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Edited Transcript of BCOLOMBIA.BG earnings conference call or presentation 5-May-20 1:00pm GMT

Q1 2020 Bancolombia SA Earnings Call

Medellin May 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Bancolombia SA earnings conference call or presentation Tuesday, May 5, 2020 at 1:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* José Humberto Acosta Martín

Bancolombia S.A. - CFO & Financial VP

* Juan Carlos Mora Uribe

Bancolombia S.A. - President & CEO


Conference Call Participants


* Andres Soto

Santander Investment Securities Inc., Research Division - Head of Andean Research

* Carlos Enrique Rodríguez

Ultraserfinco S.A. Comisionista de Bolsa, Research Division - Director of Equity Research

* Ernesto María Gabilondo Márquez

BofA Merrill Lynch, Research Division - Associate

* Gabriel da Nóbrega

Citigroup Inc, Research Division - Research Analyst

* Julian Felipe Ausique Chacon

Corredores Davivienda S.A., Research Division - Equity Analyst

* Natalia Casas;Porvenir;Analyst

* Ricardo Alonso Garcia

Crédit Suisse AG, Research Division - Research Analyst

* Sebastián Gallego

CrediCorp Capital, Research Division - Associate of Andean Banks

* Yuri R. Fernandes

JP Morgan Chase & Co, Research Division - Analyst




Operator [1]


Good morning, ladies and gentlemen, and welcome to Bancolombia's First Quarter 2020 Earnings Conference Call. My name is Anna, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

Please note that this conference call will include forward-looking statements, including statements related to our future performance, capital position, credit-related expenses and credit losses. All forward-looking statements, whether made in this conference call and future filings and press releases or verbally address matters that involve risk and uncertainty. Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general, economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy and various other factors that we describe in our reports filed with SEC.

With us today, Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Mauricio Rosillo, Chief Corporate Officer; Mr. Jose Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mr. Jorge Humberto Hernandez, Chief Accounting Officer; Mr. Alejandro Mejia, Investor Relations Manager; and Mr. Juan Pablo Espinosa, Chief Economist.

I will now turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer of Bancolombia. Mr. Juan Carlos, you may begin.


Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [2]


Good morning, and welcome to our conference call for the first quarter of 2020. In these challenging times, we are all navigating through uncertainty for ourselves, our loved ones and our community. We hope you are staying healthy and safe.

This is a very peculiar quarter, as the rest of the world, Colombia and the countries in Central America where we operate, have experienced the effects of the spread of the virus, with the collateral effects of the lockdowns and the consequential reduction on business activity. As a result, our business plan for 2020 will change in a significant way. At this time, we consider that in the second quarter, we could have a better understanding of what will be the 2020 -- the '20 results. During the quarter, we generated a net income of COP 336 billion, which is 60% lower than the net income of the first quarter 2019.

In this call, we want to give you an overview of Bancolombia's situation and the actions that we are taking as well as the results of the quarter, which were impacted by the COVID-19 outcomes. First, I want to make a quick mention of the macroeconomic environment and the government's and Central Bank's response to the COVID-19 situation, which we can see on Slide #3.

As of May 4, Colombia has close to 8,000 confirmed COVID-19 cases and 350 deaths. The Colombian government declared a state of emergency on March 17, and a quarantine has been in place since March 20. Construction and manufacturing sectors were allowed to restart operations on April 27. Other measures to contain virus transmission have included travel bans, border closures and a suspension of classes. The rest of the countries in which Bancolombia operates have implemented similar containment actions.

Colombian authorities have also announced several economic measures as part of the response to the COVID-19. On the fiscal side, various package equivalent to 1.4% of GDP for the control of the pandemic containment and palliative measures. The government has also said that there is a total of 4.7% of the GDP to use in case of a necessity in the situation if the situation aggravates further.

On the monetary side, measures include cuts in the reference rate totaling 100 basis points. The strengthening of liquidity provision mechanisms, purchases of public and private fixed income securities by the Central Bank, the reduction of reserve requirements and the establishment of additional FX hedging mechanisms.

Second, we want to share with you the response from Bancolombia to face the COVID-19 situation. Slide #4 gives you some insights. During the last 3 years, we have created the remote working tools and platforms that allow us to run the business today with no significant disruption. To give you an idea, in Colombia, close to 90% of our employees are working from home, and in Panama, 60%.

On the commercial front, we have enrolled more than 800,000 new customers in the last 3 months through Bancolombia a la Mano and Nequi platforms. And Colombia has played a key role, helping the government distribute financial support to low-income individuals. Our platform has been used to distribute subsidies from the central and local governments to more than 6,000 people.

Also we have taken actions to support our customers in different fronts. For 1.8 million mortgages and personal loans customers, we have granted a grace period of 3 months. In the SME and corporate loans, we have opened the possibility to restructure credits and extend grace periods. As of today, we have extended benefits to around 260,000 companies. In total, we have offered benefits to about COP 56 trillion worth of loans. Additionally, we have been active granting loans to existing customers with guarantees from the Fondo Nacional de Garantias, National Assurance Fund. This guaranteed loans aim to finance working capital and protect payrolls of a small business and cover up to 90% of the outstanding balance.

