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Edited Transcript of BCOLOMBIA.BG earnings conference call or presentation 6-Aug-19 1:00pm GMT

Q2 2019 Bancolombia SA Earnings Call

Medellin Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Bancolombia SA earnings conference call or presentation Tuesday, August 6, 2019 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. - VP of Finance and CFO

* Juan Carlos Mora Uribe

Bancolombia S.A. - President & CEO

* Juan Pablo Espinosa Arango

Bancolombia S.A., Research Division - Head of Economic Research

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Conference Call Participants

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* Andres Soto

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

* 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

* Jason Barrett Mollin

Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services

* Julian Felipe Amaya Restrepo

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

* Nicolas Alejandro Riva

BofA Merrill Lynch, Research Division - Research Analyst

* Ricardo Alonso Garcia

Crédit Suisse AG, Research Division - Research Analyst

* Sebastián Gallego

CrediCorp Capital, Research Division - Associate of Andean Banks

* Tiago Binsfeld

Itaú Corretora de Valores S.A., Research Division - Analyst

* Yuri R. Fernandes

JP Morgan 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 Second Quarter 2019 Earnings Conference Call. My name is Sylvia, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

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

With us today is Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Jaime Velásquez, Chief Strategy and Finance Officer; Mr. José Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mr. Jorge Humberto Hernández, 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.

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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 second quarter of 2019. Bancolombia has had a positive performance during this quarter. The results are in line with our expectations at the beginning of the year and confirm some of the signals that we saw during the first quarter. I would like to highlight 2 main issues that have driven our results during this quarter. First, the consistent credit quality improvement and a reduction in provisions; and second, the steady acquisition of new customers and the continuous growth in consumer loans as well as the increasing number of transactions we are processing through our channels.

Let me elaborate on these factors. In relation with provision charges, we experienced a consistent improvement in the quality of the loan portfolio, and therefore, the provisions for the year are changing their trend. The deterioration on the loan portfolio has decreased in recent months, and that implies lower provision charges. The corporate clients that had high impact in 2018 reached an adequate coverage level, which has a positive impact on the cost of risk. In June, we charged off Electricaribe loan, contributing to the improvement of the PDL ratios. Today, we have a 90-day coverage ratio of 165%, which we consider enough to protect the balance sheet. We believe that the cost of risk in 2019 will be below 2%, as we expect the trend observed during the first half of the year to continue.

Regarding the number of transactions, they grew 26% over the last year. The mobile channel is gaining more relevance and growing more than 50% year-on-year. Coupled with more transactions, we continue to undergo strong growth in consumer loans, which already represents 19% of our loan book. Furthermore, we are expanding our customer base by adding more than 1.3 million customers over the last 12 months, improving the risk-adjusted returns of the portfolio.

Now I want to give you an update of the progress in the digital front. Please go to Slide #3. We are changing the business in such a way that more interactions with processes, channels and products are conducted digitally. As a result, clients have a more convenient relationship with us and scalability and efficiency of the business increases. The outcome of this strategy is the growth in our consumer base. Today, we have more than 12 million customers in Colombia. Three key platforms complemented physical and online channels and permit us to reach a point where 60% of our customers use digital channels. Nequi, a digital bank for individuals, which has more than 1 million customers in Colombia and is adding around 100,000 per month is also in Panama. Bancolombia La Mano, an inclusive platform targeting nonbankerized individuals, which has now more than 1.4 million users and is adding new services such as micro loans. The Bancolombia where more than 4 million customers operates on regular basis. The portfolio of savings, loans, mutual funds and other services is integrated in one single platform.

Regarding enterprises, we have 2 groups. Large corporations, which already have a high use of products and operates through the online and mobile platforms. The relationship managers helps the clients in their most complex needs and complements the client's standardized interactions like cash management, FX trading, hedging, et cetera. For SMEs, we offer a complete portfolio of financing products and services. Out of the 1.6 million universe of SME customers, more than 56% are active users of the digital platform. We will continue developing the SME segment potential.

