Bancolombia S.A. (NYSE:CIB) Q4 2023 Earnings Call Transcript
Bancolombia S.A. (NYSE:CIB) Q4 2023 Earnings Call Transcript February 23, 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 Fourth Quarter 2023 Earnings Conference Call. My name is Robert, and I'll 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, 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 current exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy and various other factors that we describe in our reports filed with the SEC. With us today is Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Julian Marra, Chief Corporate Officer; Mr. Jose Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Preto, Chief Risk Officer; Mrs. Catalina Tobin, Investor Relations and Capital Markets; Director and Mrs.
Laura Clavijo, Chief Economist. I'd now like to 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 fourth quarter results conference call. Please go to Slide 2. As anticipated, 2023 has proven to be a year of significant challenges for the Colombian financial system. The prevailing high interest rates and inflation have had a discouraging effect on credit growth, resulting in reduced net interest income generation. Furthermore, these factors have adversely impacted loan quality and led to an overall increase in operating costs. In light of the prevailing macroeconomic environment, Bancolombia's net income for the quarter reached COP1.4 trillion, indicating a 2% reduction compared to the preceding quarter. For the entire year, the net income amounted to COP6.1 trillion, representing an approximate 10% annual decline.
The primary drivers contributing to this decline are: firstly, a 1.5% quarterly and 6% annual contraction in the loan book portfolio due to the reduced credit demand and diminished risk tolerance, resulting in slower growth of interest income. Secondly, a net provision charge that increased by 7% quarterly and 97% annually, consistent with the current credit cycle. Thirdly, higher operating expenses, which despite stringent cost control measures remained under pressure due to increased taxes and labor costs. In addition, it is crucial to highlight the substantial 20.5% annual, and 5.7% quarterly appreciation of the peso, leading to a decrease in the volume of loans and the interest income contribution of the dollar portfolio in the consolidated financial statements.
As the loan portfolio experienced continued repricing at elevated interest rates, the cost of risk was recovered at 2.7% for the quarter and 2.8% for the entire year. This reflects the anticipated slowdown in the past due loan formation compared to the first half of the year, which was a result of the comprehensive measures taken. The efficiency ratio ended the quarter at 49% and 45% for the entire year, indicating that the growth in operating expenses surpassed the growth in income, as previously discussed. The aforementioned factors accelerate downward pressure on the return on equity, resulting in a 15.2% ROE for the quarter and 16.1% for the entire year. Total solvency ratio experienced a notable increase of 57 basis points during the quarter, ending in a year-end figure of 13.4%.
This positive development was primarily attributed to a significant expansion of 105 basis points in core equity Tier 1. And Colombia's robust organic capital origination capabilities, coupled with a reduction in the risk-weighted assets were the driving forces behind this achievement. As a positive indicator and a testament of the bank's inherent capabilities, the generation of sound net interest margin has proven sufficient to absorb increased provisioning expenses and costs while maintaining mid-teen return on equity. The aggregator of Central American banks and offshore operations made a large year contribution to the overall group results, despite the prevailing economic and political environment in each country. We maintain our conviction that the recent downward inflationary trends in Colombia will enable the Central Bank to pursue a sustained interest rate reduction strategy.
This, in turn, is expected to stimulate credit demand and improve asset quality in the long term. We anticipate opportunities for credit growth primarily in housing, renewable energy and agribusiness sector as the government advances public spending. For a more in-depth analysis of the macro outlook, I will pass over the presentation to our Chief Economist, Laura Clavijo. Laura?
Laura Clavijo: Thank you, Juan Carlos. Now please go to Slide 3. The global economic backdrop of tight financial conditions, declining consumer demand and lower commodity prices, combined with local challenges due to high inflation, low investment and recent consumer sentiment pave the path to a significant economic slowdown in Colombia. Overall, 2023 proved to be a very challenging year for the Colombian economy and resulted in GDP growth of just 0.6% year-over-year, the lowest level in over 3 decades, excluding the covers and well below market expectations and our own forecast of 1.2%. Despite the lackluster results, the final quarter of 2023, note a slight expansion of 0.3%, rebounding from a 0.6% contraction during the third quarter, mainly driven by 6% growth in agriculture and 5% expansion in public administration.
