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Edited Transcript of BCOLOMBIA.BG earnings conference call or presentation 21-Feb-20 1:00pm GMT

Q4 2019 Bancolombia SA Earnings Call

Medellin Mar 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Bancolombia SA earnings conference call or presentation Friday, February 21, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* José Humberto Acosta Martin

Bancolombia S.A. - CFO

* Juan Carlos Mora Uribe

Bancolombia S.A. - President & CEO

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Conference Call Participants

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* Andres Soto

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

* Brian Flores

Citigroup Inc, Research Division - Senior Associate

* Carlos Gomez-Lopez

HSBC, Research Division - Senior Analyst, Latin America Financials

* Ernesto María Gabilondo Márquez

BofA Merrill Lynch, Research Division - Associate

* Gabriel da Nóbrega

Citigroup Inc, Research Division - Research Analyst

* Ricardo Alonso Garcia

Crédit Suisse AG, Research Division - Research Analyst

* Rodrigo Sanchez

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

* Sebastián Gallego

CrediCorp Capital, Research Division - Associate of Andean Banks

* Thiago Bovolenta Batista

UBS Investment Bank, Research Division - Research and Analysis Team Leader (ED) & LatAm Banks Analyst

* Yuri R. Fernandes

JPMorgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to Bancolombia's Fourth Quarter 2019 Earnings Conference Call. My name is Jackie, 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 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 the conference call, in future filings and press releases or verbally, addresses 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 condition; changes in currency exchange rates and interest rates; introduction of competing products by other companies; lack of acceptance of new products or services by our targeted clients; changes in business strategy and various other factors that we describe in our reports filed with the SEC.

With us today is Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Mauricio Rosillo, Chief Corporate Officer; Mr. José 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 like to turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer of Bancolombia. Mr. Juan Carlos, you may begin.

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

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Good morning, everybody, and welcome to our conference call for the fourth quarter of 2019. The net income for 2019 was COP 3.1 trillion. This result represents a 17% increase versus 2018. The results of the year were in line with our expectations at the beginning of the year, although in the fourth quarter, we saw provision charges and expenses growing faster than forecasted.

During '19, we saw how the Colombian economy had signals of recovery and remain resilient against global turbulence. We consolidated Bancolombia's strategy as the leading bank in Colombia, increased the customer base and continue positioning for growing earnings.

I would like to elaborate on some key points to understand our business today. First, macroeconomic environment and a poor performance in most Latin America, the countries in which Bancolombia operates, presented positive trends. Colombia's GDP accelerated from 2.5% in 2018 to 3.3%. This is the highest rate of growth in the past 5 years. And it is well above the average of the region.

Activity was driven by internal demand, particularly private consumption and investment due to the combination of low and stable interest rates, ample financing conditions and tax incentives for capital accumulation.

Guatemala expanded at an estimated rate of 3.5%, that's 0.4% more than 2018 figure, due to the dynamism of services, construction and retail. Meanwhile, economic activity moderated in Panama to an estimated of 3.3%. This is explained by lower performance of sectors such as construction and retail. El Salvador grew 2.5%, which is higher than the average growth of the past decade.

Looking ahead, economic perspectives are promising. We expect Colombian GDP to keep on growing steadily at 3.3% in 2020, driven by consumption and private investment. We expect manufacturing and construction to recover, while retail, the financial sector and infrastructure will be the fastest-growing sectors.

We expect Panama to expand between 3.5% and 4%; Guatemala, 3.5%; and El Salvador, 2.4%. Despite some upward pressure in the first half of the year, we expect inflation in Colombia to remain within the Central Bank's target range, allowing interest rates to remain stable during 2020.

Regarding credit demand. During the fourth quarter, we saw mixed trends in the loan portfolio. On one hand, commercial loans grew slowly and were impacted by the appreciation of the peso and some prepayments from corporate clients at the end of the year.

On the other hand, consumer loans [kept] the positive trend observed during the year, consolidating our strategy of rebalancing the portfolio. We have gained market share in Colombia, and today, we have 19%.

