Q3 2022 Grupo Aval Acciones y Valores SA Earnings Call
Welcome to the third quarter 2022 consolidated results under <unk>.
This conference call My name is Richard and I'll be your operator for today's call.
Critical about an extra on antibiotics, it's yeah.
<unk> is an issuer of securities in Colombia, and the United States SEC.
As such it is subject to compliance with securities regulation in Colombia, and applicable U S Securities regulation.
Grupo Bal is also subject to inspection and supervision of the superintendency of finance as holding company of your valued financial conglomerate.
The consolidated financial information included in this document is presented in accordance with I F. R. S. As currently issued by the ISP.
Details of the calculations of non <unk> measures, such as <unk> and ROE AE among others are explained when required in this report.
Bundle they bought that executed a spinoff of a 75% equity stake N P. A C holding international Corp.
Try to its shareholders and Grupo Bal subsequently spun off of its equity interest to its shareholders on March 29 2022.
Prior to the spin off.
But with that what's the direct parent of BHI group.
Grupo <unk> has retained an indirect stake of approximately 17, 2% and BHI.
Representing our proportional interest in the 25% equity stake N BHI retained by Banco de Bogota.
This interest and BHI is reported as discontinued operations for reporting periods prior to the spin off and will be reported under the share of profit.
<unk> equity accounted Investees net of tax equity method line item for subsequent periods.
As a result for comparability purposes, we are prepared and present, a supplemental unaudited pro forma financial information for the nine months ended September 30th 2021 that assumes the spinoff was not completed on January one 2021.
The supplemental unaudited pro forma financial information does not purport to be indicative of our results of operations or financial position at the relative transactions occurred on the dates assumed and does not project our results of operations or financial position for any future period or date.
The pro forma financial information is unaudited and the completion of the external auditor for the year ended December 31, 2022 May result in adjustments to the unaudited pro forma financial information presented herein.
Any such adjustments may be material.
This report includes forward looking statements in some cases you can identify these forward looking statements by words, such as May will should expects plans anticipates believes estimates predicts potential or continue or the negative of these and.
Other comparable words.
Actual results and events may differ materially from those anticipated herein as a consequence of changes in general economic and business conditions changes in interest and currency rates and other risks described from time to time in our filings with the right sort of ask you another valores.
And that S E T.
Recipients of this document are responsible for the assessment and use of the information provided herein.
Matters described in this presentation and our knowledge of them may change extensively and materially over time, but we expressly disclaim any obligation to review update or correct. The information provided in this report, including any forward looking statements and do not intend to provide any update for such material.
Developments prior to our next earnings report.
The content of this document and the figures included herein are intended to provide a summary of the subjects discussed rather than a comprehensive description.
When applicable in this document we refer to billions as.
<unk> of millions.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
Now I'll turn the call over to Mr. Luis Carlos Sarmiento, Gutierrez, Chief Executive Officer, Mr. Luis Carlos Sarmiento Gutierrez you may begin.
Good morning, and thank you all for joining this quarter's conference call before Diego provides a detailed look at our numbers I will provide an overview of Columbia's macro scenario followed by a quick update of our digital efforts and a few highlights of our financial performance.
Let's start with the macroeconomic scenario.
To begin with during the third quarter. The world continues to be characterized by resilient inflation and contracted and monetary policies of which Columbia was no exception.
Due to the combination of these macroeconomic circumstances the effects of the war in Ukraine, the energy market the constraint of global supply chains, and the weaker economic performance of China, the largest economies of the world significantly slowed down during 2022.
In contrast, Columbia distinguished itself because of its robust continued GDP growth.
Said that a significant deceleration seems unavoidable for next year.
In fact, the IMF estimates that there is a 25.
Percent chance that 2023 global growth will fall below 2% and even one third of the world's economies are at risk of slipping into recession, but for the time being the IMF <unk> global GDP growth moderating from six 1% in 2021 to three 2% in two.
<unk> 22, and two 7% in 2023.
In contrast, Columbia is expected to grow at over twice the global average during 2022, but slower in 2023.
Lumpier GDP grew seven 1% during the third quarter of 2022, when compared to the same quarter of last year, and one 6% on a quarterly basis.
This performance was explained by the strength of private consumption, which grew seven 8% and represented 74% of GDP.
From the demand side, the most dynamic relevant sectors, where commercial activities that grew seven 9% manufacturing that grew seven 3% and to a lesser degree recreation and entertainment and construction and communications.
The IMF now expects that Colombia's growth for 2022 will rise to seven 6% revised upward from six 3% in July .
You would also expect a deceleration to two 2% in 2023.
The Colombian Central Bank adjusted its 2022 projections to seven 9% from six 9% and reduced our projections for 2020, 320.5% from <unk>, 7%.
We now anticipate GDP growth between 7% and seven 5% in 2022.