A key topic for our business evolution today is the macro situation in Colombia. We estimate that the GDP will grow around 3% in 2019. During the last months, we have seen a moderation of the economic recovery. But on the positive side, we highlight the household financial health. The total financial borrowing has come down to 15% from '17 -- peak served in 2017. Although the line inflation has been in the upper end of the range set by the Central Bank, the core inflation remains anchored. As foretold, Colombia has had its stable interest rates for the last 14 months, and we maintain our forecast of 4.25% repo rate at the end of 2019. This combination of factors explains to a large extent, the evolution of corporate credit demand in Colombia. Having said this, I want to mention that our expectations for the second half of the year remain in line with what we have seen so far. A moderate growth on the loan portfolio, around 7%; stable margins around 5.8%; efficiency ratio around 48%. With these elements in mind, I want to ask José Humberto to elaborate on the main topics that are driving our results. José?

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José Humberto Acosta Martin, Bancolombia S.A. - VP of Finance and CFO [3]

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Thank you, Juan Carlos. For all of you following the presentation, at the end, you can find additional information that complements the bank numbers. I want to start this presentation making a reference to the performance of the international operations, which you can see on Slide #4. We have been seeing a positive trend across the geographies. In Banistmo, we have expanded NIMs, product of the loan portfolio repricing and stable funding cost. Also, cumulative cost growth has been negative, minus 0.7%. In Banco Agrícola en El Salvador, we highlight a consistent growth of the loan book and stable funding cost.

Also, we have had a negative growth in expenses, minus 6.5%. These factors have contributed to a cumulative 18% return on equity in this operation. In Banco Agrícola in Guatemala -- Banco Agromercantil in Guatemala, we updated the coverage for some corporate clients, which impacted the cost of risk and the results of the quarter. On average, the cost of risk for the group during the quarter was 1.8%. The main driver of the overall performance of Bancolombia will be the evolution of the business in Colombia, given the relative weight of this operation.

In Slide #5, we present the loan growth. The portfolio expanded 9% over the last year, mainly driven by consumer loans. As a matter of fact, consumer loans grew more than 26% year-on-year, and that really represents 1/5 of the total credit portfolio. As we mentioned at the beginning of this call, our efforts in convenience and digital channels have allowed us to grow much faster than the market in terms of customers and loans. Bancolombia has consolidated its leadership in Colombia, with a market share of 26.2% of gross loans. And in consumer loans, we reached a 19%, 1-9, market share.

The impact of the financial performance of the bank is reflected in better margins, a more stable deposit base and the largest pool of active customers in Colombia. Coupled with the growth, credit quality of the consumer loan portfolio has been in line with our forecast. The use of data and the knowledge of our customers has permitted to originate more loans and maintain default rates within our risk appetite. Today, the commercial portfolio rose 4.7% year-on-year, a slow pace compared to historical standards. We are looking forward to the second half of this year with a faster economic growth, which eventually will drive demand from companies. We reaffirm our loan growth at around 7% for this year.

On Slide 6, we see the evolution of margins. In the second quarter of this year, we saw a positive performance of NIMs. This expansion is mainly explained by higher yields of the loan portfolio due to a change in mix and stability in the funding cost. The 26% growth in consumer loans outpaced the 4.7% growth in commercial loans, contributing to the change in loan book composition that is taking place. Cost of funding has been stable because the Colombian Central Bank has kept interest rates at a level of 4.25% during the last 14 months.

Additionally, the securities portfolio has benefited from the reduction of yields of Colombian treasury, helping the overall NIM to increase during the quarter. We don't forecast big variations in margins during 2019, and we are expecting a NIM of at around 5.8% at the end of this year. The funding strategy for some geographies will be to replace long-term debt with client deposits and promote checking and savings accounts, like we have done in the first half of this year. The market leadership and franchise have permitted to accelerate the growth of savings and checking accounts over time, deposits, and the outcome is a change in mix that maintains the funding cost relatively stable.

In Slide 7, we present provision charges. In line with the trends of the first quarter, we had a lower charge of provisions than 1 year ago. This better performance is explained by 3 main components. One is the reduction of the boarding of large corporate cases as we reached the target coverage and we did the write-off of Electricaribe. The second is the overall improvement of the vintages, which has impacted parameters used for the estimated expected loss and therefore, requiring lower provisions. Finally, the lower amount of new past due loans that we have seen in the year, these trends can be observed across all segments: commercial, consumer and mortgage loans.