For 2020, we foresee improvement in commercial credit demand as a result of better economic conditions. We expect the consumer loans should moderate the pace of expansion, in line with the rebalancing of the demand components of the economy. Our expectations for growth in Latin America are also positive, and we expect the portfolio to expand between 5% to 7%. On a consolidated basis, we are expecting a loan portfolio growth between 8% to 10% in 2020.

Regarding credit cycle evolution, I wish to emphasize the fact that during 2019, we had the provision charges that we forecasted at the beginning of the year. Cost of risk for 2019 was 1.9%, in line with our expectations.

Provisions were 11% lower than charges recorded in 2018, which indicates improvement in the portfolio quality and reduction in new past due loan formation.

During the year, we saw a positive...

(technical difficulty)

Hello? Jackie?

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Operator [3]

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(spoken in Spanish)

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

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(Spoken in Spanish)

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Operator [5]

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(Spoken in Spanish)

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [6]

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Sorry for the interruption. I will continue with the general remarks. During '19, we saw a positive evolution in credit quality. Nevertheless, in the fourth quarter, we had an increase in provision expenses, mainly explained by 2 factors: provision charges associated to some corporate cases in Central America; and the updated parameters for our expected loss models in Guatemala. The portfolio of SMEs and customer loans presented a consistent positive performance during the year. Due to provisions we made, the coverage ratio ended at 194% at the end of the year.

Regarding expense evolution, during '19, expenses had a negative evolution deviation versus our estimations. During the fourth quarter, we had 3 main reasons that impacted expenses. Average FX was higher during the quarter and the year. There was an increase in expenses associated to foreclosed assets due to our strategy to improve the collection process. And personnel expenses increased because of adjustments to bonus plan payments due to higher earnings generated during the year.

Now I'm going to talk about the business evolution. And I would like to share with you some of the aspects that explain the performance of Bancolombia. '19 was a year of many achievements, and we are pleased with the positive evolution of our business. I want to highlight the success of the commercial strategy.

During the year, we added 2.6 million new customers, reaching more than 15 million in total. Out of this figure, 4 million customers are in our digital platforms, Nequi and Bancolombia a la Mano. Bancolombia's digital channels are generating about 20% of the new product sales, which has improved customer experience and simplify the onboarding process.

Finally, we reached 16,000 banking agents. This is a channel that increases the bank's popularity and permit us to be more flexible and tackle market changes. Having this new channel in Guatemala and Panama with very positive results in these operations. Thanks to this strategy, Bancolombia has more than 40% market share of transactions in the Colombian financial system, which brings the benefits of a stable and diversified funding base and a large customer universe.

With these elements in mind, I want to turn the presentation to José Humberto, who will expand on the results of Bancolombia. José Humberto?

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José Humberto Acosta Martin, Bancolombia S.A. - CFO [7]

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Thank you, Juan Carlos. I want to make a reference to the performance of international operations, which you can see in Slide #5. I would like to highlight a couple of general trends present in all of them. First, we have managed to achieve the coverage ratios between 150% and 270%, strengthening our balance sheet. Second, the fee income has been growing between 7% to 18% driven by the promotion and utilization of debit cards and services related to our retail business as well as bancassurance.

Finally, I would like to point your attention to the loan portfolio breakdown for each geography. When we see the large proportion of commercial loans in Colombia and Panama, we can explain better the slow growth of the portfolio as this segment did not expand in 2019. We expect to maintain these positive trends across our operations in 2020.

In Slide 6, we present the loan growth. During 2020, the loan growth -- during 2019, the loan growth expanded below our expectations and grew 5%. We experienced mixed trends in credit demand. By currency, we had an 8.7% growth in pesos, mainly explained by the consumer portfolio; while in dollars, there was a 4% decrease, mainly due to the low credit appetite and prepayments. On one hand, commercial loans, which represent the largest proportion of our portfolio, did not grow during the year as a result of weak demand from large corporations and prepayments at the end of this year.

Consumer loan demand was strong across all geographies and grew 23% during the year. As a result, we have reached the 22% share of our portfolio in line with our expectations and helping NIMs and profitability. For 2020, we expect the consumer loan growth at around 15%, and our commercial loan growth at around 6% for the total growth of around 8%.