And between one 7% and 2% for 2023.
The labor market has also continued to improve and the jobs GAAP cost by the pandemic is now practically disappeared.
In September the national unemployment rate reached $10, 7% 120 basis points better than September 2021, while the average unemployment rate during the third quarter was 10, 8% compared to 11% during the second quarter and 12, 6% a year earlier.
This context, we expect the annual unemployment rate to fall to an average of attainment and a 5% to 11% at year's end.
Colombia as the rest of the world has been disrupted by two digit inflation, which has triggered steep interest rate increases by the central Bank.
Furthermore, the recent acceleration in Colombia as inflation has been primarily boosted by higher food prices. In fact 12 months inflation reached 12, 22% in October the highest it has been in over 20 years.
Food inflation is running above 27% on an annual basis, mainly because of the prices of fertilizers bad weather and the depreciation of the peso that weighs heavily on the price of imports logically, including agricultural inputs.
On the other hand rents prices, which accounted for around 25% of total inflation have experienced a moderate increase in this context, we anticipate that 12 month inflation could reached 11, 7% by year's end and six 8% in 2023.
As mentioned the Central Bank has conducted a string of repo rate increases up to 11% in October a combined total increase of 925 basis points since September 2021.
Considering the persistence of inflation, we don't rule out the possibility of one additional height of 100 basis points in December which would bring the year end rate to 12%.
Even though interest rates could remain high for some time to re anchor inflation expectations within targets. The central bank should begin to reduce rates during 2023 as inflation begins to recede.
Monetary policy adjustments of central banks around the world the risk of recession in the world's main economies and the escalation of the geopolitical conflict in Europe have led to a strengthening of the global exchange rate.
In Colombia, just recently the rate peaked at 5100 basis per dollar representing a 28% devaluation since the end of 2021. However, it is currently retreated to 4900 basis per dollar or 23% devaluation for the year.
This volatility no doubt also reflects specific market concerns regarding the vulnerabilities of the Colombian economy in particular, its trade balance its dependence on external financing in the context of higher borrowing costs as well as uncertainty regarding potential policy shifts promoted by the incoming administration.
During August Columbia Street balanced registered a record high $2 $2 billion deficit. Despite a 66% recovery in oil exports on an annual basis.
Market consensus suggests that the country could end the year with a current account deficit wider than 5% of GDP.
To attenuate the volatility in recent days and an about face of a previous statement. The government mentioned the possibility of signing new oil contracts, depending on the country's economic conditions.
In addition, the agreement by Congress in the 2022 tax reform soon to become law should contribute to reduce the physical deficit.
Reform is now expected to increase tax billings by 15 to 20 Trillium basis down from the original expectation of 25 trillion.
It includes a surcharge for the oil and coal sector, which accounts for nearly half of the expected revenue.
Surcharge for the hydroelectric sector and an increase of two additional percentage points on the surcharge for the financial sector, which will now be 5%.
On the physical front the government now expects a deficit of five 6% of GDP in 2022, an improvement versus the seven 1% recorded in 2021 and to six 5% initially forecasted reflecting the strong economic rebound and the positive effect of higher oil prices and tax collections in.
Fact tax revenue grew 29, 2% to sub September 2022, when compared to September 2021.
This improved physical scenario could contribute to a lower ratio of net public debt to GDP, a 56, 5% by year end down from 61% at the end of 2021.
Moving on the source and some numbers regarding our digital strategy.
At the end of September digital customers of a bulge banks totaled slightly less than 5 million well Neil counts of our digital wallet daily have started to ramp up and are now at approximately 600000.
Valet has also successfully closed several banking as a service agreements.
<unk> the lifestyles pay wallet.
The wallet from Chile.
Take wallow, which specializes in collections and payments and through all our fintech that will provide working capital microcredit.
Our banks sold over $1 7 million digital products in the first nine months of the year, an increase of 52% versus the first nine months of 2021, our total digital share continues around 60%.
PDL ratio of our digital loan portfolio or approximately 60% better than PDL ratios of our traditional portfolio.
Digital transactions represented almost 70% of total transactions and increased by 50% over the year.
In the same period transactions conducted in our branches decreased 12, 5%.
Since we launched our first mobility ecosystem initiative Galleria.
Memberships have increased by 17 X qualify credit leads increased by $1 Nymex and the leads to disbursements conversion rate.
In September we launched our housing digital ecosystem Metro, which is currently the second largest real estate portal of Columbia with more than 200 affiliated real estate agency and construction companies and around 250000 houses listed for sale and rent.
The use of advanced analytic platforms.
Fly to our client management activity has improved marketing spending effectiveness and increase client lifetime value.
Tilda for example has reduced our customer acquisition cost of retail customers below traditional acquisition channels, such as Facebook and Google materially increasing marketing spending effectiveness.
