Q2 2023 Bancolombia SA Earnings Call
Good morning, ladies and gentlemen, and welcome to Bancolombia second quarter 'twenty twenty-three earnings Conference call. My name is Allen and I will be your operator for today's call. At this time all participants are in a listen only mode. Following the prepared remarks, there will be a question and answer session. During the question and answer session.
If you have a question. Please press Star then one on your Touchtone phone. 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.
Certainty. Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general economic and business conditions changes in currency exchange rates and interest rates introduction of competing products by other companies lack of acceptance of new products or services by our targeted clients.
Changes in business strategy and various other factors that we describe in our reports filed with the S. E C.
With us today is Mr. Juan Carlos Mora, Chief Executive Officer, Mr. Mauricio <unk>, Chief Corporate Officer, Mr. Jose Humberto Acosta, Chief Financial Officer, Mr. Rodrigo Prieto, Chief Fire, Chief Risk Officer, Mrs. Catalina to bone Investor Relations and capital markets Director and Mrs. Laura Clubby Ho Chi.
Economists I will now turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer, Mr. Juan Carlos you may begin.
Good morning, and welcome to Bancolombia second quarter results Conference call.
To begin please go to slide two.
The results for the quarter reflect the less favorable macro conditions under which the bank is currently operating in.
In Colombia in particular, the circumstances have become more challenging due to the economic.
Slow down driven by lower internal consumption lower trade flows unless dynamic pouring dore direct investment with an underlying high inflation that has kept interest rates high last week will further elaborate.
These circumstances have discouraged credit harmed asset quality, an elevated operational costs.
Driving a moderation on the loan book and income growth, resulting in a net income for the quarter of 1.5 trillion basis.
It is worth to highlight the stronger contribution that the central American operation.
He is delivering us all three banks in the region continue making brokers on income generation cost control and profitability.
Partially compensating the current slower growth of the Colombian operation I'm, providing the merits of our diversification strategy.
Due to the Colombian peso appreciation on the quarter that reduced the contribution of the U S. Dollar denominated loans, the consolidated loan book contracted contracted quarter over quarter, albeit still growing at a much more thorough you did great.
Year over year on the back of lower credit demand.
Similarly deposits also fell during the quarter due to FX appreciation and slowed its pace of growth on a yearly basis.
Furthermore, as interest rates remained high the shift from savings to debt to time deposits continues exerting more pressure on the funding cost.
NIM remained high posting a 6.7% for the quarter driven by the lending margin I spit out what asset sensitive condition.
We recorded 2.1 trillion pesos in net provisions equivalent to a cost of risk of 3.1% for the PEO. However, it is showing a dissenting base of growth, suggesting a better forecast in terms of deterioration harsh we will.
Further elaborate.
The coverage ratio of the 90 day N P. S is 207%.
But he said three core equity tier one ratio increased to 10.4% well above the minimum regulatory levels refresh, reflecting the capacity to generate organic capital.
Opex increased mainly as a matter of inflation and higher taxes and efficiency ratio reached reached 44%.
All things considered.
NIM another operating income performance offset higher costs and expenses, which coupled with smaller smaller loan book resold.
In.
Our OE of 15.7% for the quarter.
Going forward.
Even as the governments ability to pass through its ambitious reform agenda has lost some ground. It is still soon to assess the potential economic and social impacts that piece or other set of initiatives may have.
Particularly due to fiscal imbalances labor cost on deterioration on controlled risk sentiment.
We continue committed on our long term strategy confident or not on the robustness of Colombian institutions under regulatory frame.
For further detail on the macro outlook I will turn the presentation to lourenco equal our chief economist louder.
Thank you have a cabinet.
Indeed, our updated economic forecast for Columbia that was the more promising scenario for 2023 than previously expected Nonetheless modest growth for 2024, despite the resilient performance of the Colombian economy with 3% GDP growth in the first quarter, we anticipate.