On Slide 5, we present the current status of our channels in Colombia. A key point we want to highlight is the rapid adoption of digital channels during this period. To date, we are operating with 70% of our physical branches, while we are experiencing a big increase in the use of digital channels.

On Slide 6, you can see the rapid adoption of digital banking. The number of digital transactions has increased during the quarter, while the number of transactions through physical channels have decreased. This is an indication of what could happen with our customer attention model in the future. Similarly, our digital platforms, Bancolombia a la Mano and Nequi have increased the number of active users at a rapid pace. Just in March and April, Bancolombia a la Mano added more than 700,000 new clients. That's 3x the monthly average. Similarly, Nequi added 500,000 new customers.

On the other hand, the Bancolombia mobile app application has reached 4.5 million users. We expect these trends to continue, while our customers adopt the broad offer of digital channels and products that we have developed.

This is a brief description of the challenges that we face with our customers, our employees and our operating environment. In addition to the presentation of this -- of the first quarter numbers, we want to give you a point of view regarding liquidity, capital and provisions. As you will understand, it's too early to provide a guidance for the 2020, as things are evolving rapidly in the middle of the COVID-19 development.

Now I want to turn the presentation to Jose Umberto Acosta, who will expand on these aspects. Jose?


José Humberto Acosta Martín, Bancolombia S.A. - CFO & Financial VP [3]


Thank you, Juan Carlos. I want to continue this presentation elaborating more about 3 key topics: liquidity position, capital position and credit risk.

On Slide #8, we present evolution of the 2 key aspects of the balance sheet: liquid assets and liabilities.

Liquidity is one of the aspects that we have special attention to across all 4 geographies. During the quarter, we have put special emphasis on increasing the amount of liquid assets and investment that can be easily converted into cash or used as a collateral with the Central Bank for borrowing purposes. In particular, the last weeks of March and April, we have been seeing a significant inflow of money into Bancolombia. We have gotten significant influence from money that was in the money market accounts, as customer preferred liquid products. And we have experienced a flight to quality effect in all 4 geographies.

This liquidity has come through checking and savings accounts across all 4 geographies. We must mention that the increased level of liquidity is not going to be used to accelerate loan growth, but to maintain a cushion during the current situation.

On the liability side, we have been very active tapping lines of credit with international banks. These resource have been used to extend working capital and trade finance facilities to our customers in our international operation. Also we have used lines of credit with the government's second-floor banks, which are intended to finance small and medium business with working capital and paycheck needs.

The recent evolution of deposits and liabilities have permitted to reduce the funding cost. This strategy aims to have a liquid balance sheet in order to have more financial flexibility. We recognize that these are not normal levels of liquidity and deposits. They are higher than regular levels and eventually will return to normal levels.

On Slide #9, we present the current capital situation of Bancolombia and subsidiaries. We currently have a solid capital position that permit us to face stress situations, as we see, our main operation is strong with capital well above minimum regulatory requirements. The same applies to the consolidated ratios.

We want to emphasize 3 aspects to consider when looking at the current capital position. Over the last few years, Bancolombia has accumulated capital organically by earnings retention and asset growth below 10% on a consolidated basis. In our capital structure, 44% of shareholders' equity is in U.S. dollars, which help us to maintain capital ratios during periods of currency depreciation. The last liability management transaction conducted in December 2019 permit us to have a stable Tier 2 for at least the next 5 years. The growth forecast for the next years indicates that our current capital position allows us to develop our business plan, including asset growth, provision charges and the net income evolution.

In general, the Colombian banking system is well capitalized, and the regulators have not indicated any restriction regarding dividend payments. The schedule for possible implementations remains for 2021. As you know, each year, we present a dividend proposal to the Annual General Meeting and shareholders decided what portion to pay as dividends and what portion to appropriate.

This year, 2020, we are paying 36% of 2019 net income as a regular dividend and 14% as an extraordinary dividend. Last April, we paid the full amount of the extraordinary dividend and the first installment of the regular payment.

On Slide #10, we present the breakdown of provisions during the quarter. I want to point your attention to the impact that we had this quarter from the provision associated to update in parameters, including the deterioration in macroeconomic parameters as expectations related to COVID-19.

Regarding provision charges associated to consumer loans, we must mention 2 drivers for the increase. One is the 29% nominal growth of the consumer loan portfolio between March 2019 and March 2020. This growth occurred mainly in personal loans. And the second is the effect that exchange rate had on the nominal amount of provisions, which are bigger when dollar charges are converted to pesos.

Additionally, we did COP 296 billion in provision associated to COVID-19 impact on change in parameters. Just to give an idea, the most important parameters that deteriorated was GDP, inflation and fiscal deficit.