Campaigns ran Ram.
Our other platform Augusta, our data Lake platform.
Our data Lake platform achieved its 25, 24% increase in the use of credit cards and clients with high attrition risk.
Augusta has yielded improvements of approximately 10% in recovery of written off loans.
Finally in a minute Diego will refer in detail to our financial performance during the third quarter of 2022 and provide guidance for 2023, but before that I would highlight the following.
This third quarter was characterized by satisfactory growth of our loan portfolio and by improving loan quality. However, we did run into some headwinds.
First while the current contractionary monetary policy serves to quickly reprice the loan portfolios of our mostly commercial lending banks, but with dine Occidental.
Aster, then the rising cost of funds.
Same effect squeezes interest rate margins to mostly rebuild lending banks.
And popular.
Obviously, it takes longer for the consumer loan portfolios of these banks to reprice.
And in the meantime, the cost of funds of their deposit basis, mostly savings accounts and time deposits increased faster than the rate of its loan portfolio.
Secondly, fixed rate investments not classified as held to maturity also suffered the consequences of rising yield curves P&L, where OCI account.
Thirdly, although coffee Columbia energy infrastructure projects contributed handsomely to the nonfinancial sector results and in fact grew by almost 75% versus a year ago. Its contribution was almost a 175 billion. This was less when compared to the second quarter of this year, principally due to inflation accounting.
Fourthly personnel expenses were affected by the implementation of salary adjustments derived from the negotiation with banking unions and from the accrual and pavement of employee bonuses across the group.
Sort of last year's excellent financial results.
Finally <unk>.
The effective income tax rate during the quarter was almost 30% higher than last quarter's income tax rate, mainly because of the sources of pretax income.
However, we will continue to navigate through this challenging environment deploying cost control initiatives designing new investment portfolio strategies.
Gaining loan pricing discipline looking.
Looking for Michigan in the cost of deposits and continuing to invest in advanced analytics payment strategies and digital transformation, improving our customers' experiences.
And the effectiveness of our sales and marketing efforts.
With that I. Thank you for your attention and I pass on the presentation to Diego.
Thank you Carlos beginning on page seven on comparable phases assets grew three 5% during the quarter and 14, 6% year on year over the quarter loans gained share in the mix given the strong growth experienced while cash cost sharing the mix due to the payment of our 1 billion.
That's it.
Got it.
Moving to page eight we present the evolution of our loans on comparable basis gross loans grew five 1% during the quarter and 16, 5% over the year the highest figures since we adopted <unk> in 2015, and the second highest quarterly growth slightly below the five 8% Register.
During the COVID-19 pandemic hit in first quarter twin point.
Commercial loans.
Growth reached a four 5% over the quarter and accelerated to 15, 4% year on year.
Consumer loans grew five 8% over the quarter and 17, 3% year on year.
Personal loans had the strongest dynamism growing at 10, 9% during the quarter and 29, 2% year on year recovering from the room lost during this two years of pandemic.
This increase in risk appetite, followed the end of relieves positive trends in credit quality and a strong macro environment over the past two quarters.
Automobile loans credit cards, and payroll loans grew 7% five 9% and three 8% over the quarter, taking annual growth to 18, 3% 16, 4% and 13, 6% respectively.
Payroll loans still constitute most of the consumer loan portfolio with 57, 7% of the total followed by personal loans and credit cards with 21, 5% and 11, 5% respectively.
Auto loans represent eight 9% of our consumer book.
Mortgages expanded six 8% over the quarter and 21, 4% year on year, we expect loan growth to moderate in 2023, driven by lower inflation and GDP growth higher average interest rates and a softer economic outlook, both locally and globally.
On pages, nine and 10, we present several loan portfolio quality ratios on a comparable basis.
Had anticipated the quality of our loan portfolios continued improving metric both by stages and <unk>, resulting in a stable cost of risk over the quarter.
<unk> loans now represent 86, 3% of our gross loans, improving from 81, 7% and 84, 3% 12 and three months earlier.
Portion of stage, two and stage three loans.
<unk> continued improving over the quarter in all of our loan portfolios as relieves continued expiring credit risk overlays, where progressively removed and charge offs occur.
Regarding the link.
90, <unk> fell to $3, 23% or 57 basis points improvement over 12 months and 10 basis points improvement over three months.
30, the APL fell to 433%, a 64 basis points improvement over 12 months and five basis points over three months.
Cost of risk net of recoveries was relatively stable over the year in the quarter at 136%.
Finally, the ratio of charge offs to average 90 day Npls was <unk> 63 times.
In page 11, we present funding and deposit evolution on a comparable basis.
Funding growth during the quarter was close to that of our loans, maintaining a stable deposits to net loans ratio up 99%.
Deposits, which account for 70% of our funding increased four 1% during the quarter and 14, 4% driven by growth in.