Further slowdown in economic activity during the second half of the year for 2020 three we have doubled our growth forecast to 1.2% from April scenario, how do you see your point.
6% driven mainly by the statistical carryover effects from solid first quarter as well and we expect moderate GDP growth of 0.9% for 2024.
In fact weakening economic activity is already evident in monthly leading indicators that reflect a meager 0.5% growth at the mea private consumption and investment having pressured by high inflation rising interest rates and declining consumer company impacting performance keep productive.
Sectors, such as retail transportation construction mining and manufacturing on the positive side inflation has consistently falling over the course of the past few months.
After peaking at 13, 3% in March P. P. I had decreased to 12, 1% year over year as of June driven by declining steel prices.
However, inflationary pressures to acquire inflation persist fuel price adjustments indexation of service fees, particularly in housing as well as increases in electricity and gas tariff will remain stubbornly high.
Consequently, we maintain our 'twenty to 'twenty three inflation forecast, 9% end of year that foresee potential pressures to regulated goods and food prices, implying 24, resulting from indexation and climate, but it's bad from the phenomenon of the Haynesville.
Only in early 'twenty 'twenty six showed inflation returns to the central bank's target.
Receding inflation labor market resilience and overall stability in the financial sector has enabled the central bank to halt interest rate hike and keep rates stable at 13, 25% during the past few months it given the conditions, we expect the central bank to begin cutting rates as early as October and up to <unk>.
75 basis points before year end expectation of an ending tightening cycle, both globally and locally has contributed to eating market conditions and improving terms of trade.
Finally in comparison to a year ago. There are notable corrections and Colombia's macroeconomic imbalances, which have improved our country risk position reflect better financing conditions and reduced vulnerability to external shocks. Indeed, we've seen a process of adjustment in the current account deficit, which has improved from six two.
Percent of GDP deficit in 2022 to an expected three 6% deficit. This year, Unfortunately, driven by a significant slowdown of both import and export.
On the physical side, that's central government's deficit is expected to adjust your four 3% of GDP in 2023, which signals a significant improvement from the 7% level a deficit of 2021. Nonetheless, the government relies on second sources for additional income such as litigation and tax collection efficiency.
Its increasing social social spending goals and decreasing global oil prices.
In some 2023 began with an overall negative outlook regarding global growth in Colombia is expected economic for fun, even though this year will be in fact characterized by an economic slowdown. This is now expected to occur in a far more positive scenarios driven by receding inflation expectations have been lending tightening site.
Now please let me turn the presentation basketball, Carlos who will present Bancolombia quarterly performance.
Thank you Laura.
Now we move to slide four.
This opportunity I want to introduce these five value driven pillars dot are framed within our purpose and therefore are the foundation for our current and future results.
For which we will continuously comment going forward.
First our client centric approach to design and deliver integrated solutions second and evolving interoperable on multichannel platform.
Third our corporate structure, and governance model or financial management, and our risk and capital controls controls us foods to our performance and thus our culture of efficiency and productivity as a catalyst for profitability.
Moving to slide five I want to share a snapshot of the main initiatives. We are working on the pillar one seeking integrated solutions leverage only information analytics and technology.
First our ecosystem model under which we are orchestrating experiences in our own channels on allowing third parties to develop financial services under their own brand.
Second we are transforming our value proposition for our business.
Barack deep supply chain, and social and environmental projects. A good example, it's the origination of loans for small farmers through our digital wallet Bancolombia a la Mano.
And third we are continuously evolving our analytics base models to further encased our preapproved loans accuracy. Our ratings models on the collection process to estimate the clients payments capacity and anticipate too crazy.
Did you ration.
Moving to slide five six I'm, sorry, no I will refer to the main initiatives. We are working on the pillar two that are essential to further encase our transactional capabilities.
Over time, we have built a robust multichannel platform as we deem each channel Hearts and his sage central vocation going forward will pursue further capillarity and interoperability hunting hand, with our digital evolution.
As of June we had more than 8 million digital active.