The 90-day coverage ratio decreased because the runoff of a large loan to a mass transportation company in Bogotá, which reached the 90-day threshold. We wish to stress the fact that the rapid growth in the consumer loan portfolio has come along with a lower cost of risk for that segment. This is because the consumer loan portfolio and its NII have grown much faster than past due loans and cost of risk. The recent performance of the loan portfolio has lowered the cost of credit and lead us to forecast that this metric will be below 2% for the whole year.

The next Slide #8 shows the quality of the loan portfolio. In this slide, we can see the improvement in the 30-day past-due loan and coverage ratios. This reduction is the outcome of a slower pace of deterioration. The 90-day past-due loan ratio increased because the deterioration of our large loan to a mass transportation company in Bogotá. The most important fact of this slide is the consistent reduction in the amount of new past-due loans. This confirms the improvement of the conditions of the loan portfolio, in particular, the commercial loan portfolio. We have experienced improvement in SMEs and the issues with large corporate plans are in the past. Also, we have accelerated pace of charge-offs as we reached 100% coverage for troubled clients. The total amount of charge-offs COP 1.16 trillion. The effect of Electricaribe write-off was COP 642 billion. We expect to maintain the recovery path in 2019. And as we mentioned before, we forecast the cost of credit to be below 2%.

Slide #9 shows the evolution of fees. Fees are presenting a steady growth in 2019. To put it in perspective, fees have grown faster than total revenues of the bank over the last 3 years, and as a result, they represent today, 18.5% of the total operating income. Gross fees grew 13% versus 2018, presenting a very dynamic pace. This evolution is explained by more transactions related to cash management services, bancassurance, debit cards and asset management. Nevertheless, we have had higher expenses related to fees, and services that we pay for -- and help us to move from fixed cost to variable cost.

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Clear, 22% versus 1 year ago. These agents already represents 18% of the total transactions performed by Bancolombia. And the fast growth in cost related to collections, which supports our strategy to grow faster in consumer loans and contributed to a low NPL ratio in that segment. We maintain our fee growth target between 8% to 10%.

Slide #10 shows the evolution of expenses and efficiency. During this quarter, we saw a consistent trend of improvement in the cost-to-income ratio. This is mainly explained by the positive performance of revenues, which have diluted expenses. During the second quarter, we observed stability in the operational expenses. Cumulative growth for the first 6 months of the year is 7%, but we are confident that as we advance in the year, the figure will converge towards our estimations at the beginning of this year, that is to be at around 5%. We reaffirm our forecast of cost-to-income that will be at around 48% at the end of the year.

After seeing the result of this quarter, I want to review our expectation for the year. Growth will remain in line with our forecast for all geographies, reaching 7% for the year. Regarding margins, we will continue optimizing the funding structure and promoting retail loans in the portfolio mix in order to maintain NIMs at around 5.8%. Fees should maintain a positive trend given the growing number of transactions in Colombia and the launching of new products in other countries. We forecast 8% fee growth. In 2019, we see a normalization of the cycle. The stock of past-due loans is not growing, and we forecast a cost of risk below 2% as we see better performance of the loan portfolio. The combination of cost and revenue evolution should put the cost-to-income ratio at a level of 48%. With this combination, we forecast a return on equity between 12.5% and 13%. After elaborating on these key topics, we want to open the line for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Gabriel da Nóbrega from Citibank.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [2]

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During the quarter, we saw that your 90-day NPLs actually increased despite you fully writing off Electricaribe. So here, I just maybe wanted to understand why this happened? And also, where do you believe that we are in the NPL cycle in Colombia? And also, on the second question here, could you just guide us through the ongoing process with the government in relation to the liquidation of CRDS? And are you expecting any relevant reversals from those loans for this year?

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

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Thank you, Gabriel, for your question. Regarding the 90-day ratio, as José Humberto mentioned, one big customer of the massive transportation system of Bogotá reached the 90-day threshold. That's why the number increased during the quarter. As we mentioned in the last conference call, an agreement was reached between -- or between -- or among the operators of the massive transportation system, Bogotá and TransMilenio. And based on that amendment to the contract, we negotiate a restructuration of the loan with those operators. So we will expect that for the third quarter, those loans are going to be normalized based on that change that we did to the loans. So that will change during the third quarter. We feel comfortable with the level of provisions that we have at this moment. So we don't expect any surprises on that front. Regarding the Ruta del Sol II, we are expecting today, what is going to be the result of the arbitration process, and based on that, we will move forward. Let me remind you that we have a coverage of 50% of that loan that we have in our books.