Finally, we did specific provisions for corporate clients. We expect to see a deterioration of the loan portfolio in the second and ongoing quarters as the economy suffers the impact of the lockdown. We don't know yet how much passive loan formation we will have and, therefore, we have not a clear estimation of provision charges for 2020.

On Slide #11, we give you a snapshot of our standalone operations. We want to highlight the growth in cash, equivalent and investment in securities that we have across all 4 geographies. This effort has been coordinated across all balance sheets of the group and aims to provide safety and flexibility in each of our 4 operations. We must highlight that coverage ratios of our loans are in between 120% and 225%, which permit -- will permit us to face potential deterioration in the coming quarters.

In Slide 12, we present the loan growth and the loan breakdown. As we mentioned a few slides ago, it's key to highlight the composition of our assets as we increase the amount of cash and equivalents and investments in order to have a better liquidity profile. Loans grew 12% during the quarter, mainly due to the utilization of lines of credit in pesos by corporations and the depreciation of the pesos versus dollar. With do not expect this pace of growth will continue as the economy has slowed down.

In the last weeks of the quarter, we started originated loans using the credit facility designed by the Colombia second-floor banks. We have originated COP 480 billion with these lines and have focus in loans with less than 2 years. Second, loans to SMEs with a guarantee provided by the Fondo Nacional de Garantías. Until today, we have reserved COP 1.8 billion in loans with this feature with tenures ranging from 12 to 36 months. And finally, loans to SMEs with our own resource accounting for around COP 1.1 trillion.

Finally, I want to mention a few facts about our loan portfolio. One is the diversification across several sectors of the economy and the small exposure that we have to oil and gas, where we have less than 0.6% of our loans and, as an example, airlines and airports where we have less than 0.5%. The second factor is the fact that the 44% of our loans have either guarantees or collateral.

On Slide 13, we see the evolution of margins. Lending margins remained stable during the quarter, in line with the trend observed in the previous quarter of last year. On the other hand, investment margin remains low, as some securities in the portfolio lost value in the last weeks of the quarter. The Colombian Central Bank cut interest rates twice in the last 2 meetings, 50 basis points each, setting the reference rate at a level of 3.25%. We could see pressure on margins due to these actions. But so far, cost of funding has come down as well, thanks to the faster growth in checking and savings accounts.

In the following Slide #14, we see the net interest income and the evolution of the funding cost. Please note, the reduction in deposit cost during the quarter. This is the result of the bigger share of checking and savings accounts. This trend contributed to the reduction of the loan-to-deposit ratio to a level of 104%. The second component of the reduction in funding cost was a liability management conducted last December and January. We did one issuance of subordinated debt and another issuance on senior debt, which permitted to reduce the funding cost on these instruments by 140 basis points.

In Slide 15, we present provision charges. Complementing the explanation at the beginning of the presentation, we experienced an increase in the passive loan ratio to 3.04% for 90 days past due, with a coverage ratio of 188%. This coverage ratio is a result of our risk provisioning models based on expected losses.

The next slide, #16, shows the past due loan formation. New past due loans during the quarter increased in nominal terms due to 3 factors: first, early impacts of the general lockdown of Colombia and Central America; second, the depreciation of the peso versus dollar, which counted past due loans from Central America to represent more pesos; and finally, the deterioration of specific corporate clients.

Slide 17 shows the evolution of expenses and efficiency. The largest impact in our OpEx is explained by the 20% depreciation of the peso. Nevertheless, regarding COVID-19, we are reviewing the projects pipeline in order to postpone or cancel some, and we are reviewing also all the general expenses.

Now I want to turn the presentation to Juan Carlos in order to summarize the most relevant aspects. Juan Carlos?


Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [4]


Thank you, Jose. As a summary, I want to highlight that digital channels will play a relevant role on our strategy to be the pillar of our future developments. Loan growth will be difficult to forecast at this moment, but we will continue assessing the developments of the economies in which we operate to see how credit demand is going to evolve.

Fee income, which has a high correlation with economic activity, tend to be lower this year. Margins may have a compression and will be correlated to the Central Bank's monetary policy. Provisions will increase, but, as we mentioned before, it is still difficult to predict its growth for the year. Finally, regarding expenses, we will face new challenges in this new operational environment, which will require us to be more selective in -- with the projects that we undertake. Expenses is going to be a big focus of our activity, of our strategy in order to be very efficient on the -- on this front.

With this, I would want to open the line for questions.


Questions and Answers


Operator [1]


(Operator Instructions) And we have a question from Andres Soto from Santander.


Andres Soto, Santander Investment Securities Inc., Research Division - Head of Andean Research [2]


I hope you and your families are doing well. Thank you for the additional details about cost of risk in your presentation. I noticed that if I exclude the parameter update and the specific corporate provisions, your cost of risk would have been at 1.8%, which is what you have guided for earlier this year. So I would like to understand, first, what was the GDP assumption in your model update? And if we could expect additional updates in second Q or later this year due to further model adjustments.