Active clients an hour up Bancolombia, a Nike has reached more than 17 million close tumors.
Furthermore, we are developing our super App and Super Web morals, providing several financial a nonfinancial services that connect demand and supply in one place. So Chas mankins therapies as transportation home services amongst others does a seller.
Our rating Digitalisation pacing customer experience.
After after these general strategic other view I want to turn now the presentation to Jose Humberto Acosta, who will.
Further elaborate on our second quarter 2023 results Jose.
Thank you Juan Carlos.
Please go to slide save any which I will elaborate on our regional operation on its contribution.
The Colombian Nobel group receives almost 70% of the total portfolio, whereas the central American operation accounts for roughly 27%, providing a good source of diversification and growing economies with different end market dynamics.
Banco Agricola standouts give any tire net income generation, coupled with a very low cost of risk that drives profitability posting and above.
Return on equity of 26% for the quarter.
Going forward, we expect the bank to continue delivering very positive results in a more promising economy and political environment seem to be underway.
Also it's worth highlighting bomb Ambonese my positive yearly evolution has reflecting in David how your nims and return on equities on wind suited to pursue growth opportunities on the back of the better performing economies.
Nevertheless, we remain cautious of the inherent political and economic uncertainties in these geographies and those we are working with at risk adjusted return approach and enhancing contoured initiatives to boost profitability.
Please go to slide eight in which I will elaborate on our strong and well diversified loan portfolio in which commercial loans represent almost 64% consumer 22% mortgages 14 per se.
The other half loan growth during the quarter was affected by a three 4% on average peso appreciation on the quota.
The consolidated loan book decreased two 4% quarter over quarter by the sharper deceleration of consumer segment has high interest rates have parm credit demand and risk appetite has been adjusted.
Commercial loans decreased the least during the period explained by a couple of the large corporate loans disbursed in June .
On a yearly basis, the pace of growth has significantly be decelerate to a seven 4% rate as of second quarter consistent with the creative cycle described previously.
NATO fix the loan book would have been wrong, one 2% quarter over quarter.
It'd be it still reflecting the significant motivation in terms of growth.
Breaking it down into segments are shown on the boto graphs, we want to come in not only on the positive evolution in terms of clients and loan growth in each but also to highlight the growth and value potential that the SME segment for percent provides.
Provided that the growth in clients has outpaced that of loans, leaving enough room to further grow leverage on client centric integrated solutions.
Please go to slide number five.
Consistent with the loan book performance total deposits fell 3% quarter over quarter with a higher than the average contraction in savings and current accounts and a modest 1% growth in time deposits.
Year over year deposits grew nine 5% slightly above loan growth are mainly explained by time deposits with a 48% increase whereas savings accounts recorded a drop of almost 5%.
As expected time deposits increase its share on the total deposit peaks, reaching up 35%, albeit growing at a slower pace on a quarterly and yearly basis.
When do you with your hand savings account kept the share of 38% of the total funding mix, whereas shaking Oh, they're funding sources you need to time deposits.
These larger portion of time deposits and the rise in interest rate expenses based on loans and loans due to higher interest rates increase the cost of funding during the period to five 5%.
It is also worth to highlight that 62% of our outstanding fixed rate time deposits mature in less than a year, providing some margin protection up on interest rate cuts.
Due to the lows.
Ending dynamic in the market, we do not foresee funding pressures affecting our cost of funds for the reminder of the tier nor our our ability to maintain comfortable liquidity coverage a need state bill stable funding ratios.
Please go to slide number 10.
Interest income decreased two 2% quarter over quarter attributed to a fall in interest income on valuations to all on the investment portfolio in the period. However, this drop on the investment portfolio income is compensated by income on derivatives recorded on their older operated.
Income.
On a yearly basis interest income grew 52% due to the repricing dynamic as power our asset sensitive condition and because new loans up these doors at the higher interest rates.
On the flip side interest expenses grew two 9% during the quarter. Despite the drop on deposits mainly explained by the change in funding mix.