Deposits that favors SWT of funding.
On page 12, we present evolution of our Tahoe and attributable equity and the capital adequacy ratio of our banks as reported.
Our total equity grew three 3% over the quarter.
Attributable equity increased two 1% driven by the contribution of net income.
Decreases of our equity will reflect the spin up 75% of the HIV in March 2022.
Solvency ratios slightly filled in some of our banks due to the increase in risk weighted assets, resulting from strong loan growth and the lower valuations of our investment portfolio through OCI.
From the acute increasing interest rates described by these cuts.
On page 13, we present, our yield on loans cost of funds spreads and NIM on a comparable basis.
Our overall NIM fell 12 basis points to 352% during the quarter driven by a compression of our NIM on loans and a negative NIM on investments.
The quarter Columbia Central Bank increased its reference rate by 250 basis points from seven 5% to 10%.
Two anchor expectations I missed inflationary pressures.
In addition, the speed at which monetary policy has been submitted to cost of funds has been substantially faster. During this cycle relative to the past rate increase cycles due to recently increased requirements of long term funding to comply with the net stable funding ratio in Spanish introduced by the.
Patients are Colombia to basal III.
The magnitude and speed of the current interest rate cycle has compressed the NIM of retail loans. Good some of the higher credit quality loans, such as payroll loans are priced at fixed rates. We expect this pressure to receipt during the second half of 2020 as funding prices driven by the reduction in the Central Bank.
Intervention rate and as fixed rate loans continued repricing up.
While we expect the pressure on NIM on our fixed rate retail portfolio to persist over the next few quarters in.
In this context Nemo loans in our banking segment contracted 30 basis points from the quarter.
The higher funding cost of our nonfinancial activity resulted in an overall NIM on loans of 455% contracting 36 basis points during the quarter.
Bear in mind that the increase in interest expenses associated with the funding of our nonfinancial activity was upset by a strong performance of the nonfinancial sector presented on the following page that benefits from inflation.
Tailwind on our commercial lending activity that we've processed promptly from a hawkish monetary policy.
31 basis points quarter over quarter increase.
On commercial loans, while headwinds on our NIM and retail loans that have longer repricing periods and take longer to benefit from this environment contracted 127.
<unk> points quarter on quarter.
Newmont investments was negative 65% from deepwater.
Impacted by the performance of Mark to market fixed income in a rising rate environment, New money investment includes the performance of our investments held by port of any under the mandatory stabilization reserve.
On page 14, we present net fees and other income and comparable basis.
Gross fee income increased one 8% year on year and 7% quarter on quarter.
Net fee income decreased three 3% year over year and increased seven 1% quarter on quarter.
As mentioned on our last fall pension funds fees decreased due to lower performance based fees and higher insurance premiums associated with the increase in mortality rates during the pandemic.
Income from the nonfinancial sector remained strong although softer than a particularly high second quarter as mentioned in the past financial assets from our concession agreements benefit from higher inflation and the depreciation of the Colombian peso.
Other income decreased during the quarter, mainly because of the softer results of BHI.
The appreciation of the Costa Rican colon and the increased impairment losses, following the end up releasing.
Negatively impacted U S denominated results.
Appreciation of the average peso rates.
Over the quarter.
Partially offset this performance.
On page 15, we present, some efficiency ratios on comparable basis.
Two assets had a slight increase over the quarter and remained flat versus a year earlier at two 7%.
Cost to income increased to 47, 7% driven by softer results from our nonfinancial sector relative to a particularly strong results during the second quarter and by a compression in our NIM on retail loans quarterly.
Quarterly expenses increased 14, 6% relative to third quarter of 2021 with personnel expenses, increasing eight 8% and administrative expenses increasing 21%.
By increases in operating taxes, particularly the industry and commerce municipal taxes, and depreciation of 14% of the quarterly average exchange rate that means the effects ICU related opex in Colombia.
And overall expenses in the mid teens.
Quarterly expenses grew six 8% driven by personal expenses that grew 8% as salary.
Salary adjustments and annual bonuses were recognized in some of our companies during this quarter.
Administrative expenses grew seven 7% over the quarter.
Finally on page 16, we present, our net income and profitability ratios as reported attributes.
Attributable net income for the quarter was 408 billion pesos or 17, 2% basis per share.
Return on average assets and our return on average equity for the quarter were one 3% and nine 8% respectively.
Before we move into questions.
I will now summarize our general guidance for 'twenty two first.
We expect 2022 loan growth to be in the 16% with commercial loans growing at 15% and retail loans at 17%, we expect our cost of risk net of recoveries to be in the 145%. There we expect full year NIM to be in the three and three quarters area.
With NIM on loans in the four and three quarters area.
We expect cost to assets to be in the two 6% area.