And second, regarding the specific corporate provisions, I would like to understand how many clients, what is the total exposure and what are the current coverage for those cases.


Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [3]


Thank you, Andres. Regarding your first question, we updated our parameters with the forecasted GDP of -- a decline of GDP of 2.7%. Further updates, I think, will come once we have more data.

So your analysis is correct, and we have updated -- the parameters update. And other than that, the provisions are the one you mentioned. With this, I want to pass the -- your second question to Jose Humberto.


José Humberto Acosta Martín, Bancolombia S.A. - CFO & Financial VP [4]


Yes. Thank you, Juan Carlos. Regarding the exposure on corporate clients, we are basically talking about the 2 corporate clients here in Colombia that are already passed due. That's the reason why the level of provisioning for corporate is mainly explained for this couple of corporate clients.

And going back to your question of GDP, just to give you an idea, that will change every quarter for complementing the answer of Juan Carlos. For example, for the Panamanian situation, we are assuming a GDP drop of minus 2.4%. That explains why the increase of the COVID-19 provisioning.


Operator [5]


Our next question is from Ernesto Gabilondo from Bank of America.


Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [6]


My first question is on loan growth. We noted that the peso-denominated portfolio came at double-digit growth. So can you elaborate what was behind that? Was it mainly explained from corporates and SMEs withdrawing credit lines and individuals requesting for more credit during the grace period? And how should we think about loan growth in the next quarters?

Then my second question is on provision charges and cost of risk. You mentioned in your presentation, you have already created an impairment of COP 296 billion due to expected losses from COVID-19. However, when do you expect the peak of provisions? And how should we think about the cost of risk in the next quarters?

And then finally, my last question is on your capital ratio. Your Common Equity Tier 1 ratio stood at 9.1%. Well, I believe that with Basel III, you could be around 10.5%. However, considering that Bancolombia is a systemic bank, don't you think that you will be complying just in the limit?


Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [7]


Thank you, Ernesto, for your questions. I will take the first one regarding the loan growth, and I will pass the second and third questions to Jose Humberto.

Loan growth, as you could imagine, once the pandemic was clear that, that was going to affect the economy and countries started to talk about lockdowns and the effects on the economy, corporate clients starting to ask for money. So March was a month in which we have a big demand of corporates, mainly corporates, asking for money to provide -- for them to have enough liquidity to pass this period. So the demand in March, as I mentioned, was very big, and that is the cause of the growth of the commercial loans on our portfolio.

So the economy was growing well in Colombia during the first 2 months, and we have demand. But in March, that demand was caused for the pandemic. So that created the loan growth to grow -- the loan -- the commercial loans to grow around 12% year-on-year. So basically it was corporations looking for liquidity.

With this, I want to pass your questions to Jose Humberto. And if he wants to complement this answer, please go ahead, Jose.


José Humberto Acosta Martín, Bancolombia S.A. - CFO & Financial VP [8]


Thank you, Juan. Just very clear, complementing the first question is, in terms of U.S. dollars, the loan growth was close to 1%. And in terms of local currency, was, as Juan mentioned, 10%. And if the first wave of the first quarter was because of the corporate clients, on the next coming 3 quarters, maybe that will be impacted basically because of consumer loans and because of SMEs, not because of corporates.

Going back to your second question, yes, as we are modeling the COVID provisions under the model of expected losses probably in the second quarter, you will see a materialization of the new numbers of GDP, new numbers on the unemployment level, new numbers of a fiscal deficit. So probably, we will touch the highest point maybe on the second quarter once we have a valid data to adjust the expected losses model and because on the second quarter, you'll realize how you are impacted the second half of the year. This is our perception.

Regarding the capital ratio of the 9.1% that you mentioned, yes, if it is -- if it were under Basel III, that number will jump 150 basis points. That's correct. But I want you to highlight 2 factors.

This year, we are not expected to have a loan growth of the original that we plan it of 10%. So that will be a factor than support or maintain the level of solvency ratio under control. And the second factor is the fact that the 44% of our equity is in U.S. dollars, so that will give us some cover in terms of FX variations.

So based on those calculations, based on the loan portfolio, we'll be stable. We don't foresee any particular concern regarding the levels of Tier 1 and Tier 2 ratio.


Operator [9]


Our next question is from Gabriel da Nobrega from Citibank.


Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [10]


I actually have 2 questions as a follow-up. The first one, regarding these 2 corporate cases, which went delinquent this quarter, could you just maybe share with us what is your exposure there? And what's your coverage levels as well?

And as for my second follow-up, it's actually on capital. I understand what you just said, maintaining the similar levels, but I wanted to ask about your payout ratio and what you're expecting for dividends being that you weren't going to grow. But at the same time, you could have a higher risk from higher RWA results.


Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [11]


Thank you, Gabriel, for your questions. Let me pass then to Jose Humberto.