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Operator [4]

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Our next question comes from Ernesto Gabilondo from Bank of America Merrill Lynch.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [5]

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My first question is on interest rates. Where do you see them this year? And after the fed movement, do you think there is room for Colombia to lower rates? And what's your sensitivity to a potential cut of 50 basis points in the interest rates? My second question is on the global trade war. Have you evaluated any potential impact on the economy or for Bancolombia? And how does this compares against the region? And my last question is on your digital transformation. Juan Carlos, I believe you have done a fantastic job in this front. So can you elaborate on what are the new challenges and opportunities? For example, how are you doing with the new QRs in taxis and mom-and-pop shops? What are you doing on smarter solutions, are you developing apps for mom-and-pops? What are you doing in terms of fintechs? I don't know if there is a cross-selling target for the next years. Any color on this will be very helpful.

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

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Thank you, Ernesto. I'm going to answer your question in the reverse order that you put them. Let me first take the -- your comment and your question around the digital transformation. As you mentioned, we have been working on this front for the last 3 years, and we are now seeing the results. In concrete examples, we now have more than 100,000 shops with -- that accept Bancolombia's QR code, and the number of transactions through this mechanism are increasing rapidly. And our target is to provide a simple way of payment for small shops. And I think that, that is -- it's -- the results are there and are improving, and we see it in the number of customers that we are acquiring.

You mentioned Fintechs. We are very active working with different Fintechs in different fronts. We are doing joint ventures, but also we are investing in some of them. So we believe that the Fintechs complement very well our strategy, and again, we are seeing the results in the number of customers that we are acquiring. And besides that, we have 2 platforms for -- to do the basic transactions that people need. And those 2 transactions, the 1 Nequi, which is a digital -- pure digital bank is doing very well. It's growing fast.

The services that we are providing are very -- the customer really appreciate what we are doing. We are starting to offer micro loans, and that's growing also fast. And you mentioned cross-selling. That's another target, another focus that we have. And that the numbers are also improving. So we are happy with the results so far. However, the numbers -- the operational numbers are improving, but also we know that still we have a lot of way to go, and we keep moving, investing and investing on the digital front. With this, I'm going to pass to Juan Pablo Espinosa, who is going to answer your questions around interest rates in Colombia and the trade war.

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Juan Pablo Espinosa Arango, Bancolombia S.A., Research Division - Head of Economic Research [7]

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Yes, Ernesto. Regarding interest rates, well, the recent moves by the -- not only by the Federal Reserve, but also by the Central Banks of Brazil and Chile has led several agents to maybe expect a rate cut in Colombia. However, we continue to expect as our baseline that interest rates will remain -- referenced interest rates will remain stable for the remainder of the year. And that is based, first, on the consideration that inflation has been increasing in a steady way in the past few months. For example, yesterday, we knew that the inflation in July stood at almost 3.8%, which is close to the Central Bank ceiling and given that there are short-term pressures on prices that's a fact that we'll keep Central Bank cautious in our opinion.

We have mentioned in the -- during the call, we think that the economy is going to recover in the second half of the year. So actually in terms of having more stimulus on the monetary policy side, we don't think that's the case in Colombia. Because activity is going to pick up and interest rate levels at this moment are attractive enough to lead to more growth. And finally because with the uncertainty in global markets, we think that the current label -- level, sorry, of interest rates allows the Central Bank to counter in a certain way the effects on the markets, especially the weakness of the peso. And regarding the trade war, we think that the -- on the financial side, Colombia as well as other economies in the region is exposed to volatility and risk aversion as we have seen during the past few days.

In that sense, I think that Colombian peso could, in the short term, weaken more than we have seen so far. And in my opinion, that's a factor that will lead in the future to an adjustment in the current position or in the current position of the country and eventually will go back to the levels that we think are in line with the fundamentals, which is around 3,200. And on the real side of the economy, especially on the possibility that the change in the trade flows across countries can actually lead Colombia to access to some products, especially some products that are now subject to tariffs coming from China.

So in the medium term, I think that this confrontation leaves opportunities for countries such as Colombia, which has, at this moment, active trade with the U.S. and will remain to have a pre-trade agreement in effect with the United States.

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

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Regarding sensitivity, Ernesto, the sensitivity for every 50 basis points of change of interest rate, the sensitivity for the bank is 4 basis points. And that is basically because on the loan side, 70% of their loans are floating, and on the liability side around 50% are floating as well.