Our fee income ratio to be in the 18% target, we expect our nonfinancial sector to be one two times that of 2021.
Finally, we expect our full year reported return on average equity.
In the 18% dairy.
And that is return includes extraordinary income from the consolidation of 75% of the HIV.
Regarding guidance for 2023, we expect loan growth to be in the 12% area with commercial loans growing in the 12% diverse retail loans in the 13% that we.
We expect our cost of risk net of recoveries to slightly increased to one 5%.
We expect full year NIM to be in the three and three quarters to 4% area with Neiman loans in the four and three quarters area.
Our new money investments is expected to recover to positive ground.
We expect cost to assets to slightly for to be in the two and a half to two 6% range. We expect our fee income ratio to be in the 20%, we expect our nonfinancial sector to contribute 70% of that contributed in 2022.
Finally, we expect our full year reported return on average equity.
In the 13% to 14% range.
We're now open for questions.
Thank you.
We will now begin the question and answer session. If you have a question. Please press zero then one on you touched on phone.
If you wish to be removed from the queue. Please press zero two.
If you are using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press zero then one on your Touchtone phone.
We're standing by for questions.
Okay.
And our first question comes from Mr. Nicolas Riva from Bank of America. Please go ahead.
Thanks, very much with Carlos on there for the chance to ask questions. A couple of questions I'm going to make them all at once.
Cutoff. So the first one on the tax reform.
If you can confirm if there is going to be a surcharge in the income tax rate for the banks, a 500 basis points starting.
Next year and therefore.
The impact in.
Starting with our income tax rate for all of it would be 200 basis points given the current severance charge for the banks.
First question on the tax reform second question on the pension reform I believe has not been presented to Congress, yet, but if you can give us your latest thoughts in terms of how you think.
Look on the impact for any of it.
Groupon.
Third question funding needs for the Hong Kong you include a chart.
George just wanted the Holdco year by your it seems to me you don't have any large maturities off these after the payment of the 22, we see in September .
Therefore, I would assume no no no need to come to the global market next year, but if you can give us your thoughts on that and then fourth double leverage for the Holdco given that these guys have already particular definition.
One thing that I know this was after you paid the $1 billion maturity in September .
There was no there was no.
Dropping the double leverage after about if you can tell us why.
Yes.
And let me, let me take a few of those.
And we will take the pension.
Regarding the tax reform you are right.
5% or five percentage points start charge of which we already have three percentage points. Therefore, the marginal change will be.
<unk> two percentage points affecting only the banking business that we have so.
Businesses, such as what comes from the Nonfinancial sector what comes from.
Equity method and other pieces will not affect that therefore.
The impact will not be additional 200 basis points on that overall effective tax rate rigs.
Regarding funding needs for the hopefully you're absolutely right. We're already done with that our next maturity comes around in 2030.
International bonds local bonds will only come around in almost 24 months from now and there are minor additional.
Refinancing of around $50 million.
When you add them throughout the last months up next year, so no need of cash at this point.
With what we've already done.
September then regarding double leverage.
What happened is exactly what what should be happening because the way double leverage is calculated is you take your investments.
And you divide them by your equity given that what we had was a transaction from cash that took away liabilities, it's not affecting either of those so what reduces double leverage is that combination of two things. One is as time goes by and we.
Retained earnings that generate some benefit reduced double leverage and then.
One of the pieces that.
Adds to our double leverage is the the 81 bond that we bought from.
That was a non core five that has around three years to go or short of three years to go and that should be a step down in our leverage when and if they exercise that.
Paul.
Okay, Let me let me try.
To be as brief as I can about the pension reform that the government plans to bring to Congress I believe.
May.
2023 years, so basically about.
Mid year next year, the pension reform will be percentage of Congress.
<unk>.
To talk about how it will affect.
You have to.
Bear in mind.
How what would need to makes it.
Its revenue.
And the way that it does it comes from four sources basically.
First of all there are obligatory contributions to pensions that comes from.
Employees and.
We would take a part of their salary every month and the companies. They work for they also contributed with a part of that money the money goes to.
Our monies go to their to their own accounts input, we need and we.
We need is.
Paid with a percentage of the total funds that are contributed every month.
Of the monies.
That are paid to board renewed the contribution of the total contribution from the employee in the company they work for.
That commission that we need receives based on those monies.
Is basically split out two ways.
On the one hand.
The insurance companies are paid.
A commission.
And the insurance companies basically charge.
For premium for insurance in case the employee.
Has to become.
Has to pension.
Before the obligatory that required H and number of weeks of work.
Nowadays.
Because especially after after COVID-19.
Premiums as you know insurance premiums have reason all over the world.
And insurance premiums charge.
To protect the these.
Sure.
The need for people to two.
Two to become pensioned before Theyre times have really risen and.
To the point.