José Humberto Acosta Martín, Bancolombia S.A. - CFO & Financial VP [12]


Yes, Gabriel. The most relevant case that we are having today is Bioenergy, which a subsidiary of Ecopetrol that we are working with them. This is one of the most relevant. And we have another specific case regarding energy industry in Panama. Those were the most relevant cases that we are having today.

Regarding your second question, we don't foresee -- we are not sure about what will happen with the dividend payout ratio for next year because this is a clear measures that is happening in Colombia. Our net income is dropping 60% compared with the first quarter of last year, so all depends of what we designed for the second half, what will be our guidance in terms of loan growth, NIM and in terms of cost of risk. That deviation will be important. So today, we don't have a clear position about the dividend payout for the next coming years or even for the next coming year.

And in terms of the risk-weighted assets, just to give an idea. Again, the density will change. The composition is not changing a lot in terms of commercial and consumer loans. So we believe that if Basel III will take place on January 1, our density will drop more than from 77% -- 76% to at around 65%, releasing a kind of capital for solvency ratios.


Operator [13]


Our next question is from Julian Ausique from Davivienda Corredores.


Julian Felipe Ausique Chacon, Corredores Davivienda S.A., Research Division - Equity Analyst [14]


I have 3 questions. So the first one is related to the impact, like, if you can give us more impact on what's happening on the equity method.

The second one is about the -- what is the expectation that you all have in the percentage of the total commission that are exposed mainly to the situation?

And the third one is that if you can give us a little bit more color about the losses model, which are the parameters that you have, the GDP inflation rate and exchange rate.


Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [15]


Julian, in the second question, you referred to the fee -- fees or -- could you repeat to me your second question, please?


Julian Felipe Ausique Chacon, Corredores Davivienda S.A., Research Division - Equity Analyst [16]


Yes. It's about the fees, like what are the -- in the total commission or the total fees, what are the -- like the products that are more exposed because, as you -- we all know, some of them are no longer charged?


Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [17]


Okay. Thank you, Julian. Let me take that question, and I will pass it to Jose Humberto.

What we are seeing is a huge increase in the use of our digital channels, our digital platforms, in Bancolombia a la Mano, Nequi . The use of our app and mobile app, it's increasing a lot. That's good. We -- as I mentioned, we expect that the fee growth is going to be impacted. But on the other hand, since we are acquiring customers at a very, very fast pace, that is going to help on fee income.

So in general, what we are doing is we are supporting our customers with the -- giving them grace periods on loans, but we are not waiving fees, in general. We are waiving some fees on withdrawals. We are waiving some fees on some specific transactions. But the gross amount, or the amount of fees, still, we are charging them.

That could be changing in the future, but we will try to maintain, as much as possible, the fee charges that we are charging to our customers. So the growth, we still expect the growth on the year, but will be lower than the one we forecasted for this year.

With this, I'll pass to Jose Humberto for the -- for answering your other 2 questions.


José Humberto Acosta Martín, Bancolombia S.A. - CFO & Financial VP [18]


Thank you, Juan. Yes, regarding your question of the equity method, we have 3 impacts in the equity method. The first one is the joint venture that we have with Exito, the credit card Tuya, because the same reason of COVID-19, they have to adjust the models and, as a result, it dropped the level of income that we have to register.

The second one effect is what happened with Proteccion. Also they reduced the level of income, so we have to adjust the numbers also on equity method.

And there is a third element. We have another JV of the Fondo Inmobiliario, Viva Mall, which is malls and real estate that also, because the situation, were affected. So those are the 3 main effects why the number drops.

Regarding your third question, the loss models, as we mentioned at the beginning, just to highlight, we have 3 elements for the adjusting the models for provision: fiscal deficit, GDP and employment rate.

And again, just to give an idea, originally, for Colombia, our GDP expected was 3.2%, 3.3%, and we reduced to minus 0.8%. And in Panama, we have, for example, a GDP originated at around 3-point something. I don't remember exactly, 3.2%, 3.3% as well. And the new number for adjusting, it is minus 2.8%. Those are the most relevant data that affects the level of provisioning.


Operator [19]


Our next question is from Carlos Rodríguez from Ultraserfinco.


Carlos Enrique Rodríguez, Ultraserfinco S.A. Comisionista de Bolsa, Research Division - Director of Equity Research [20]


I have 2 questions. The first one is regarding asset quality. And if you could give us more detail as of the close of April and how this COP 56 billion credit reliefs are affecting new past due loans and provision in April compared to March.

And my second question is related to Banco Agricola and its solvency ratio. And if you could -- it is a concern to you, the current level and if there is any plan to increase the solvency ratio?


Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [21]


Thank you, Carlos. I will take your first question, and I will pass your second one to Jose Humberto. Regarding asset quality, we are seeing -- we have been very active providing support to our customers. So we are restructuring a lot of credits, particularly to our retail customers. We proactively move to give them additional time, a grace period. So the asset quality -- we are seeing that the asset quality is behaving as we were expecting. And we are receiving more payments than we were expecting. So in general, what we see is a good behavior regarding payments and regarding asset quality since we moved fast to provide those new terms to retail customers.