Construction, manufacturing and retail sales continued to underperform. The biggest culprit to economic stagnation lies with public and private investment, which fell close to 25% during 2023. Total investment as a percentage of GDP has consistently declined since the pandemic from levels of 22% to just 17% last year. This scenario weighs heavily on our GDP outlook for 2024, which stands at 0.9% annual growth. On the [indiscernible] side, inflation has continued its downward trend, closing the year at 9.3% and falling further towards the 8.3% mark in early 2024, receiving food prices help explain much of the expense, but core inflation has come down consistently towards 7.9%. The drought season coming from a mine has pressured energy prices to some extent but has proven to be much milder than initially expected.
We maintained our 5.9% year-end inflation forecast considering some upward pressure from potential bee price hikes and the effect of suborn prices and services such as housing. Given this macro scenario of falling inflation amidst the economic slowdown, the Central Bank began cutting interest rates in late 2023 and early 2024, accumulating a 50 basis point reduction thus far. Currently, venture rate stands at 12.75%, and we expect it may come down towards the 9% level at year-end. We maintain our view that 2024 will be a year of gradual recovery, especially during the second half of the year when interest rate cuts will begin to pick up speed. 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 discussing the quarterly results, I would like to provide an overview of the advancements made in several initiatives that are aligned with our four value driving pillars. These pillars significantly contribute to our market leadership, operational soundness and the scalability of our business model. Please go to Slide 4. Under our first pillar, which embraces our client-centric approach, we would like to share the developments we have made as a part of our capabilities as a service model. This model is based on the open banking regulations approved in Colombia, making it the third country in Latin America to achieve this significant milestone following Brazil and Chile. The regulation establishes the foundation for financial and non-financial entities to disclose, coordinate and utilize data.
It complements the Central Bank's immediate payments system framework introduced in October and anticipated to be fully operational by 2025. While there are some potential risks to our strong position in the transactional space, we anticipate numerous opportunities and avenues for growth. Our multichannel platform is well established. We have made significant progress in developing our ecosystem model, and we have already made a range of APIs available. The two primary sources of growth originate firstly, from the immediate payment system framework, which will streamline all types of payments processing through a low-value payments system managed by the Central Bank with real-time clearing hereby, reducing operational costs and improving user experience.
Secondly, it will enable us to further integrate our financial capabilities into new marketplaces, promoting financial inclusion and enhancing the value proposition for our clients. Notably, we pioneered the launch of a new feature on our app for account aggregation, allowing our clients to manage all their financial data in a centralized location and interact seamlessly through a single app. Furthermore, we are delighted with the positive development and performance of our banking as a platform, as a service models as they have enabled us to innovate and explore novel business models. As of the end of 2023, we had processed close to 50 million transactions, resulting in deposits and fees of COP7.7 billion. Notably, these models have demonstrated remarkable growth with compelling compounded annual growth rates of 16% and 14%, respectively, over the past five quarters.
This indicates the substantial potential for Fortin expansion under our ecosystem approach. On Slide 5, under our second value driving pillar that focuses on our digital capabilities and multi-can platform. I would like to elaborate on what we believe is the most compelling evidence of the robust competitive advantage we have built in this area. For over a decade, we have strategically invested in the development of a comprehensive resilient, multichannel and interoperable platform. We recognize the critical role of each channel in our business strategy. As illustrated in the accompanying graph, the platform has emerged as a powerful instrument for acquiring new customers, particularly those who are unbanked or underbanked and seek affordable money transfers and cash withdrawal solutions.