On Slide 7, we see the evolution of margins. The annual compression from 5.8% to 5.7% is the result of the combined effect of 2 new accounting standards adopted by Bancolombia. IFRS 9 reduced the revenue generated by the loan portfolio due to the stop of accruing of loans classified as Bucket 3. IFRS 16 increased interest expenses associated to the assets on leasing agreements.

The evolution of securities NIM during the year was positive because of the reduction in yield of Colombia sovereign bonds. The proportion of securities is 7% of the total assets. We expect to maintain an investment NIM of around 100 basis points for our securities portfolio, which is the spread between our securities portfolio yield and the funding cost. For 2020, we are expecting a stable total NIMs of around 5.7%.

In the following Slide, #8, we see the net interest income and the evolution of the funding cost. In line with the evolution of assets, net interest income grew 7% during the year. This performance was the result of growth of the consumer loan portfolio, and our effort of bringing down the funding cost by promoting savings and checking accounts. We must highlight the consolidation of savings account as the main funding vehicle with a 35% share of total funding and reducing its cost by 7 basis points.

Net loans to deposit decreased to 109%, coming from 116% during the quarter, impacted by basically 2 factors. The loan portfolio decreased 1% in the last quarter of the year, and deposits grew 5% in the same quarter. Looking forward into 2020, we don't expect change in the Colombian reference rate in the near term, and therefore, we expect stability in funding cost.

In Slide #9, we present the provision charges. 2019 was a year of improvement in the credit cycle. Provision charges were 11% lower than 2018. The cost of risk for the year was 1.9%, which was in line with our expectations. As Juan mentioned at the beginning of the presentation, the increase in provision expenses in the last quarter was mainly driven by 2 factors: the provision charges associated to some corporate cases in Banistmo; and the update in parameters for our expected loss models in Guatemala. The coverage ratios increased to 134% for the 30-day past due and 194% for 90-day past due.

For 2020, we see an improvement in the quality of the loan portfolio as a result of better conditions of the economy and the performance of the vintage originated in 2018 and 2019. We forecast that the cost of risk will be at around 1.8% at the end of this year.

The next Slide #10 shows the past due loan formation. The COP 730 billion new past due loan formation is mainly explained by Ruta del Sol II where we have an exposure of COP 330 billion and was not past due in September. Other segments like commercial and consumer loans deteriorated in line with our forecast.

We expect to maintain the recovery part in 2020. And as we mentioned before, we forecast the cost of credit to be at around 1.8% in a macroeconomic environment where inflation and interest rates will remain stable.

Slide #11 shows the evolution of fees. Fees continue growing during 2019 and expanded at a level of 9% for the full year. We had a very positive evolution of fees associated to payments with debit cards, bancassurance and cash management and expect that these products will continue leading the growth this year. A key driver for this evolution is our strategy to acquire more customers and promote utilization of our services across all geographies.

Our international operations also posted a good performance of fees. Banco Agrícola grew 13% and Banco Agromercantil grew 19%. The fee growth forecast for 2020 will be between 8% to 10%.

Slide #12 shows the evolution of expenses and efficiency. This is the point where we had an important deviation from our forecast for the year as OpEx grew 10% during the year 2019. As we explained at the beginning of the presentation, there are several factors that affect that number. The FX volatility during the year represented COP 97 billion in expenses above our budget. This amount contributed with 2.2% out of the 10% growth. As a result of our initiatives to normalize some loans in default, we increased the amount of foreclosed assets, which required additional charges of COP 94 billion. Nonetheless, this strategy has had a positive impact in the quality of the loan portfolio. This amount contributed with 1.2% out of the 10% growth. And the main impact occurred in the fourth quarter of the year.

Finally, the 60% growth in net income in Colombia was the main contributor to increase in charge of bonus payments. This amount contributed with 1.2% out of the 10% growth. As you can see, those 3 effects accounts for 4.7% out of the 10% growth in OpEx for 2019.

On Slide 13, we see the evolution of equity and capital ratios. Bancolombia's capital ratios today are at a comfortable level, and we intend to maintain Tier 1 ratio levels between 9% and 10%. In the last quarter, Bancolombia executed a liability management transaction that not only enhanced the Tier 2 ratio levels in approximately 50 basis points but also improved the capital quality since the new bond is Basel III compliant. The cost of this new capital was raised at historical low levels.