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Operator [9]

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Our following question comes from Jason Mollin from Scotiabank.

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Jason Barrett Mollin, Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services [10]

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My question is on your guidance and outlook for the rest of the year. You've been mentioning that you expect an acceleration in economic activity, yet, you're talking about loan growth guidance of about 7% for the full year. We saw a 9% year-on-year in the second quarter, 26% growth, as you mentioned, in the consumer side, slower growth on the commercial side. But how should we think -- I mean, the ROE guidance you're talking about is 12.5% to 13% and you reported 13.5% in the first quarter, 15% in the second. So are you looking for a material slowdown that you're looking for ROEs in this 12.5% to 13%? I think part of it may be explained by the tax rate that was low in the second quarter, 25%, typically you talked about that being higher.

And you did talk about the high level of income from the securities in the net interest margin, that was 4.7%. That seems relatively high versus history. So are you expecting pressure on loan growth? And you talk about stable NIMs for the year, but I would imagine, from this quarter, there'll be pressure on that securities income. So in general, why are you talking about a lower ROE for the year with an acceleration in income? And what are the drivers behind this outlook for slowing profitability?

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Juan Pablo Espinosa Arango, Bancolombia S.A., Research Division - Head of Economic Research [11]

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Thank you, Jason. Yes, we have to explain several factors that explains the second quarter. The first one is cost of risk. You see that the cost of risk this quarter is 1.8%, and now our expectation is to be at around 2% or 1.9% at the end of the year -- of this year, that will affect in a certain way, develop income at the end of this year. Securities. You see a very good performance of the security portfolio, which is 9% of our assets. We'll see, as Juan mentioned, the second half of the year, we don't expect a major change in interest rate. So the securities will behave as expected, meaning that this will be 1% of NIM of the security. So you don't expect from them a huge performance for the rest of the year.

The third factor is the fact that the FX, you see that there is a devaluation of 10% year-on-year. So we don't see 1/3 of our loan portfolios in U.S. dollars. So we don't believe that at the end of the year, we don't have a clear picture about FX. So that's the reason why we think that will be 7%. And the fourth factor is that the path of growth of consumer, yes, it's growing at a pace of 26%, but there would be a kind of plateau. Remember that the first half of last year was very weak in terms of economic activity because that were elections, the situation politically was very nice, that affect the level of business. So you are conferred 2 different basis, first half of last year with this half of this year. That's the reason why the combination of those 4 factors why we believe that the loan growth at the end of the year would be 7%.

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José Humberto Acosta Martin, Bancolombia S.A. - VP of Finance and CFO [12]

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Okay. So let me summarize our view. We think that the trends that we saw during the first semester are going to continue during the second semester. The loan growth, we are cautious, and we are forecasting 7%. Let me remind you that is affected by the exchange rate. So we have to -- we need to take into account the FX rate. Second, at the beginning of the year, in general, we were expecting a 3.5% GDP growth for Colombia. Now we are expecting 3%, which is not bad, but it's lower than we expected at the beginning of the year, and that is affecting the commercial book.

So for me, the question is how the commercial loans are going to perform. And we have seen lower -- a low demand, and probably that's going to remain for the rest of the year. And regarding ROE, remember that we are accumulating capital. So even though the returns -- the net income is growing and is improving we are calculating the ROEs on a higher base. And also, it is important to take into account that cost of risk is key. We -- at this moment, we are operating at around 1.8%, we think that the cost of risk should be around 2%, a little bit lower probably, but still we need to be sure how it's going to perform the second semester. We combine all of that, the returns on equity are around 13%.

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Operator [13]

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Our next question comes from Tiago Binsfeld from Itaú BBA.

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Tiago Binsfeld, Itaú Corretora de Valores S.A., Research Division - Analyst [14]

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I have just one question on Nequi. You now have 1.1 million users. I don't know if you shared the information, but if possible, can you tell us how many of these clients are not Bancolombia clients? Or in other words, how many of those Nequi clients do not have a Bancolombia account? And as the second part of this question, can you share a little bit more of details on your monetization strategy or the revenue potential of these Nequi clients?