Consequently, we have achieved exponential growth in transactional volume, increased fee revenue and significantly enhanced our ability to attract and retain deposits. In response, there has been a substantial raise in highly diversified, low value and low-cost sticky deposits. These deposits have primarily come in through savings accounts and more recently through digital time deposits. Notably, digital time deposits have experienced a remarkable compounded annual growth rate of 125% over the past five years, aligning with our digital transformation. Certainly, these well-structured strategy serves as a reliable foundation for maintaining a competitive funding cost, thereby enhancing NIM performance and overall profitability. On Slide 6, under our fair value driving pillar of structural capabilities that provide distinct market advantage.
I would like to highlight the credit risk model we have developed for corporates, midsized companies and most SMEs. We consider this model as a key differentiator in assessing credit risk which significantly contributes to superior performance of our commercial loan portfolio compared to that of major Colombian banks. This is evident in the latest report released by the Colombian Financial Superintendence which measures performance based on the 90-day past due loan ratio. Our model employs an end-to-end credit cycle approach supported by a comprehensive suite of tools for assessment, writing, follow-up and collection, underpinned by extensive research and well-articulated sectorial risk assessments, our mall provides an in-depth understanding of each industry and its cycles.
This enables us to effectively diversify our portfolio, identify early warning signals anticipate potential challenges and support our customers with tailored solutions. The most notable and valuable feature is the advanced analytical model. It draws upon the clients transactional and cash flows in sites captured on our multichannel platform. This provides a unique risk perspective freeing us from the sole reliance on financial statements. By leveraging our unparalleled insights, we have meticulously crafted a robust risk assessment framework. This framework has been instrumental in evaluating over 600,000 SMEs and 15,000 corporate clients in Colombia. Currently, we manage approximately COP120 trillion in commercial loans under this model. Notably, our portfolio has consistently outperformed industry peers.
Lastly, on Slide 7, regarding our fourth value driving pillar, which is the culture of efficiency and productivity, we would like to present the evolution of our digitalization strategy in addition to the benefits of attracting more clients and transactional flows discussed earlier, it has also provided substantial efficiency gains and flexibility, enabling us to allocate resources more effectively. Over the past decade, there has been a significant shift in the way monetary and non-monetary transactions are processed. In the early 2010, nearly 30% of these transactions were conducted through physical channels such as branches. However, by the end of 2023, this figure has planted to just 8.3%, with branches accounting for a near 0.3% of all transactions.
This strategic shift has involved the closure or transformation of branches into sales points with the aim of routing transactions through less expensive channels. Consequently, we have successfully reduced our overall fixed cost by replacing physical channels, primarily branches with digital channels and variable cost-based channels such as banking agents. This strategic move has enabled us to expand our reach and enhance user experience while maintaining operational efficiency. Furthermore, we are pleased to report continued advancements in the scalability of our business model, which will enable us to capture additional gains in efficiency and productivity. Now, I would like to invite Jose Humberto Acosta to provide further elaboration on our fourth quarter 2023 results.
Jose Humberto?
Jose Humberto Acosta: Thank you, Juan Carlos. Please go to Slide 8 to discuss results of our Central American operation. Despite the lower share of the Central American loan book on a consolidated basis, explained to a large extent by the peso appreciation, almost all banks increased its contribution to net income. However, when broken down by each bank, their performance in the quarter is fixed. [Indiscernible] sustained its NIM despite a loan contraction, and accurate lower provision charge but delivered a lower return on equity quarter-over-quarter on the back of higher costs. Likewise, Banco Agricola also posted lower interest income due to a higher income expenses and below average provision charges as the loan portfolio performed better than expected, contributing to a higher return on equity versus the previous quarter that reached 24.1%.