Finally, I want to present the return on equity for this year, which was 12.1%. I want to highlight the positive evolution of return on assets, which are starting to grow from the bottom of 2018. Leverage today is lower, and as the loan portfolio starts growing faster, we should see a return on equity expansion as well. Juan?

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [8]

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I want to end these remarks telling you that we are happy with the results of the 2019, 17% increase in net income, it's a good result. Last -- the fourth quarter, we saw some results that were not in line with our expectations, as we mentioned, particularly provisions and expenses. But although those results, we can affirm that the results of 2019 were good.

Related to 2020, we are expecting a growth in the loan portfolio of around 8% to 10%. We will continue undertaking our commercial strategy, which has been very successful so far. Adding new customers will allow us to do additional business with them.

Regarding NIMs, we are expecting them to be around 5.7%. And fee growth will be between 8% to 10%. And we are expecting an improvement on the credit conditions. So we are foreseeing a 1.8% cost of risk for 2020. With all of these numbers, we are targeting an ROE for 2020 between 13% and 13.5%.

After this information, I would like to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Brian Flores with Citibank.

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Brian Flores, Citigroup Inc, Research Division - Senior Associate [2]

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Just a quick question or follow-up in the topic of provisions. How recurrent are these? Or is this more of a front-loading of the expected loss models in Guatemala and the cases in Banistmo, that we will see going forward? And just a second question, in terms of net income growth, what are your expectations for 2020?

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

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Thank you, Brian. The case is -- the second one that you mentioned, it's just a onetime adjustment to the models in Guatemala, due to the behavior of the basically credit cards and consumer loans in that country. So it's more that we are adjusting our models to the behavior of those loans -- of those portfolios in Guatemala. Regarding net income?

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José Humberto Acosta Martin, Bancolombia S.A. - CFO [4]

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Regarding NII, assuming that, as Juan mentioned in his presentation, that the loan growth will be 8% to 10%, we aligned the NII growth at the same level. And the main rationale because -- it is because we are not expecting a big change in interest rates. So we are expecting to maintain the NIM. So at the end of the day, NII will grow in line with the loan growth.

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Operator [5]

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Our next question comes from Andres Soto with Santander.

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Andres Soto, Santander Investment Securities Inc., Research Division - Head of Andean Research [6]

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My question is maybe a follow-up on the topic of cost of risk. I understand that there are like recurring and nonrecurring factors in the 2.5% that you reported in the fourth quarter. So it will be helpful for me to split up between those 2 and understand what is the recurring cost of risk for the fourth quarter? So I have a clean number to compare with the 1.6% that you reported last quarter and the 1.8% that you reported in 2020. And my second question is regarding your guidance. I'm not sure you provided any guidance in terms of expenses, in terms of expense growth of -- or efficiency. So if you can please give me that number, it will be helpful as well.

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José Humberto Acosta Martin, Bancolombia S.A. - CFO [7]

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Regarding cost of risk, yes, Andres, our -- remember that our new standard in terms of cost of risk for the new -- for the 2020 will be 1.8%. What happened again in the fourth quarter is as a result of the change of models in Guatemala, you see the numbers and the answer of Juan and what happened in Banistmo specifically was of a couple of corporate cases in which with the level of provisioning that we are registering in this quarter we perceive that we don't need to increase those provisions for the whole year basically because the level of warranties that we have with those clients. So again, the big deviation was mainly driven by those geographies in Colombia, we are having a very good performance of the loan portfolio. We have had some cases that increases the provision, but nothing out of the range. So again, the normal cost of risk will be 1.8%.

Regarding your second question, our guidance for expenses for next year will be to be at around 6%. And let me elaborate why we are planning to be in the range of 6%. Basically, because if you look at expenses of the last year, most of them are related to IT, related to new investments in technology to develop new products. So we are continuing and you see that the answer -- and the result of that is what Juan mentioned, increasing our customer base, improve -- implementing more perks. We are investing in our geographies as well. So that's the reason why we have to maintain this path of growth. And the main driver will be IT and the development of new products.