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

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Thank you, Tiago. At this moment, around 500,000 customers of Nequi are not Bancolombia customers. Meaning that those are just Nequi clients, which, for us, is very positive. They are seeing in Nequi an alternative for their financial transactions as a platform that allows them to move money digitally. Regarding monetization, we have some -- the basic, the core products of the platform are free, meaning a savings account and you can withdraw money in any Bancolombia ATM or banking correspondent free of charge, but we have additional services like a prepaid card, in which we already have more than 100,000 prepaid cards.

We also have our joint venture with PayPal, and that has been very successful in which Nequi customers could bring money from their PayPal account and withdraw that money in pesos in Colombia. That has been very successful. We also have a top-up business growing. Additionally, we also have an agreement with the massive transportation system in managing -- metro managing in which you can top-up your cards for riding the metro, also growing very well. You can do payments and also we integrated Nequi with the QR strategy of Bancolombia. So now Nequi is accepted in any shop that receives Bancolombia QR. So -- and that's growing also. So as you see, there is a -- there are businesses around that generates fees. And we are reaching a number of customers that allow us to continue growing and to improving that returns of this platform.

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Operator [16]

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Our next question comes from Andres Soto from Santander.

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Andres Soto, Santander Investment Securities Inc., Research Division - Head of Andean Research [17]

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Congratulation on the results. My question is related to FX. Based on yesterday performance, the Colombian peso has depreciated almost 20% over the last 12 months. Last time we saw this performance, we saw an impact of that in terms of asset quality. I would like to understand what is the current exposure of your clients in terms of -- local clients, Colombian clients with U.S. dollars? And how do you assess this risk, putting some pressure on your asset quality indicators?

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [18]

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Thanks, Andres. Yes, there is a small portion of our loans in Colombia in U.S. dollar, that will be at around 5%. Most of them are related to trade business, that implies that this kind of companies then take these kind of loans, they have a protection because they are explorers or they have derivatives. So we don't see a separate this stage, a huge impact. Because, again, the size of the loan portfolio in U.S. dollars is very limited in Colombia. And on the other side, we are protecting our balance sheet against FX. Remember that around more than 20% of our equity resource is in U.S. dollar, that protects our solvency ratio and protects us against FX variations.

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Operator [19]

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Our next question comes from Julian Amaya from Davivienda Corredores.

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Julian Felipe Amaya Restrepo, Corredores Davivienda S.A., Research Division - Research Analyst [20]

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I have 2 questions. The first one is related to the growth of the consumer portfolio. Could you please explain a little bit further about this? And also, the performance of the operation in Guatemala, could you also explain about this and the trend in the future?

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

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Thank you, Julian. Regarding the consumer loans, we decided a couple of years ago that we want to add more consumer loans to our books. And we are using our analytics capabilities with -- in combination with additional other information to assess the creditworthiness of the -- of our current customers basically. And based on that, we are preapproving lines of credit to them. And that's why we are growing at the pace that we are growing, but most important is that we are growing without deterioration on the loans. As you see, the past dues loans on consumer loans are not increasing. And if you compare our past-due loans in Colombia with other institutions, it's even better than them. And so we are growing. We are growing to our -- in our own customer base based on information and analytics that we have on our customers. And the risk that we are taking is, we think, under control. Regarding Guatemala, let me pass that question to José Humberto.

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José Humberto Acosta Martin, Bancolombia S.A. - VP of Finance and CFO [22]

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Thank you, Juan. In Guatemala, we have been doing several things. The first is the key challenge there is how to become more efficient. Remember that the number of efficiency level at year ago were around 70%. Today, we are in the range of 65%. Our target is to reach a level of 50% efficiency ratio in 2020, how we are planning to do that with a combination of factors. First, we are reducing the number of branches. We came from more than 220 2 years ago, and we are expecting to close the year with 150 branches. The second one is the headcount. We announced a reduction of the headcount of 9% in April, which is helping to become more efficient. This is on the efficient side. On the quality of the loan portfolio side, we are increasing the level of provisioning, so adjusting under IFRS standards. So the combination of these 2 factors is the reason why it's affecting the financial statements for this second quarter.

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Operator [23]

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Our next question comes from Yuri Fernandes from JPMorgan.