On the other hand, Banco Agromercantil had low loan book growth after a large commercial loan prepayment and sub growth in consumer that impact interest income. Provision charges increased on the back of all vintages, consumer loans and a corporate loan, driving net income to AWS. It is also worth mentioning that despite higher loan deterioration, all 3 banks run with comfortable level of 90-day past due loans coverage, providing balance sheet protection. We remain positive on Salvador's micro performance, but not cautious about Guatemala, given the most recent political and social and risk and with Panama due to the more challenging fiscal outlook as per the lower tax collection. Please go to Slide 9. Consistent with the trend seen in the previous quarter, the consolidated loan book contracted 1.5% quarter-over-quarter and almost 6% year-over-year.
Not surprisingly, this reduction reaffirms the impact of the persisting high interest rates at discourage credit demand and has provided incentives for prepayments and shorter-dated loans that limits the loan book growth. Furthermore, at 20.5% year-over-year peso appreciation reduced the contribution of the loan denominated in U.S. dollars. Net of FX, the loan portfolio will have increased 1.5% on a yearly basis. From a segment perspective, consumer portfolio keeps driving the largest contraction with a 2.6% reduction quarter-over-quarter and 8.4% year-over-year as expected. Please go to Slide 10. Total deposits increased 1.5% quarter-over-quarter, explained most by a seasonal effect as the government-related entities in Colombia tend to increase its deposits on year-end.
The year-over-year deposits dropped 1.2%, consistent with a weaker credit demand. Nevertheless, there was an interesting change in the funding mix dynamics during the quarter as time deposits dropped 3% where as savings, current accounts and other deposits increase. Year-over-year, however, time deposits increased its share in the total funding mix to 35%, up from 30% after the strong growth in the first half of this year. Consistently, on a yearly basis, the patio growth of time deposits dropped to 13.3%, main grounds for lower interest expenses ahead. Consequently, the cost of funding fell slightly to 5.8%, an early signal of interest expenses reduction as a rate subside, a situation for which we continue adjusting our liability structure to provide margin protection.
As a matter of fact, as at year-end, the share of fixed rate time deposits maturing in less than a year was 70%, up from 68% as of September. Please go to Slide 11. Total interest income and valuation of financial instruments increased 4% quarter-over-quarter, supported by first, a 67% growth on interest and valuations on financial instruments as per higher valuation on a large securities portfolio held during the period, coupled with a fall in rates and second, by a 1% growth on interest income on loans and financial leases, mainly attributable to the loan portfolio repricing dynamic. On a yearly basis, total interest income and valuation of financial instruments increased 38%, albeit at lower pace than the previous year and driven mainly by a 42% growth on interest on loans and financial leases.
On the other hand, interest expenses was flat quarter-over-quarter as interest on deposits remain unchanged and coupled with a slight reduction on interest on bonds and interbank borrowing. On an annual basis, however, interest expenses grew 97%, driven mainly by a 17% increase on interest expense on deposits after the larger stake of time deposits and higher interest rates. Nevertheless, the pace of annual growth is subsidized, consistent with the annual drop of deposits. Despite the loan book contraction, NII grew 8% quarter-over-quarter and 11% year-over-year due to an increase in interest income while interest expense remained flat and is mainly attributable to the Colombian operation as 67% of the loan portfolio is floating in contrast to a 34% of deposits.
Thus, the NIM in Colombia was proceeding to subsidize inflation and short-term reference interest rate as shown on the bottom hand side graph. Consistently with the above, NIM expanded 47 basis points quarter-over-quarter to 7.8%, driven by the remarkable 354 basis points expansion in the investment NIM as per the securities portfolio strong performance discuss above, coupled with 11 basis points growth on the lending NIM. To NIM for the full year was 7%, a 20 basis points expansion year-over-year on the back of a strong 8% annual in Colombia, reaffirming the competitive advantage in funding and its asset-sensitive condition. Please go to Slide 12. Net fee income increased 7% quarter-over-quarter, mainly attributable to a higher volume of transactions associated to our year-end seasonality.