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [8]

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I just want to complement, Andres, José Humberto's answer. We are seeing a very good commercial dynamic. And the transformation of the bank, it's going ahead with a lot of new developments. So we will keep our eyes on expenses growth is important and efficiency is important, but we need to balance the growth of the business and how to maintain expenses under control. So we will be balancing both.

So what we are saying is we will keep investing and some expenses, particularly in IT and business transformation, will be there. That is probably the main driver around the expectations of expenses growth around 6%. But we will keep working on expenses. We are not saying that this is not a focus of the management and that we need to keep improving. So we will be keeping a balance between transformation and expenses.

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Operator [9]

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(Operator Instructions) Our next question comes from Ernesto Gabilondo with Bank of America.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [10]

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My question is a follow-up in expenses. I agree, OpEx could normalize if we have a more stable FX and if there are no longer expenses related to foreclosed assets. So are you evaluating to negotiate IT or advisory contracts denominated in dollars since the beginning of the year to reduce the FX volatility? I don't know if you have calculated how much is the sensitivity in expenses for a 1% depreciation of the Colombian peso against the dollar. Any color will be very helpful. And then only just 1 last question. I heard that it's only 1, but if loan growth accelerates and if provision charges and OpEx normalize from last quarter, can we continue to see the same pace of net income growth that we saw in 2019?

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José Humberto Acosta Martin, Bancolombia S.A. - CFO [11]

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Ernesto, beginning for your last question, yes, loan growth and NII, as we mentioned in the previous question, it will grow at the same level, meaning 8% to 10% NII, and we are able to sustain that. We will be able to maintain that trend. Regarding the OpEx and the normalization, you are right, we had a spike in terms of certain expenses. We internally in the bank, we have a coverage, we have a derivative for the local expenses related to U.S. dollars. So we are maintaining a strict control in those expenses tied to U.S. dollar. But again, remember that the 30% of our operation has an expenses, and they have also a natural coverage because of NII as well. So to give you some idea, inflation is not affecting the performance of the bank because as increase, the expenses also is increasing the net interest income coming from the U.S. dollar operations. So at the end of the day, the impact is that.

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [12]

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To make sure, it's the FX, not inflation.

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José Humberto Acosta Martin, Bancolombia S.A. - CFO [13]

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Sorry, the FX. I was talking about FX. I'm sorry about that. And our sensitivity for the valuation, obviously, it is not as important as you probably see because, again, we have a natural coverage for the international operation.

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [14]

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Ernesto, and I want to elaborate a little bit more on your second question and remark. I think that we have been building a very strong balance sheet. We are -- have a coverage of past due loans that is very strong. So for us, I think 2020 is a year that we see as a positive year in which we are going to consolidate many of the actions that we took during 2019. Also, remember that during the last 2 years, we have had a lot of accounting changes related to new accounting rules, and those are going to be -- in 2020, we will not have many of them. So we see 2020 as a positive year.

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Operator [15]

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Our next question comes from Thiago Batista with UBS.

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Thiago Bovolenta Batista, UBS Investment Bank, Research Division - Research and Analysis Team Leader (ED) & LatAm Banks Analyst [16]

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I have 1 question about Bancolombia's -- if you can talk a little bit about your strategy to expand the use of the digital platform, especially Nequi? And how big Nequi can become? Looking to the number of clients, it already achieved more or less -- a little bit more than 10% of total Bancolombia's clients. So if you can talk a little bit about your strategy to expand the Nequi. And just as more follow-up about margins. You already mentioned that in 2020, the most likely scenario is a flattish NIM, but when I look to your loan mix with a much stronger loan growth in consumer segment, and also, with no pressure from cost on the funding side, so why not more expansion in margins considering this change in mix and without any kind of funding pressure?

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

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Thank you, Thiago. Related to Nequi, we are seeing a very positive trend and a very positive growth of our digital platform Nequi. Today, we have 2 million customers in that platform. We are growing at a pace of close to 100,000 new customers a month. We are adding new features to the platform. Since last year, we are offering credits through this platform. Also, we are offering different products and services. So the platform is stronger, and it's becoming very popular among a segment that use it on an everyday basis. So we are very positive. We will continue developing the platform and adding new features, especially related with credit products.