Year over year, if you 152% as it continues to capture the Ray you need those grace.
Consequent to NII fell almost 8% quarter over quarter, but increased 14% on Nigeria basis.
On the other hand, when analyzing the need by companies. The lending NIM was seven 9% that is three basis points higher compared to the last quarter and 86 basis points year over year.
Whereas the investment mean fell by 458 basis points quarter over quarter dragging the overall mean to six Boeing 7%.
Please go to slide 11.
Net income slightly decreased minus cedar point, and 36% quarter over quarter did increased 13, 5% year over year. Despite fee expenses growth outpacing that of fee income on the back of higher costs related to the third party providers and processing charges.
Vehicle ratio was 19, 6% for the quarter.
It's worth mentioning that the fee income generation is well diversified in terms of sources.
Also I want to highlight the good we saw some positive evolution of income related to the fleet leasing operation, which was a driver to older Income's performance that reached 13% growth quarter over quarter and 127% year three to you.
Please go to slide 12 in which we present, our provision expenses our support to our strong coverage.
Net provision expenses are paid losses for the quarter were 2.1 trillion pesos equivalent to a cost of risk of three 1% for the period.
This represents an increase of one 8% quarter over quarter, driven by new nonperforming loans and rollovers, mainly on the consumer segment income in Colombia as high inflation and high interest rates kept pardon me, Andy we do our payment capacity during the period.
And somebody who thought there was 158 billion pesos increase quarter with what any provision expenses on the consumer segment in Colombia to which we will refer to fourth or on.
On the other hand, even as the economic backdrop has become more challenging commercial loans are performing well despite of some isolated cases in the corporate segment that do not represent systemic risk.
So except for Colombia, where provisioning expenses grew 7% quarter over quarter. The rest of the countries in which we operate provision expense decrease denoting better than expected asset performance, driven but more fiber revel macro perspectives on credit payment behavior.
The 90 day past due loan ratio for the quarter increased to 3% up from two 7% in the first quarter, reflecting higher past due rollovers in consumer and a couple of a specific commercial loans.
For the last hour allowances as a percentage of our past due loans remains as strong and represents 207% coverage of 90 day past due loans.
From an expected loss perspective, 87% of our total loan book remains currently in stage one.
They took one 9% remaining balance is composed of stage, two and three loans, which represent the current and potential M. P. S O.
All of which have a coverage of 41, 7%.
Although stage three increases due to the rollovers is stage two balance remains control because of the several actions taken to cut back deterioration.
Moving to slide number 13, I will elaborate some further insights on credit quality for Colombia, where the loan deterioration focus has been.
Same as in the previous quarter deterioration occur mainly in consumer segment, which holds up.
16, 4% balancing the stage two and three our 90 day past due loans ratio are at around four 8% and consequently cost of risk of 13, 3% remaining as an outlier.
Personal loans that represent 54% of consumer loans accounted for most of the deterioration with a six per same past 90 day past due loan ratio and 16% cost of weeks, whereas credit card is will contain Ronnie with a 90 day back in a ratio of three nine.
[noise] foreseen below de Alvarez segments matrix.
As discussed in our previous call. This deterioration face is consisting with our consumer segment penetration strategy based on pre approval loans, which in our view has been successful from a risk adjusted return perspective.
However, aware of the potential risks to.
Asset quality the strategy, calling came to a halt for lower income segments and those we have reduced our preapproved loans to individuals in almost 28% year over year, and 17, 6% quarter over quarter.
Consequently, the pace of deterioration for consumer segment in Colombia has it started to subside a subsidiary in the lower left chart as of me.
Also in the bottom right chart, you can see the 90 day past due loans for the Colombian financial system as of April 2023.
Although far from ideal the explanation for our better than the average system performance is twofold.
First is due to our well articulated securing at least assisting that provide us tools for an in depth understanding of each industry and those allow us to appropriately diversify anticipate and support our customers with solutions and to adjust quickly to credit cycles.