Also on the commercial side, we are working with our customers. And as I mentioned, we work with 260,000 customers, providing them new terms for their loans. So to summarize the behavior, we are seeing it's better than the one we were -- we expected.

Let me pass your second question to Jose Humberto.


José Humberto Acosta Martín, Bancolombia S.A. - CFO & Financial VP [22]


Thank you, Juan. Regarding, Carlos, your second question, Banco Agricola, the situation in terms of solvency ratio, I have to remind you that Banco Agricola is one of the better performers in our group.

Just to give you idea and to give you some comfort about the level of solvency that we have, today, we have a coverage ratio of more than 280% that it is a buffer that we are having. It is the most profitable operation. We are not seeing a huge deterioration of the loan portfolio, so we are maintaining a very good performance.

And the reason why the number drops is basically because the dividend policy, they generate 90%, 95% of the dividend. And we have accumulated that dividend in our Bancolombia Panama operation. Remember that we have Bancolombia Panama almost $1.9 billion, and that is the result of the capital that we are -- or the dividend that we are receiving from our subsidiaries. So again, we don't have any particular concern regarding capital. And the reason why it drops is basically because of the dividend.


Operator [23]


Our next question is from Alonso Garcia from Credit Suisse.


Ricardo Alonso Garcia, Crédit Suisse AG, Research Division - Research Analyst [24]


My question is again on cost of risk and asset quality. So if we go back to 2007, you had a cost of risk of 1.8%, which is very similar to the 1.9% you reported last year. And then in 2008 and '09, amid the subprime crisis, your cost of risk materially deteriorated.

So I just wanted to ask if you think this -- or why you think this crisis could be reasonably expected to be better or worse in terms of cost of risk and provisions compared to back then based on the state of economy, but especially based on your portfolio mix and based on the current leverage in terms of households and corporates now compared to back then.

And my second question would be if you could discuss how your liquidity metrics performed during the quarter. I noticed that your loans-to-deposit ratio actually declined during the quarter compared to 4Q '19, which is, of course, positive. But if you could discuss the performance of all metrics, such as the liquidity coverage ratio or the net stable funding rate, that would be great.


Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [25]


Thank you, Alonso, for your questions. I will take the first one, and I will pass the second one to Jose Humberto.

Cost of risk, that's key. I mean -- and many of you have asked around -- questions around cost of risk. You mentioned 2007 cost of risk of 1.8%. We were moving towards a normalized cost of credit of around 1.7%. Our cost of risk in 2019 was 1.9%. What can we expect regarding cost of risk?

It is close related to what is going to happen with economic activity mainly in Colombia. As I mentioned on my presentation, Colombia allowed some sectors to start working again one week ago, that's construction and manufacturing. Now we have information that a good number of companies started to work and started moving towards a normalized activity. So that's going to be key. And I think Colombia has done a very good job on controlling this situation. And now it's allowing the economy to start moving.

And on the other hand, we have been very proactive working with our customers, and the key here is to anticipate to the difficulties that the customers are going to have because they will have difficulties. So we moved proactively working with them.

So the cost of risk is going to increase, no doubt about it. How much is it going to be? We still don't know. It's going to be similar to the 2008 number or 2009? Remember, in our case, the effect of the 2008, '09 crisis was different. We were not hit as hard as many other economies. So here I think, the effect is going to be higher in Colombia because this crisis is different.

But we think that we have all the tools to manage the situation with our customers. We are moving proactively. There's going to be an increase in cost of risk, no doubt about it. How much is it going to be? We will be -- we'll have a clear picture probably on the second quarter of this year when we know how much economic activity is going to be at that moment and how hard the economy is going to be hit.

With this, let me pass your second question to Jose Humberto.


José Humberto Acosta Martín, Bancolombia S.A. - CFO & Financial VP [26]


Thank you, Juan. Yes, regarding your question about liquidity, yes, just to give idea, we doubled the size of the liquidity that we are having on a regular basis here in Colombia and also in the geographies. We in fact have internal way to measure that, which is the liquidity horizon. A liquidity horizon means the base that you are able to support all the liabilities and to disburse all the commitments. And usually, we manage that number between 45 to 60, 70 days. Today, we have more than 100 days of liquidity horizon.

So this is the best way to understand that we have, right now, doubled the size of the liquidity. But again, as we mentioned in the script, we have not contemplated that extra liquidity as a general purpose for loan portfolio because we know that these inflows of liquidity, they will go back again maybe to the asset under management or to the fiduciary. So -- but today, in local currency, more than comfortable as well as in U.S. dollars.

Also in order to increase our level of liquidity in U.S. dollar, we went to the market and we raised money through the international banks. So that gives us one of the pillars during these days, which is to maintain a high level of liquidity.


Operator [27]


(Operator Instructions) Our next question is from Jason Mollin from Scotiabank.

Our next question is from Natalia Casas from Porvenir.