Of the total commission that is charged on those monies will be needed is receiving almost nothing that the maximum.
That can be charged of those monies as 3%.
And right now the insurance companies are charging about two seven or 270 basis points. So it is only retaining about 30 basis points of those months.
But we need to also make some money on.
The managing of CIS on DS.
And that those are monies that come in in February 14 of every year and basically they are sort of withdrawn.
From from the people from the employees that.
Who they belonged to throughout the year, so far when it make some money on managing the funds not not under on a contribution of what is comes in every year, but but on the average monies.
And then thirdly, there is a voluntary pension funds and.
For Port renewed that's really not a very very big business.
Firstly and most importantly.
We need manages its own capital.
Capital requirements are pension funds are pretty substantial.
The law says that that capital is basically.
Maintaining cash and it has to be invested in the same way that we need invest the funds.
Its affiliated.
Affiliated.
Please so.
So.
The money that we need really makes us substantially comes.
From its own capital.
And the.
The yields that for when you would get on those.
Funds that it manages its own capital.
All of this very long story to tell you that most of the revenue the port we need makes.
From that fourth source upping its own capital managed and.
And invested therefore.
What should happen if the pension reform is passed the way that it's been presented already.
It's been talked about which is that employees that make up.
Up to four minimum salaries.
<unk>.
$800 more or less a month.
That they will start contributing to the private pension funds and instead.
Start to contribute directly to the government owned pension funds <unk>.
Then that means that obviously the monthly revenues coming in Newport, we need we will obviously diminish and diminish substantially by about 60% is the first the first calculation that I have.
Since.
What we need is really not making that much money towards tone total revenues from the <unk> contributor to every month because the commission is ending mostly in the insurance companies.
And then really.
First look we will indicate that the diminished.
The less money received by bipolar we need do.
Due to those commissions were really not affect its bottom line as much as obviously, how they manage their own capital in the in the funds that it invests.
So we.
We will see I mean first of all in just two two.
To finish with.
See first.
<unk>.
The reform is presented to Congress.
It can be we will see how it comes out of Congress because as you know laws come into US one way and then when they are finally.
When they finally become law in Congress as they've changed substantially most of the time.
And then thirdly, the most important thing is to keep in mind that nowadays that actually.
The.
But when you use the funds are not really that much dependent anymore on the monies that come in every month, but mostly on how they manage their own portfolio.
Thank you. Our next question comes from Yuri Fernandes from Jpmorgan.
Highlights Carlos Diego. Thank you will for the percent of asking questions I had the first one regarding your FX losses this quarter and if you can provide more color explain what happened there.
Could it be something more recurring.
Was a one hit this quarter.
So first question regarding FX losses.
I have a second one regarding also data.
<unk>, usually we used to pay a lot of additional loan Banco de Bogota, but this quarter. We note some decrease unless you think that.
The quarter to one decrease about 100 deep.
And what happened there like what is the outlook for auto data capitalization.
And if I may a third and last one guys.
We see the evolution of our discussion before are all right.
We understand like Colombia has been suffering a lot.
But is there any.
Movement from management too.
Proof of that kind of evaluation. So for instance, launched buyback program. This is something that you have been considering on that regard. Thank you very much.
Okay.
Regarding FX losses.
<unk>.
The way to think about FX losses, as Theres actually two accounts or three accounts that add together what is happening on the epic side is what happens.
Foreign exchange gains.
Net and I'm, referring you to page 14 of the report.
Net income in large part of the presentation on financial derivatives and trading income and derivatives take a look at that what we had during the second quarter was negative 109 and for the third quarter was negative $1 54. So.
What is happening here is we have upsetting numbers, it's actually a number that has become more expensive as depreciations that are part of derivatives.
Are much higher than what they normally should be however, there has been little change throughout the quarter, then regarding capitalization of bankruptcy and what Youre seeing here is bankruptcy entity over.
Over the past few years has been working on improving its commercial effectiveness and they've been quite successful in growing both on the corporate business and the retail business and that's the reason why they've been consuming.
Consuming capital in some sense give.
Given that.
The the OCI from fixed income has been particularly negative over the past the past day, a few months than what would normally happen that would be equity growing at the same pace as you would have the loan portfolio.
Successful growing bank Banco looks here with basically equate however, we have that negative and Thats. The reason when you have a positive commercial performance, but you have the changes in OCI you end up consuming capital that's the story of bankruptcy.
Then regarding actions to change valuation if I got your question right. Then I apologize here. If you can repeat it what have we done or are we planning something about it.
If that was your question at this point, we haven't announced any action in that sense. What we're doing as management is working on increasing net income in such a manner that we're able to generate intrinsic value.
If I got your last question right Judy.
No.
Was there idea, but it was more like do you plan to increase dividend I don't know if thats the right thing to do now given the uncertainty in Colombia, but buybacks.