And second it is also the result of our enhanced collection process based on analytics, which has increased client contact effectiveness, allowing us to move ahead earlier, preventing further deterioration.
Please go to slide number 14, where I will discuss up on efficiency on our productivity initiatives.
The cost to income ratio for the quarter reached 44% as our operating expenses grew three 2% quarter over quarter, and 25, 8% deed over jewelry, mainly driven by first higher taxes related to transactions and deposit I spent last year fiscal reform.
Second higher personnel expenses due to the annual wage increase and how you actually have to aerial evaluations when certain employees benefits, resulting resulting higher NPV.
And third higher expenses related to our business transformation and journey to the cloud.
Also net of FX the annual growth would have been 21, 3%.
We continue executing ambitious transformational projects and cost control initiatives that cover a wide range of areas confident that that will that it will boost productivity going forward.
Please go to slide 15 to further elaborate on our profitability metrics.
As we had anticipated in our previous call lowered loan growth and net income generation, coupled with a higher provision expenses and overhead costs has impacted our profitability.
Net income for the quarter was one five trillion pesos, a 15% contraction quarter over quarter, and 18% year over year and consequently return on equity decreased though it remains high at a level of 515.7%, which if adjusted for good results.
In our return on tangible equity it would be 29%.
Finally on slide 16, we present the evolution of capital generation.
Shareholders equity grew almost 10% year over year. Meanwhile, assets grew 8%, respectively, reflecting the bank's capacity to generate capital to foster growth wise preserving a sound balance sheet.
On the other hand, Basel three total capacity adequacy ratio increased to 12, 5% on a consolidated basis for the quarter with a CET one of 10, 4% of net income generation in the quarter helped to offset the dividend payout declared in the previous quarter and the FX appreciation.
We do some risk weighted assets capital consumption.
Consequently quarter over quarter, there was a CET one generation of 70 basis points.
Now I will hand over the presentation back to Carlos for some final remarks.
One.
Thank you what's in there too.
Please go to slide 17 in which I will comment on the progress made on our sustainability strategy.
As a part of our business with purpose strategy, we have disbursed almost 20 trillion pesos during the year, reaching an aggregated of hundred and 23 trillion pesos since 'twenty 'twenty.
Also last week, we closed it.
$100 million sustainability linked credit with Wells Fargo Bank, our third of this type to secure financing for our sustainability loan growth.
Regarding sustainability framework, we made progress on the following three initiatives first we Polish our D. C. F. D 20, twenty-two report containing our climate change strategy.
Management unmarried metrics as well as our sustainability governance model by which we declare that our commitment it's embedded in our corporate decision, making process faster and its execution.
Second we are moving ahead with the pilot program for Colombian for Colombia on the climate Finance leadership initiative, which aims to engage the private financial sector and supported climate action, mainly focused on energy.
ASP rotation and infrastructure sectors.
And last we declare our diversity equity and inclusion of strategy a set of initiatives that part of the way so that by year 2025 at least 50% of the leadership positions in the bank are held by women.
Please go to slide 18 in which I will provide our guidance for year end 2023, given the current macro environment.
We expect a loan growth of around 2% in peso denominated loans and 3.5% non dollar denominated loans. So that the consolidated results will depend on FX.
Our NIM of around 7% as the average rate of the central bank that determines reference rate will remain high during the year there last year.
In the long term NIM should be around five 5% area.
In terms of cost of risk, we forecast an annual annual cost of risk between two four and 2.6%.
Per cent as we expect for the moderation in the economic activity, coupled with still high rates and the slope downward.
Sure.
We expect an efficiency ratio of 446% on an arrow you have 16% area as we respect our asset since it sensitivity conditions to keep above average margins for the long term, we expect anoro <unk> of around 15%.
Unless provided our net income unexpected performance in effects forecast our core.
Core equity tier one target remains in 11% area for at year end.
And left in.
Slide 19, I would like to share our investment theses, a summary of our most distinct drivers of future growth.