Natalia Casas;Porvenir;Analyst, [28]


Well, according to your presentation, around 40% of the increase in the provision expenses was caused by COVID-19, which means that the remaining 60% increase was caused by the normal operation of the bank. According to my numbers, this brings to an ROE around 11%, which is not very good to me and to the history of the bank.

So I want to understand what's going on in Central America. What happened there? Which are those corporate clients that created this impact in the -- in your P&L? And if you expect further provisions from this operation specific, without thinking about COVID and the current crisis.


Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [29]


Thank you, Natalia, for your question. Let me pass your question to Jose Humberto. Jose? Okay, Jose Humberto is having some issues with the call. Let me answer your question.

Provisions, we have, as you mentioned, several issues around provision. We have the effect of COVID-19 and the updated -- update of parameters that's -- for the quarter that's around COP 300 billion on provisions. Then we have some provisions related to our retail portfolio.

As you know, we increased our portfolio of consumer loans last year, and the portfolio was performing well until February. The expectations that we and the vintages we were follow were performing according to our expectations. Then March, we got the hit of the COVID-19. And some customers that we didn't have enough time to work with them and restructure their credits were impacted and were past due. Specifically, Panama was hit by that.

Other than that, we have some effects on customer -- on corporate clients. We mentioned Bioenergy, which is an Ecopetrol company. Then in Panama, we have some other corporate customers that we have to provision. So those are the effects for the quarter.

What we could expect for those clients, we will need to have additional provisions on them. The coverage ratio of many of them are close to 50%, 60%. So we are -- we have been provisioning them, so we will need additional provision.

So we will have the effect of the COVID-19, which we have some in the first quarter. Then we will see what is the effect in the future. And we still will have some effects from those corporate clients, mainly in Central America -- Panama, mainly at this moment. But we have provisions that cover them.

As I mentioned, cost of risk is going to increase. And we are taking into account the -- in the cost of risk not just the effects of the COVID-19, but also the effects of provisioning -- of additional provisions on those corporate customers.


Operator [30]


Our next question is from Yuri Fernandes from JPMorgan.


Yuri R. Fernandes, JP Morgan Chase & Co, Research Division - Analyst [31]


I have 2 questions. The first one is regarding the capital, the 44% capital in U.S. dollars Jose Humberto mentioned. I remember this number being around 20% in the past, even in 2019. So my question is if you move your long -- let's say, long exposure to dollars this quarter and also if you have any kind of sensitivity. If the peso depreciate, how much we could see on a benefit for your capital? Because I think like about 30% of your assets, they are more or less in foreign currencies, right? So now I think you are -- you have a long dollar position.

And my second question is regarding the renegotiated loans, the 41% of your loans in Colombia. I would like to know if you have this number for Central America. So basically, how Central America renegotiated loans are tracking. And also if you have any kind of estimates of potential NPL for those renegotiated loans because I know it's not totally apples-to-apples, but in other countries, usually, the renegotiated book runs with 5x more delinquency than the average book. So just trying to get any color on how much losses can we get. Because, again, 41% of renegotiated loans, I totally get, that's the right thing to do. But still, it's a high number, right?


Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [32]


Thank you, Yuri. Let me pass your questions to Jose Humberto. Let's see if he reconnected to the call.


José Humberto Acosta Martín, Bancolombia S.A. - CFO & Financial VP [33]


Yes. I'm here, Juan. Thank you very much. Yes, Yuri. Your first question, there are 2 reasons why the number went up in U.S. dollar from 20%, as you mentioned, to 44%. The first one is when we decreed dividends this year, that was 50% on the net income. All of these dividends, we're paying in peso. So the number in peso drops, and the number in U.S. dollars right now have more cushion.

And the second reason is because the net income of the last year of the international operation were positive, that also helped us to increase the level of equity in our subsidiary in Bancolombia Panama. So because of these 2 reasons, now, the weight of the equity in U.S. dollars is heavier than we had 1 year ago.

Regarding your sensitivity, we make some calculations, Yuri. And for every COP 100 of devaluation, it will be affected, the solvency ratio around 4 to 5 basis points. That's the math. And again, remember that we have 37% of our assets is in U.S. dollars, so we have the protection -- a kind of protection on the equity side.

Regarding your second question, the status of renegotiation in Central America is not at the same volumes as in Colombia. Juan mentioned that we are doing here a very good job, more than 40% of the loan portfolio within grace period. In Agricola, we are doing less than that. And also in Banco -- Yuri, in Banistmo in Panama, also we are doing less than that. Of course, we are reacting as a first wave with individuals through mortgage and consumer, and as a second wave with SMEs and corporates. But relatively, the size of the volumes there are lower than you are seeing in Colombia.

And regarding what happened with the deterioration with this grace period loans, remember that under IFRS 3 -- I'm sorry, under IFRS, you have to update. No matter if you have a loan with a grace period, but if you belong to a sector with a huge deterioration, you have -- the bank will have to do provisioning level. So no matter if the clients are, right now, with grace period, we will have to adjust every quarter based on market conditions, new provisions.