Payment & collections, banking service and bancassurance related fees grew the most on a percentage basis on a quarterly and a yearly basis. However, year-over-year, it grew close to 5%, admittedly below expectations as fee expenses grow outpaced the fee income growth, coupled with a higher third-party provider costs and processing charges. The income ratio for the full year reached almost 19%. Please go to Slide 13. As shown in the upper left-hand side chart, the slowdown in the volume of past due loan formation continued during the quarter, consistent with the trend seen since the second quarter of 2023, although admittedly at a slower pace than expected. This, coupled with an uplift in charge-offs quarter-over-quarter prove our efforts and commitment to preserve a healthy balance sheet.
Despite this positive albeit still mild, new past due loan evolution, asset quality metrics exceeded a quarterly and annual deterioration at the 90-day past due loan ratio reached 3.3%, implying 110 bps year-over-year increment explained by the loan portfolio contraction during the last 12 months rather than the by escalation in the pace of past due loans. On the other hand, given the higher charge-offs in the quarter and the fact that some loans of which provisions have already been charged became due during the period. The 90-day past due loans coverage ratio fell to 184%, although still proving a strong coverage to the balance sheet. Moreover, net provision expenses for credit losses for the quarter was COP1.7 trillion, a 7% increase quarter-over-quarter and equivalent to a cost of risk of 2.7% for the period.
When breaking down the provision charge for the quarter into its companies, the results were needed. First, on the SME segment, there was a COP22 billion decreased quarter-over-quarter, driven by releases related to loan repayments. Second, on the Consumer segment, provision expenses was almost flat quarter-over-quarter as Pat loan formation is being contained as we will further elaborate. Third, on the large exposure segment, there was COP168 billion charge, explained by additional provisions on a handful of loans related to construction and retail sectors. And fourth, in the case of midsized companies and corporate, there was COP93 billion released to provide several prepayment and semen with clients. Year-over-year, net provision charge increased 97% attributable mainly to deterioration in the consumer segment in Colombia as we will further elaborate and to a lesser extent, on SME and certain corporate loans, consistent with the current economic and credit cycle.
From an expected loss perspective, Stage 1 remained flat year-over-year as the periation is being contained whereas Stage 2 decrease and Stage 3 increase as per non-performing loans rollover. However, the combined coverage for Stage 2 and 3 loans increased 17 basis points to almost 40%. Going forward, we remain confident that the peso past due loan formation will keep a slowdown trend due to all measures taken and at a lower rate release some pressures on debtor cash flows. However, we remain cautious and expect higher delinquencies and news on the back of the weaker economic performance. Moving to the Slide number 14, I will further discuss on credit quality in Colombia. In line with the past quarters, personnel loans that hold a 52% share of consumer loans accounted for most of the deterioration during the period, increasing its 90-day past do ratio to 7.4%, reaching a cost of risk of 16.7%, with a 20% of loans in Stage 2 and 3.
On the flip side, credit cards, auto loans and payroll loans all performed better reducing their cost of risk and their share of loans in Stage 2 and 3, signaling, better asset quality conditions ahead. Moreover, when it comes to evolution of passive loan formation, as shown on the upper right-hand side graph, despite the low new past one level in the quarter, the ratio that of deterioration increased due to a high level of charge-offs. Notwithstanding the above past loan formation in the second half of the year, certainly grown below the average of the first half. And most importantly, new businesses in Colombia continue performing well, and those we foresee an improvement in all metrics going forward. As a matter of fact, after falling for three once quarters, the volume of new consumer loans slightly increased during the fourth quarter leverage on the new origination standards and the portfolio better performance.
Asset sector-wide metrics, we continue performing with the lowest 90-day past due loan ratio for the Colombian financial system as of October of 2023, driven by our superior risk framework and capabilities that allow us to better assess credit behavior and mitigate deterioration. Please go to Slide number 15. The cost-to-income ratio for the period was 48.6% as operating expenses grew 6.6% quarter-over-quarter, attributable to IT investments and general expenses. On the other hand, personnel-related expenses were flat quarter-over-quarter. On a yearly basis, operating expenses grew almost 19% driven by the high annual wage increase. Other taxes introduced to the tax reform of 2022 and IT-related in payments, devoted mainly to the journey to the cloud and business transformation.