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Yuri R. Fernandes, JP Morgan Chase & Co, Research Division - Analyst [24]

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Congratulations on the results. My first question is regarding the Central America business. If you can explain a little bit how you see El Salvador and Panama going on in the future? In particular, in Banco Agrícola, the cost of risk was really low. So my point is, like are those 20% ROE sustainable for that business or should we see more mid-teens ROEs for Banco Agrícola. And for Banistmo, it seems like the tax rate was a bit low. So if you can comment on that would be great. And my second question here is regarding a small asset sale you had, I think, COP 35 billion pretax. If you can comment on what was that if we should see additional asset sales in the future? That would be great as well.

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José Humberto Acosta Martin, Bancolombia S.A. - VP of Finance and CFO [25]

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Okay. Thank you. Regarding Central America and Banco Agrícola, as you mentioned, yes, the cost of risk this quarter is historically low, reaching the level or touching the level of 0.5%. Our forecast is one -- the cost of risk at the end of the year will be 1%. This is the Banco Agrícola operation, by far, the most profitable operation that we are having. We are expecting to close the year with a return on equity at around 17% and this is because of combination of cost controls, loan growth. They are growing in both in commercial and also in consumer loans. The NIMs are quite healthy. So this is a very good operation.

But again, cost of risk, we are forecasting a cost of risk at around 1.1% and 1.2%; and the coverage, which is relevant, that will be at around 250%. Regarding Banistmo, the reason why the taxation in Banistmo seems low this quarter is because we have an exposure in securities, and those securities are tax free, the dividend -- the interest that we received. So that explains part of the reduction of the taxation. Remember that the statutory tax in our international operation is at around 25% in those geographies and the statutory tax in Colombia is 37%, but the combination is reflecting a 28% this quarter, and the reason is that because of the good performance of the international operation.

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [26]

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And Yuri, regarding the COP 35 billion that you were asking about. This is the result of the sale of our operations in Peru. Remember, we completed that process during this quarter. So we booked this COP 35 billion as revenue.

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Operator [27]

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The next question comes from Nicolas Riva from Bank of America.

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Nicolas Alejandro Riva, BofA Merrill Lynch, Research Division - Research Analyst [28]

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I have a follow up on Ruta del Sol. You mentioned earlier in the call that you're expecting a decision from the tribunal today. I wanted to ask you, what's your expectation regarding that liquidation value, and how much more the bank's are going to get repaid? And if you can remind us your exposure, you mentioned 50% coverage of the exposure. I am estimating a number around $110 million for the gross exposure before it serves. But if you can remind us your exposure in dollars or Colombian in pesos, that will be helpful.

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

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Thank you, Nicolas. As I mentioned today, we are expecting the decision from the tribunal. Our position is that we lend money to a project, that money was invested. The road is there, it's not completed, but the money that we lend was invested in the project. So our expectations are that we will -- we should get repaid for the money that we lent and was invested. We need to wait for the results or for what is going there to say the tribunal today. But for us, it's clear that we lent money. The money was invested, and we should be repaid. Regarding our [exposure] we have an exposure of COP 390 billion, which is something around 120 -- $110 million with this volatility. Now I don't know how much is that in dollar. Around $110 million, $120 million, and we have a coverage of half of that already. We have reserves for that. We need to wait how this is going to evolve. We will analyze the result of -- we will see the decision. And based on that, we will take the actions accordingly to that decision.

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Operator [30]

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Our next question comes from Sebastián Gallego from CrediCorp Capital.

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Sebastián Gallego, CrediCorp Capital, Research Division - Associate of Andean Banks [31]

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I have 2 questions, mostly on strategy. The first one is related to a new branch format that you're launching and managing in El Tesoro. Can you please tell us how is that going? And if you're planning to expand that kind of branch model? The second question is regarding all the digital strategy and all the services you're providing with Nequi and all the products you have been mentioning. What's the status of those products and those services in Central America? Are you already implementing all that strategy or what stage are we on right now?

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

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Thank you, Sebastian. Regarding your first question, as you mentioned, we opened a branch, as we call it a lab. It's a branching -- we are experimenting with the different technologies and different interactions with our customers. It's a self-service area, which is doing pretty well and the acceptance of that self-service area is very positive. Also, the branch, the -- how the branch is organized is not like a traditional bank branch. And what we are doing is we are learning a lot. We are learning on how the customers like what we are offering, and we are adjusting the model. So the concept of lab is working pretty well.