And the trend that we are seeing allow us to think that we will continue growing at a very good pace. As I mentioned, we have in total in Bancolombia around 15 million customers. Out of those 15 million, 4 million are in our digital platforms. We have 2 digital platforms. One, it's Bancolombia A la Mano, which is our banking inclusion platform; and Nequi, which is more -- it's targeting young people that are underbanked, basically. So to just summarize, we are very positive. We see very good trends, and we will continue adding features to the platforms that allow us to think that it will continue growing on a very healthy base.

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José Humberto Acosta Martin, Bancolombia S.A. - CFO [18]

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Thiago, regarding your question of NIM, we have 3 different forces, that at the end of the day, the impact will be almost flat, and that's the reason why we are seeing to maintain the same NIM. The first one is on the upside, the consumer loan growth. Yes, we are expecting a loan growth this year 2020 at around 15%. That will give us a certain level of increase of the NIM, but we have also designed our loan growth in commercial of around 6% and you know that these kind of loans have a tighter NIM and tighter spreads. So combine those effects, I would say that in terms of income of -- of interest income coming from the loan portfolio, that will be the same.

There are another force, which is the funding side. Yes because we are -- we have a strong coverage of our retail business. We are grabbing the liquidity from the market in terms of checking accounts and saving accounts, more than 45% of the liquidity of the country. And we have an additional strong funding base, which is the capital markets. We are very active on the local and international capital markets, and we are able to grab the liquidity from those markets and at very competitive interest rates. So those are the rationale why we believe that the NIM will be sustainable in an environment of a flat rate of the Central Bank.

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [19]

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And related, the loan mix that you mentioned. We declared a couple of years ago that we want to add more consumer loans to our books. And that's what we have been doing during these 2 years. We expect that trend to slow down. We need to take into account market conditions. In 2020, as José Humberto mentioned, loan growth -- consumer loans are going to grow around 15%. That's less than the growth that they have -- they had during 2020 (sic) [2019], but commercial loans are going to grow around 10% to -- 10%. So still, we will add some more consumer loans than commercial loans. But we are feeling now more -- much more comfortable with the loan mix that we have in our books and the relationship between consumer and commercial loans is reaching the point in which we feel comfortable.

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Operator [20]

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Our next question comes from Rodrigo Sanchez with Davivienda Corredores.

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Rodrigo Sanchez, Corredores Davivienda S.A., Research Division - Senior Equity Research Analyst [21]

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First one is, could you repeat or maybe expand a little bit on the higher provisions in corporates in Panama? And is this something that we could expect to see again going forward? And also, could you please give us some -- your guidance on growth for the mortgage portfolio for 2020?

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José Humberto Acosta Martin, Bancolombia S.A. - CFO [22]

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Rodrigo, the provision is explained mainly in some corporates in 2 sectors. The first one is the energy. And the second one is the real estate sector. And the level of provisions, as we mentioned during the script, the level of provision is it's -- we believe that enough because the level of warranties that those clients have in our loan book. So we don't expect more deterioration in the Banistmo operation regarding those specific cases.

Regarding your second question?

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [23]

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Mortgages.

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José Humberto Acosta Martin, Bancolombia S.A. - CFO [24]

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Regarding mortgages, the loan growth in mortgages this year, 2019, was 5%. Obviously, the key driver here is what happened in Colombia. And for the next year, we are expecting a mortgage loan growth at around 8% to 10%, basically because we are perceiving a rebound in the mortgage business here in Colombia. The main driver will be the Colombian operation.

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Operator [25]

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Our next question comes from Alonso Garcia with Crédit Suisse.

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Ricardo Alonso Garcia, Crédit Suisse AG, Research Division - Research Analyst [26]

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I would like to follow up on expenses. So this year, 2020, you are expecting 6% growth. So my question is, if after a stage of heavy investments, should we expect a convergence of OpEx growth to inflation levels in the foreseeable future? And what is the level of efficiency that you see from here?