However, it is worth mentioning that the tens of OpEx growth, we see during the second half of the year, given the informing of cost control measures. Moreover, if we were to deduct taxes actual valuations on certain employee benefits and FX variations, the annual growth of operating expenses would have been 14% in tandem with inflation. The efficiency ratio for the full year was 45.3% as slight increase compared to 2022 given the overall higher cost and taxes environment. Please go to Slide 16. Net income for the quarter was COP1.4 trillion, equivalent to a 3% drop quarter-over-quarter and COP6.1 trillion for the full year, equivalent to a 10% drop year-over-year, driven by lower income generation as per the loan book contraction and the FX appreciation in tandem with higher credit and operating expenses.
In turn, return on equity receded to 15.2% in the quarter and 16.1% in the full year, which adjusted for goodwill results in a return of tangible equity of 21% that shows the profitability of the duration accelerate goodwill related costs. And finally, on Slide 17, I will present the evolution of capital generation. Shareholders' equity grew 1.5% quarter-over-quarter and contracted 2.6% year-over-year intended assets, reflecting the bank's capital generation capacity that preserves a sounds balance sheet structure. Basel III total capital adequacy ratio reached 13.4%, increasing 57 basis points over the quarter and 6 basis points year-over-year on the back of a strong Tier 1 expansion with 105 basis points year-over-year increase attaining 11.4% for year-end.
This positive expansion is the result of net income generation, lower risk-weighted assets and FX appreciation during this year. With this, I will hand over the presentation back to Juan Carlos for some final remarks. Juan?
Juan Carlos Mora: Thank you, Jose Humberto. Please proceed to Slide 18 for some remarks concerning our sustainability strategy. As of the conclusion of the year 2023, we have successfully exceeded the COP140 trillion milestone in the total disbursements under our business with purpose strategy, which was initiated in 2020. Notably, approximately COP38 trillion worth of new loans were granted during the preceding year. These loans have been instrumental in providing financial support for various initiatives, including small-scale agribusiness ventures, cream building projects and gender-related endeavors, among others. With regard to environmental matters, we are pleased to inform you that we successfully completed our first set of disclosure information in accordance with SASB Standards for the commercial mortgage investment banking and asset management units last year.
Additionally, for the third consecutive year, we have released our TCFD report as mandated by local regulations, thereby enhancing the understanding of our commitments and accomplishments. In terms of economics, the Dow Jones Global Sustainability Index recently evaluated as one more. And we received a score of 78 out of 100 points. This accomplishment is a testament of the strength influence and openness of our ESG framework. Finally, on the social front, 12 of the financial education programs we designed to provide financial wellbeing to our customers we are certified by the super intendency under its standards, making us the leader in this important area in Colombia. Lastly, on Slide 19, I will share our guidance for the end of 2024 based on the current data and our macroeconomic forecast.
By the end of 2024, we anticipate a loan growth of approximately 3% in peso denominated loans and 5.1% in dollar-denominated loans. We project a net interest margin of around 6.8% based on the expected lower average reference rate, save at the Central Bank. The cost of risk is anticipated to decline to 2.6%, driven by lower interest rates and inflation. The efficiency ratio is expected to be approximately 49%, influenced by reduced interest income and ongoing investments in business transformation. Consequently, we forecast a return on equity in the range of 14% and a common equity Tier 1 ratio of around 11%. In closing, I would like to inform you that we recently announced the proposed dividend which will be discussed at the Annual Shareholders Meeting on March 15.
The dividend paid out will be 62%, equivalent to COP3.4 trillion and will be paid in four corporate installments of COP3,535 per share throughout the year. With that, we conclude our remarks on the fourth quarter 2023 results. We are now ready to address any questions you may have.
Operator: Thank you. [Operator Instructions] Our first question comes from Tito Labarta with Goldman Sachs.
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