Any kind of.
Change on capital distribution.
Given the share prices.
Was it just at both buybacks basically.
If we take any action, we will announce it to the market at that point, we can't announce anything as of today.
Okay. Thank you very much.
Thank you. Our next question online comes from <unk> <unk> from <unk>. Please go ahead.
Hi, everyone. Thank you for having my question.
I have two question on my first question is regarding.
The DHA.
I don't know administration have any opinion or our.
Our analyses have.
About it.
Grupo I'll have been going to consider any opportunity to sale.
He has an MBA.
And my second question, they will likely respond better.
Why you weren't expecting.
Okay.
ROE of 13% for the next year, we have seen.
Good.
Out of the loan portfolio, we see that controlling cost salaries and improvement of what it will be the fact that we're doing.
Jim.
Purple next year. Thank you.
Okay.
Regarding ehi fully and we have to be very careful at this point, because thats, how efficient that bank with us.
<unk> should be taking and hasnt taken yet.
Partys participation in.
This tender offer.
I can tell you without being visible.
Analysis of what's going on.
What will happen.
Banquet sales.
Investment in BHI day, one they will get cash and they will liberate some solvency and improve their fine as well so that they won so depending on how they invest that money over time, they will get some sort of return at this point that the only thing I can comment.
Stan if you go out to market and check what you can get from risk free in Colombia, It's basically.
The improvement over the rate that you currently have long term, we need to see what banquet suggest but we are in this process, improving solvency and improving the sustained position that gives them room for mobility, so even though I can't comment and we have to be very careful because this is not a decision.
That needs to be taken by by bank level, what does board, but these are some basics not a full analysis about some basic things that need to be taken into account.
Then.
I have to apologize, but I didn't get your question on the 13%.
Ro.
So if you can kind of try to rephrase it.
Okay.
I would like to understand why you expect generic problem next year.
Good performance has been loan growth and a stable cost of weak and uneven improvement on my.
What are the main reasons that we have these radio channel.
The next year.
From.
BHI.
<unk>.
It's been up.
But we know that the ROE you will be with us for the next year.
Yes.
You are right the main explanation of why.
Roy falls relative to this year is that.
Fair enough.
However, I'm not sure if thats your question, but part of what I need to say is a 13% to 14% ROE is not what we expect to use stable ROA.
But we are moving forward and the reason why we are prudent on the <unk> that we're guiding to is at this point, we see pressure on the NIM.
On the retail lending side, therefore, we expect that to overflow into next year negatively affecting the first half of the year. So what we should be seeing next year is a first half that is not representative of what it looks like and we're going to have an.
Over the rest of the year. So when you average those out you end up let's call. It two par ROA for next year.
Thank you. Our next question comes from classic Winker from Citigroup. Please go ahead.
Hi, everyone. Good morning, and thank you for taking my questions I have a couple of follow ups.
The first one is with regard to infrastructure income performance, we are seeing a very good performance in the past couple of quarters.
Both train train three guidance implies relatively softer performance. It seems to me I just wanted to confirm if this is due to <unk>.
Inflation, eventually and I would guess.
FX also these two variables eventually stabilizing for next year and those.
Not being like very important very strong tailwind.
Our infrastructure income that.
That would be my first question.
Second question is with regards to the effective tax rate I really didn't understand.
Why the effective tax rate was a bit higher especially.
When considering our pretax profit.
A bit softer both quarter over quarter and year on year. So.
If you could clarify a bit wide.
Let's say software earnings.
The effective tax rate was.
Higher than that.
Lastly, I am not sure if you could comment a little bit on.
What do you think would be a more normalized sort of sustainable Roe level.
Moving moved.
Moving forward. Thank you very much.
Okay regarding improper performance Youre, absolutely right and just to remind you of what our initial guidance quality coal was.
I'm basically going back.
A year in time, we had anticipated that the Columbia now should be reducing its contribution in around 25%. However, as you very well pointed out interest inflation and FX do favor our concessions they do favor those because what they do is they generate.
Increasing earnings overtime for those concessions that get marked into the financial assets from the concession. So what we actually had three this year was an unexpected inflation and depreciation that brought in unexpected over performance of the <unk>.
Concessions devaluation devaluation.
And.
And what we expect to see next year is exactly what you said it is a normalization in both inflation and depreciation that should bring us back to normal.
To add as well that Columbia has been working on generating.
The opportunities for new projects some of those infrastructure that are very well advanced that hadn't begun in the past, but that had already been awarded to quality, Colombia, and they're looking at as well in other opportunities in the energy sector that should continue to help them bring them over time then to your normally.
<unk> Roe.
A key assumption for that is that inflation is going back to the 300% to 4% area.
To make numbers of ROE comparable in that sense in that sort of scenario, we're expecting our OE to be north of 15% in a sustainable manner.