Operator [34]


Our next question is from Sebastian Gallego from CrediCorp Capital.


Sebastián Gallego, CrediCorp Capital, Research Division - Associate of Andean Banks [35]


I have 3 questions. The first one, can you provide some color about the treatment on risk weighted assets coming from guaranteed loans, particularly the ones that have been announced in Colombia?

Second question is regarding Central America. You have been focusing quite a lot in Colombia, but can you provide more details on your business strategy for the Central American operation under the current environment?

And third question, going back to loan growth. You mentioned that you expect a deceleration of loan growth, but how does this contrast with the fact that the government is pushing for the initiatives with guaranteed loans?


Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [36]


Thank you, Sebastian. Let me take your third question, and it's related to the first question. And then I will pass your other question to Jose Humberto.

Loan growth. We -- as I mentioned, we have a big demand for credit lines on the -- at the end of the quarter. That was due to the situation that emerged. What we are seeing is that people are more cautious around asking for loans. So we will maintain a prudent approach of our earning credit, so that's important. So that's what we are expecting, that the loan growth is not going to be very strong during this year.

We will work a lot with client restructuring. We will give them some additional credit. But the demand is not going to be very high, we think, because of economic -- the slowdown on economic activity.

Regarding the loans that the government is giving some guarantees, those loans are a small portion of our portfolio, really. The total lines that the government is offering at this moment is COP 12 trillion. That was the total close to a dollar we disbursed in March. So it's not a huge amount that is going to take a peak effect on the -- and on the total loans in Colombia, which are that -- those figures are not going to move significantly the numbers.

In our case, we have disbursed around COP 250 billion of those lines with government guarantees. That number is going to increase, which is good, and it's good for the economy and it's good for everybody. But again, the numbers in the -- the significance of those numbers in Bancolombia side -- size is not very significant. So it's not going to change dramatically the number.

What -- we complement that with loans that we provide with funds from second-floor -- government second-floor banks, which provides us with liquidity. So those loans will continue growing, but are not going to be significant.

With this, I pass your other questions to Jose Humberto.


José Humberto Acosta Martín, Bancolombia S.A. - CFO & Financial VP [37]


Thank you, Juan. Regarding your first question, the treatment of the risk weighted assets, I have to highlight 2 parts.

First, in the case, for example, of mortgage, our loan-to-value is below 40%. Today, it's currently 39%. So you can assume that the consume of capital is low. And under Basel III, it will be lower, less than -- or around 25% on today's accounts, 50%. That gives you an idea what happened.

And the second number is 44% of our total loan portfolio, we have our guarantee. That also implies that we are -- we have lower consumer of risk weighted assets. And under Basel III if the corporate has a rating, or if SMEs has a guarantee, we will reduce our consumer capital from 100% to maybe 80% or 60%. So the idea is for 2021, because of Basel III, we will release capital because the density will change.

Regarding your second question, what we are doing in Central America, and I have to remind you our original plans. Our original plans were focus on consumer in those geographies, replicated the same experience that we are having in Colombia. But because with COVID, our main challenge right now is support our clients, give them facilities. Maybe at the end of the day, we would maintain the same composition that we are having in each geography.

So for example, in the case of Banco Agricola, it's almost 45% consumer, 45% corporate. At the end of the year would maybe -- it will be of the same area, and the same will happen in the other operations.

So recap is supporting the clients, offer them grace period, supporting them for working capital facilities. And we don't expect a major shift in the composition of the loan portfolio.


Operator [38]


I will now turn the call back -- the presentation over to Mr. Mora, Chief Executive Officer of Bancolombia, for final remarks.


Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [39]


Thank you, everybody, for attending this call. I want to recap and highlight a couple of ideas.

First, we took all the needed measures to protect our employees and our customers. And we are operating normally at this moment, with close to 90% of our employees working from home in Colombia and with a high figures also in the other countries. So we are operating normally, protecting our employees and our customers in the 4 countries in which we have operations.

Second, we took all the needed measures to have enough liquidity to confront this situation, and we have been very successful on having that liquidity. Our deposits grew. We have funds from correspondent banks, so our liquidity position is comfortable. And we have very good liquid assets at this moment.

Third, regarding solvency, we are taking all the needed measures to work -- to have the solvency to go through this period. And we feel comfortable that with the quality of our capital and the size of our capital is more than enough to support the situation that we are facing.

And fourth, we are working very close with our customers to support them, to understand their needs and to anticipate the situations that they are facing, so we can work together to have the smallest effect possible on past due loans and delinquency. We will have effects. They are going to be significant. But I think we -- with the measures that we are taking, we can handle them.

With this, I sincerely hope that the situation in the world will improve soon. Take care of yourself and stay healthy. See you on our conference for the second quarter 2020. Thank you.


Operator [40]


This concludes today's conference. Thank you for participating. You may now disconnect.