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [27]

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Thank you, Alonso. Heavy investments, yes, we are investing in improving our -- the way we reach the market. And as I mentioned, commercial strategy has been very successful. Our target is to converge to inflation. As I mentioned in one answer before, that is not easy because we need to balance how to grow, how we are more efficient, how we compete in the market, with expenses. So we will continue working on that direction. That's what we want. Definitely, we -- this year, we don't see that we are going to converge to inflation in terms of how expenses are going to expand. But we will continue in that direction. We will see how the competitive environment develops, but that's our target.

Related, efficiency ratio, we will -- we are targeting to be below 50%. It has been difficult to go below 48%, 49% in Bancolombia because of the reasons that I mentioned. So what I can assure you is that we will continue working on being more efficient, but we need to balance how the banks become -- it's competitive in the market and transform itself and add more digital features and expenses. So we will continue balancing the -- both aspects, but be sure that expenses is a focus of the management and we need to keep working on that direction.

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Operator [28]

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Our next question comes from Sebastián Gallego with CrediCorp Capital.

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Sebastián Gallego, CrediCorp Capital, Research Division - Associate of Andean Banks [29]

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Just an additional follow-up on OpEx. Can you provide some more color about what kind of investments are you doing in IT in terms of the amount? And how does that compare to the previous years?

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [30]

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Sebastián, the investments in this business is not anymore an investment that you do one-time and you wait 10 or 15 years for the next investment. Digital transformation and adding new features, it's something that you do on a continuous way. That means how you transform your processes to digital, how you add robotics, how you add cloud features to your IT infrastructure. So I cannot say that we are at the peak of the investments. We will continue investing in the following years at a pace similar -- at the pace that we have invested in the last 3 or 4 years. And just to give you an idea in what we call transformation and investments, we are doing around $120 million to $150 million a year in transformation and that will continue. Because we cannot just say that we are done with the IT investments. That will continue because it's transformation from legacy systems to new ones and also adding new capabilities and new features to compete in the market.

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Operator [31]

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Our next question comes from Yuri Fernandes with JPMorgan.

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Yuri R. Fernandes, JPMorgan Chase & Co, Research Division - Analyst [32]

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I had a follow-up on ROEs. I remember in the past, you mentioning ROEs this year to be around 14%, 14.5% and maybe moving to 16% in 2021. But now, I guess, the guidance you provide is like around 13% to 13.5%. So I would like to ask what has changed here? It's basically the compound effect from higher expenses, why ROEs should still be on those 13% level? That's the first one. And my second one is regarding G&A. I know many people explored this topic already. But if I look here on -- and again, I understand the FX impact. I understand the foreclosure and your investments on digital transformation. But the main line that caught my attention here was personnel expenses. It was up like 12% year-over-year in the full year and mainly driven by bonus, up like 27%. So my question is, what explains it? Like, how is this related to the digital transformation? And how should we expect personnel expenses line to behave in the future? Because if I look at the number of employees, it has been mostly flat year-over-year.

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José Humberto Acosta Martin, Bancolombia S.A. - CFO [33]

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Okay, Yuri. Regarding the reason why the return on equity, we are moving the guidance is there is a specific line in our balance sheet that grew more than the other lines, which is capital. If you took a check on our last 3 years, we have been growing below 10%, and we have been increasing our capital above 13% on average. That means that we are grabbing more capital. And that's one of the reason why the return on equity is coming down because our strong level of capital that we are having today. Remember that every time that we grow more than 12% to 15%, we begin to increase and to use the capital, and that will be the rationale. When the bank, again, go back to the path of growth, 10% to 15%, you'll see a much better return on equity. And that's finally the reason why we are talking about at around 13.5% at the end of this year because the main driver will be loan growth. And that will be, again, 8% to 10%.

Regarding your second question, what we expect in terms of bonus plan for Bancolombia in the next coming years. That was a big 27% this year because, again, the most profitable operation in Colombia was -- in Bancolombia was Colombia. But we are touching almost a ceiling in terms of bonus plan. Remember that we have a cap, which is the top will be -- or the cap will be 6 month salaries per year as a bonus plan. So you are not going to see a huge deviation in terms of bonus plan for the next coming years because we are assuming that the base today, it's under a very good performance of the bank in Colombia.

