interest rates and better margin increase. So our efficiency ratio improved because of that part. Now that interest rates are going down, we need to work on expenses. So the pressure on the efficiency ratio indicator is big. But we still believe that the 45% is achievable next year. So our inflation year forecast for the end of the year is 5.7%, during 2024. But the average — average — so that’s year-end, but the average inflation is going to be closer to 7% probably.

So there is a pressure. And I want to remind you that labor costs in general, during the for 2024, increased 12% on top of 16% that was the figure at the labor cost increase in 2022. And before that, that was 10%. So if you do the compound rate of 10 16 and 12, is a big pressure on labor costs. So we are carrying that during this year. So, we need to work on that for 2024 and the results we will see in 2025

Andres Soto: Thank you, Juan Carlos. My second question is regarding these mandatory loans, that the government is proposing as part of the package to rate an IT economy. And this in the context of — you already mentioned — you have a target of COP 500 trillion in loans or sustainable or ESG factors. So, how do you see those discussions evolving? Do you think that with these targets that you have for this loan portfolio will be sufficient for what the government wants to achieve in terms of mandatory investments? Or do you expect any additional pressure from the government in terms of, where you have to put the money on?

Juan Carlos Mora: Andres, the president mentioned mandatory investments for financial institutions. But still, we don’t have sufficient details to have a view that we can elaborate on. So at this moment, we are engaging conversations, with officials from the government through the Banking Association to have the details of what is the government thinking about this mandatory investment. Let me say, that we — in Colombia, we have already on mandatory investments that are focused on agricultural investment and in the past that we have done in Colombia and the results were very, very poor. So that’s, what we that’s the conversations that we are having with the government at this moment — at this moment to have more details and to see how are their planning or what are their planning and on are their views regarding this mandatory investments.

And your second part that you mentioned our ESG strategy, we do that loans because we are convinced that that’s the way to go. We are dedicating funds to clean energy, renewable energy, mobility, green construction. So those are loans that we are — lines of credit that we are building because we are convinced that that’s the way we can help for say the economies in which we operate to be to tackle climate change. It will be ideal, if we can — and we think that all those initiatives could easily be regarding or close to what the government is thinking. Also, we are dedicating big efforts to agricultural loans and mainly to main — two small producers. So those are in lines of what the government is thinking, construction, agriculture and we already have a big portfolio on those loans.

But still Andres, we don’t have enough information to see if those are going to confide or not.

Andres Soto: Understood. Thank you, Juan Carlos and congratulations on the results.

Juan Carlos Mora: Thank you very much, Andres.

Operator: Thank you. Our next questions come from the line of Nicolas Riva with Bank of America. Please proceed with your questions.

Nicolas Riva: Thanks very much. And first of all, I think it’s important that both equity analysts and fixed income analysts can ask questions during the earnings call. So I hope that going forward, as on the fixed income side, we can also ask questions. So thanks again for the opportunity. Okay. So with that, I have a few questions on your capital. First one, if you can talk a bit about the cool option you can exercise on the 2029 Tier 2 bonds in December. If I look at capital on a consolidated basis, your total capital is at 12.3%. That’s only 80 basis points above the minimum requirements. And given that the 2029, the Tier 2s will start losing capital treatment, if not called, my view is that sooner or later, you will need to raise more Tier 2 capital.

So again, if you can discuss a bit your thoughts regarding the call option that you have on the 2029 T2s in December. And also, if you can confirm that even if you do not exercise the call option and you can only exercise that one, after the call date, you could still do a tender offer for the 2029 or even currently, the 2027’s, assuming that you get approval from the bank regulator to take out some of the 2027’s and/or the 2029’s. And in that case, if you could even think about doing a larger Tier 2 issue and then calling the 29th in December and also doing a tender offer for the ’27’s. And finally, on Clearly, there was a drop of roughly 100 basis points in this quarter. I assume given that you declared the dividend payment this quarter. I want to check if the entire dividend declared in the quarter, the $873 million, if that was fully deducted from your CET1 in this quarter?

Juan Carlos Mora: Thank you, Nicolas. And thank you for your question. I want to pass your question to Jose Hamberto.

Jose Humberto Acosta: Thank you, Nicolas. Regarding your first question, yes, we are looking for the 2027 part of the Tier 2 treatment. And next year, we’ll begin to — at a level of 60% of the 2029 next year we’ll begin to lose 20%. Our calculations based on that is that we are going to close the year at a level of 1.7% this year and maybe next year, the level will be 1.22. And our target for Tier 2 is to maintain a healthy leverage in between 1% to 2% and all depends Nicolas of market conditions. You mentioned that we are having a lowest level of BIS of 12.3% at the end of this quarter, but this is basically because of our dividend payout because of our COP 3.4 billion in dividend, but in our calculations because of the net income because of the loan growth that will be below 10%, we are going to close the year at a level of at least 11% in Tier 1 and at around 13% at the end of the year.

So at the end of the day, this is basically because of our dividend. Your third question, yes, we are able to do a tender offer, but all of that will depend on market conditions, first; second, the level of liquidity of we have in the next coming quarters. And we are — and we talk about it with several investors. We are checking every month, market conditions to see what will be the best opportunity for the bank. If we think about to do something in the market. So that will be very monitoring process, but all depends on market conditions. Again, the market right now is very active. You mentioned that it is true. But again, this is an opportunistic measure that we will take in the next coming months. You asked about dividend. The dividend was fully deducted for the calculation of CET1.