And then you wanted to two <unk>.
You asked about the effective tax rate during this quarter versus last quarter and.
What happens and it's tough.
Tough to analyze but.
As you said, where you had we had softer earnings before taxes, but then you have to see where the earnings come from because for example, every earning that comes from the Central American Operation will does not pay taxes here because it has already paid taxes in Central America now asked.
Central American operations effect in pre income tax decreases than most or some.
Of the remaining large portion of our remaining pre tax income is tax so therefore.
What happens is just that the sources of the pretax income.
Deferred vary from one quarter to the other and then depending on the source where the income comes from it has.
Income taxes were not so.
So.
That's exactly what happened this quarter the different sources of the pre tax income made the taxing the tax rates seem more significant than in previous quarters.
Thank you.
Our next question comes from Daniel Mora from Credit Corp Capital. Please go ahead.
Hi, good morning, Thank you for taking questions.
I have a couple of questions. The first one is regarding <unk>.
I would like to begin asking if.
What will be the name of strategy the margins throughout the going forward considering.
The current phase of the Central Bank rate and also cost of funding you already mentioned that you expect better numbers in the second half of the next year, but I would like to really do move light or you are thinking in doing something different in the loan book in the loan mix to two to improve margins on also if you can repeat.
The guidance that you have of NIM for this year for 2022.
And also for 2023 that will be grateful for my first question on the second one is.
Regarding npls.
Even so we are observing improving numbers of asset quality indicators.
It is clear that after the spinoff of BHI Grupo <unk>.
We board reports higher npls, when compared to peers above the 20% threshold what it is.
The outlook going forward given that we are entering in a scenario of economic this on a ratio on higher interest rates on a persistent high inflation.
Thoughts regarding this front.
Thank you so much.
Okay.
So.
Regarding margins.
The scenario, we're looking at to assess scenario, where we're very close to the end of the rate increase cycle, we should see it.
Throughout this year should be stable to bring the first months of next year, we are not certain that at what point should that turnaround of its beginning or end of third quarter, but that's the sort of scenario that we're taking as a base.
Regarding strategy for cost of funds, what we have been doing and it's part of the reason why you see some increase in our cost of funds as we've already been increasing our position in time deposits.
And working on bonds.
Therefore, we have been preparing for that sort of a scenario cost of funds trying to get funds in advance to the remainder of.
The increase in the interest rate.
Cycle.
Regarding the.
The loan book and this ties to your question on Npls.
What what prepares us for the cycle is the work we've been doing over many many years. When you look at our book in Colombia. It is very concentrated in payroll lending that should perform much better over time regarding npls there.
Yes.
Then an average book in Colombia so.
We already went in that direction and then when you look at our numbers our numbers do have higher <unk>.
NPL ratios than pre spin off of <unk>.
Because <unk> had a much faster.
Cycle to write off the past due loans. So part of what do you need to look into is by stages.
Our stages are behaving or stages continue to improve when you look only at Npls and you compare throughout the system.
At this.
Somehow affected by differences in REIT metrics.
When you look in principally at our portfolio.
Is that improvement in.
In.
The stage one loans stage, two loans had even the compensation overall by by stages.
Then something to look into is the speed at which npls are changing for all banks and the speed at which Npls.
Increasing for the rest of the system.
At this point, we continue to see a positive behavior.
Our level.
Been watching our peers and some of our peers have started to show different NPL increase behavior and that is explained by a higher concentration into higher risk consumer lending products in the case of our what we're having is a protection from the structure that we've built.
Over the years.
Please let me know if I covered both of your questions I did it in a.
Not in a very organized manner, but I want to make sure that I properly answered your questions.
Yes, no that's perfect just if you can join us.
The guidance of Mark I'm, sorry, yes.
Dr. Joseph Thanks regarding NIM for this year NIM on loans should be at 475, when you think of it.
Next year, we're looking in anemia at a similar level also for 75%.
With some opportunity for increase there, but at this point, we're taking it as flat.
However, new money investments that has been running negative we expect to move to the positive ground. Therefore, when you look at overall NIM that for this quarter was or for this year, we guided at $3 75.
For for next year, we're guiding an improvement of around 25 basis points to that and the explanation is similar NIM unknowns, but we're stripping away the negative from NIM on investments.
Thank you.
We have no further questions at this time I will now turn the call over to Mr. <unk> for his final remarks.
Well. Thank you so much and so as you can see this quarter, we had some headwinds, but as <unk> was saying.
We do expect to be almost at the end.
The rising.
Repo rate scenario that would really work in our favor and we are implementing all other sorts of.
Corrective actions that I think will in the next.
Or to get us back on track.
With that I leave you in and I. Thank you again, all for your attention and your great questions and we will see you next time.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Okay.
Yes.