And in expenses, yes, it is a pickup in the fourth quarter. Right now, we are doing some adjustments for the next coming 3 quarters in order to avoid that volatility regarding some issues or regarding some expenses. So you'll see the next coming quarters a flattening in terms of the expenses growth and trying to reach, as Juan mentioned, a 6% level.

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Operator [34]

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Our next question comes from Gabriel Nóbrega with Citi.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [35]

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So just say a quick follow-up on the ROE question. I just wanted to maybe understand what is your sustainable ROE being that we have already seen levels of around 16% in the past couple of years? So if you could just maybe elaborate a bit more on what are the main levers that you will be working on to expand ROEs? And when do you believe that we could reach maybe levels of 16% again?

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José Humberto Acosta Martin, Bancolombia S.A. - CFO [36]

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Regarding ROE, we are foreseeing and how we are going to get the 15% to 16% return on equity. And we see that if you design under the numbers of the bank, we have to maintain a cost of risk level of 1.8%. We have to maintain a NIM at around 5.5% area. We have to maintain a loan growth, 10% to 15%. We have to maintain expenses in between -- the expenses growth, 4% to 6%. So those will be the numbers that we are designing for the next coming 3 years in order to reach that level of 15%. Remember that today, the NIMs have been compressing, interest rates are very low. So there are some macro conditions also that getting the 16% was very complex. We had a 20% many, many years ago because the inflation at that time was different. Interest rates was very different. So if you calculate, assuming the macro environment, the 15% will be reachable in 2 or 3 years based on the numbers that we told you.

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Operator [37]

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Our next question comes from Carlos Gomez with HSBC.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [38]

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I would like to ask you what your expectation is for the tax rate in 2020 and 2021? And this is another question, but I think before you were asked several times about your expectation for net income growth for the bottom line rather than just NIM, perhaps you want to elaborate on that.

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José Humberto Acosta Martin, Bancolombia S.A. - CFO [39]

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Regarding -- thank you, Carlos. So regarding your second question. NII growth...

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [40]

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No, not NII, net income.

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José Humberto Acosta Martin, Bancolombia S.A. - CFO [41]

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Net income. The net income, we are expecting to get the net income at around in between COP 3.4 billion, COP 3.5 billion at the end of the year. And the main driver will be, again, loan growth and assuming NIM, assuming cost of risk as we design. And most important, assuming an OpEx growth in between 5.5% to 6%. So that would be the number that we are designing. Obviously, in the middle will be the volatility of FX that this year or last year affected us in a very important way.

Regarding taxation, we believe that this year, 2020, the tax will be in between 28% to 30%. And remember, that the positive numbers comes from the operation that has the highest level of statutory tax, which is Colombia. And the numbers of the international operations, if they are lower than expected, the tax at the end of the day in a consolidated basis will be 28% to 30%.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [42]

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Sorry, and for '21?

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José Humberto Acosta Martin, Bancolombia S.A. - CFO [43]

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And the Tier 1, you asked Carlos? I'm Sorry. Hello? If you ask for Tier 1, the Tier 1, our range that we designed based on the conditions of loan growth and macro conditions is to be in the range of 9% to 10%, if that was your question, Carlos. We couldn't hear you, sorry.

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Operator [44]

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And our next question comes from Nicolas Alfonso with Compass Group. Okay. The line closed there. And at this time, we have no further questions.

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [45]

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Thank you, everybody, for your interest on our conference call. I want to reaffirm that we are happy with the results of 2019. There were 2 items that were not in line or -- in the fourth quarter, were not in line with our expectations. But for the year, we think other than expenses, we were in line with our expectations and guidance. And reassure that we are positive on our views -- on our view for 2020. We are acquiring new customers. We are adding new products and services to serve those customers. The commercial dynamic is very good. We foresee an economic environment that is going to help our strategy. So we remain positive for 2020. We will consolidate many of the changes that we have been doing for the last 3 years during this year. So we will expect to deliver the results that we are telling you that we will deliver. So we will be following this during the year. And we hope to see you for the presentations, for the results of the first quarter.

Thank you very much, and have a good day.