Go ahead.

Nicolas Riva: Thanks very much. I was going to say — so then basically, you are saying that you’re guiding for a CET1 of roughly 11% at the end of this year. And then you are saying we want to have between 100 and 200 basis points in Tier 2 capital. So that means that then your CET1, basically, you’re guiding for 12% to 13% as kind of a sustainable level. That would be only between 50 and 150 basis points over the minimum requirements. Would you feel comfortable with that kind of buffer over the minimum requirements?

Jose Humberto Acosta: The answer is for this period with the contact over there is one main driver why we feel comfortable because of loan growth. We are expecting below two-digit loan growth 2024 and 2025. If you grow less than two-digits less than 10%, 11% to 11.5% Q1 is more turning off to sustain this low growth.

Nicolas Riva: Okay. Understood. Thanks very much, Jose Humberto.

Jose Humberto Acosta: Thank you, Nicolas.

Operator: Thank you. Our next questions come from the line of Carlos Gomez with HSBC. Please proceed with your questions.

Carlos Gomez: Hello. Good morning, and congratulations, and thank you very much for taking the question. I wanted to ask you first about the tax rate? I know that we update this every quarter. I wanted to know where you are now, what do you expect for this year and for the coming year? And second, you mentioned that you have — that Bancolombia represents now so much of the earnings of the Colombian banking system, which is great for Bancolombia. Maybe it’s not that great for Columbia itself. Are you concerned about the situation in which the rest of the system is? Are you perhaps a bit more careful now when you take counterparty risk with any of the other institutions in the system? Thank you so much.

Juan Carlos Mora: Thank you, Carlos. Regarding taxes, income — income tax where we are expecting our effective tax rate on a consolidated basis to be around 26%, 27%. Remember that we have income from different geographies different jurisdictions with different tax treatments. So, on a consolidated basis, we have tax rate — income tax rate in Colombia about 40%, 4-0. But combining the income from the different jurisdictions, our tax rate should be around 26%, 27% as I mentioned. Regarding your second question, I’m going to be very clear, we are not concerned about the situation of the — financial institutions in Colombia. All of them are solid with good level of capital. What we see is more a situation that is particular to conditions regarding interest rates and how the some companies are funding their operations.

But it’s more a situation of a market situation that is currently or happened during last year and the beginning of this year. But we are not concerned at all regarding the systemic risk in Colombia, because all the institutions, as I mentioned, have a good level of capital. They are taking the measure. So we are not concerned at all.

Carlos Gomez: Okay. That’s clear. Thank you so much.

Juan Carlos Mora: Thank you, Carlos.

Operator: Thank you. Our next questions come from the line of Tito Labarta with Goldman Sachs. Please proceed with your questions.

Tito Labarta: Hi. Good morning. Thank you for the call and taking my question. I’m sorry some of this repeat, I joined a little bit late. But just you maintained your ROE guidance of 14% for the year despite a pretty good quarter. And I know there’s still some headwinds going up. But just what do you think is sort of going to drive that ROE lower from here? Is it mostly a function of interest rates and as rates come down? Do you see pressure on margins? Are you concerned about asset quality getting worse? I know provisions were a bit lower but did that increase from here? And also, in terms of loan growth, which is still somewhat muted any concerns on that? And then just thinking a little bit beyond 2024, if the economy is maybe beginning maybe in flex and improves in 2025, do you think that 14% ROE is sustainable beyond 2024?

Or how could it evolve particularly if rates continue to come down in 2025? Just some color on sort of the path from the current ROE, which is very strong to that 14% that you expect for the full year. Thank you.

Juan Carlos Mora: Thank you, Tito. Let me answer your question this way. Very clearly, the variables that you mentioned are going to take or impact our performance and the ROE but for us, the key factor for this year is cost of risk. It’s when we see more uncertainty and when we — and the 40% is achievable, and we think that we can reach that level and probably that’s our base case. At this moment, I could say that we have an upside possibility of getting a better ROE. But the key factor repeating is cost of risk. In terms of NIM, in terms of how the loan book is going to grow. We have those pretty much clear, and we think we have the elements to manage the margin the NIM to be in a level that helped our results. Loan growth is not going to be very healthy.

It’s going to be slow because of the performance of the economy. But we have the tools to manage that. There is much uncertainty is, as I mentioned, on cost of risk and is what we are going to monitor very closely. And when we are working and taking the measures to manage risk. Again, repeating, SMEs is one of our main focus now is where we are and also consumer loans, even though they are performing well, better than expected to be frank. Also, we need to monitor it onto consumer. But our main focus for the next quarter is going to be how SMEs are going to perform. Another factor that to take into account is how fee income is going to behave. Economy is not growing much. So fee income generation is going to be a key part, again, aggregating and to conclude, cost of risk is the key factor to achieve our ROE during 2024.

Operator: Thank you. We have reached the end of our question-and-answer session. I would now like to turn the call back over to Juan Carlos Mora for final remarks.

Juan Carlos Mora: We would like to thank you for attending our first quarter 2024 conference call. As we said during the call, it was a good quarter. We are very happy with the results. Uncertainty remains an important factor to determine our results for 2024. So, we expect to see you on our second quarter conference call to see the development of Bancolombia. Thank you very much, and have a good day.

Operator: Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.