Yes, we are planning to open a branch in Bogotá in this year. And we will continue evolving on this concept. And as I mentioned, it's a concept in which we interact with our customers. We learn and we adjust, and we will be adding some of the things that we are learning in the traditional branch network. So it's part of the process of our evolution and our relationship with our customers.

Regarding our digital platforms in Central America, Nequi was launched in Panama 2 years ago. It's growing well. It's very well accepted. It's also an alternative to the traditional banking offer in Panama. We are very happy with the results in -- of Nequi in Panama. And in the case of El Salvador and Guatemala, we are launching new products in El Salvador, the QR code strategies there. The app, it's -- we launch a new app this year. So it's also going very well, and we are leading that process also in Central America. In the case of bank, our focus now, it's different. We are working on cost. We are working on the number of branches. So this year it's going to be more on organizing and having the right platform. And next year, we will start to deploy the strategy in Guatemala.

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Operator [33]

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Our next question comes from Alonso Garcia from Crédit Suisse.

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Ricardo Alonso Garcia, Crédit Suisse AG, Research Division - Research Analyst [34]

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My question is regarding regulation. I mean Nequi (inaudible) a bill or law that's intended to eliminate the number of banking fees. So that removes the significant source of risk for banks in Colombia. But I want to hear from you, if you are seeing any sort of similar risk consumer proposal to appear in the foreseeable future? Or any other source of risk on the regulatory front in the coming quarters?

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [35]

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Thank you, Alonso, for your question. Regarding regulation, and you mentioned that project that was -- when going through Congress last semester, I think that's a process that we are going to continue seeing. But our position is that if we advance in our strategy of offering better products, digital products, in many cases, free products, that's the way that we are going to keep moving on the direction of having a good offer to our customers and not letting those initiatives to cut down on how we go to the market. So there are some initiatives already in Congress, but they are much more moderate. And many of them are also in line of what we are thinking. So we will continue to see that. I think it's a trend all around the world. But if we keep improving our offer and being closer and adding new customers, we think we can handle well this trend that is there in the market.

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Operator [36]

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Our next question comes from Carlos Gomez from HSBC.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [37]

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I have 2 questions. And the first one refers to El Salvador. Do I understand correctly that you expect now a medium-term ROE of 17%? And how comfortable are you lending in a sort of -- it has been a difficult market and not a very high growing economy for a number of years. Are you more comfortable now than you were in the past? My second question refers to capital. You may have mentioned it earlier and I might have missed it, can you give us your estimated time line for Basel III implementation right now and remind us of the impact?

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [38]

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Thank you, Carlos. Regarding El Salvador, yes, we feel comfortable in El Salvador. We have been feeling comfortable since we are there. Economy is not growing much. You are right. But we are market leaders, the margins are good. The cost of credit is low. And we are -- the bank is more efficient. So we have a combination that is pretty positive in El Salvador. So we will think that ROEs in El Salvador will continue around 16%, 17%. It's not something that we just saw on 1 quarter or it's -- but we think that in the midterm, we can achieve those returns. And it's a combination. I mean we are investing in El Salvador in new technologies, as I mentioned, in digital. The cost of risk is low. The economy is not growing much, but we are market leaders, and we manage to grow our loan portfolio on a decent numbers and costs are under control. So we really believe that we can maintain those kind of returns in El Salvador.

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José Humberto Acosta Martin, Bancolombia S.A. - VP of Finance and CFO [39]

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And regarding your second question, we are expecting the new regulation from the regulator, and they are adjusting the risk-weighted assets. So at the beginning, I mean, a year ago, we thought that we will begin the process next year, but we are not sure that will take place the second half of 2020 or we have to wait till 2021. So again, we didn't receive any particular measures from the regulator and any particular decrease. So we are expecting. Once we know, we will let you know to all of you when it's going to happen finally, the Basel III in Colombia.

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Operator [40]

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We have no further questions at this time. Thank you, ladies and gentlemen. I will now turn back the presentation to Mr. Mora, Chief Executive Officer of Bancolombia, for final remarks.

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Juan Carlos Mora Uribe, Bancolombia S.A. - President & CEO [41]

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Thank you, everybody, for your interest in our conference call. We think that the results that we presented are good. We are confident that these results are the base to continue on the trends that we are following. So we will expect that the second semester of the year performs similarly to the first semester. Again, thank you very much. And we expect you in the next conference call for the third quarter of 2019. Have a good day.

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Operator [42]

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