We deliver integrated solutions under a client centric approach the nurseries.
Preferences and loyalty on our rapidly growing client base.
Second our interoperable multichannel platform and digital.
<unk> creates a competitive advantage positioning us first in the market and fostering customer experience efficiency and growth.
Third our continuous investment in leading edge technology and know what the operational capability to support our business evolution and unlocks profitability.
And fourth we are a leading regional banking platform with access to broad funding sources Sone earnings generation and best in class risk on corporate governance.
With this we conclude our second quarter results conference call. We now invite you to our Q&A session.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone.
If you wish to be removed from the queue. Please press the pound sign or the husky, if youre 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 Star then one on your Touchtone phone.
We will pause momentarily to assemble our roster.
Our first question comes from Tito La Barca of Goldman Sachs go ahead.
Hi, Good morning, Hong Kong, Oklahoma at all Thank you all for the call and taking my question I just wanted to take a little bit about the the outlook or profitability from here I know you gave a long term guidance of 15% and the revised guidance for this year, maybe thinking a little bit into next year, you're right you know what your loan growth guidance.
For this year you increased the cost of risk a bit you have it's been decelerating GDP growth into next year unemployment picking up a little bit get Debbie you get additional downward pressure on profitability thinking about you know 2020 for well alone that decelerate a bit more.
When do you think asset quality would peak I mean, your revised guidance sort of implied that maybe the worst is provision might be behind us, but just to think a little bit about that.
And in your margin should fall as you mentioned and as interest rates come down, particularly more in next year. So is that 15% you think doable in 2024 could there be some downside risk to that I'm just given some of the headwinds from from the economic outlook that you're seeing thank you.
Hey, good morning people on and thank you for your question.
Yeah.
Regarding the outlook for 2024.
And what we see is that the economic dynamics for 'twenty 'twenty four will be better done for 2023, meaning that.
The GDP growth for the year.
It should be around 2%.
5% the global environment also will be will be will be better.
Probably the fight against inflation, the global fight against inflation will be in their final phases.
Interest rates will start to go down globally.
In Colombia, what we expect is that.
Interest rates remain.
Yeah.
Hi, meaning that the.
Got it.
The rates going down we'll will start at the end of the year, but eh during 2024 still we will have.
Triste rates that are now going to be.
Broadly.
Rates for the long term, meaning that our our margin.
Our.
Loan book margin will will continue.
Hi.
If we compare it with the with the long term.
The NIM.
And regarding risk, which is which is key we are.
Ah respecting.
That the risk.
This year.
And we expect broadly that uptick is.
This quarter that we are we are discussing.
Yeah.
And loan growth wont be very very.
The.
Dynamic so with all of these to answer your question. If we believe that we can achieve the.
15% ROE a we think that all in all combined we are able to achieve that 15% Roe.
In 2024, where we will be challenges regarding risk.
We are very focused on how we originate the eh.
The new loans now that are there.
Loans that will be it for me in the next year. So we are in that we are we are very very careful on origination meaning that our focus is not on growing the loan book it's in quality.
So to summarize margins will go down, but not as fast as we thought some amongst single so that will also give us some room from data from the income side.
Margins.
Margins will.
We will remain.
As a consequence marriages will remain.
Hi, compare with the with the long term average.
The cost of risk should.
Go.
Looking forward for the long term guide.
Guidance right, even though it could be a little bit higher due in 2024, but we don't expect.
A big deterioration.
And Oh.
Lomborg wont be very dynamic, but with all again, we think that we can achieve that 15% ROE for 2000 2042.
Okay, Great No. That's helpful. One Carlos I think you know I guess that makes sense just on the on the loan growth to clarify I know you said it won't be dynamic but.
But it sounds like perhaps that can accelerate a bit compared to the guidance that you've given for this year.
Because I guess lower inflation lower interest rate, maybe and the new origination teams who've been a little bit of a better place. So maybe that accelerates a little bit versus this year and cost of risk coming down so that those should be the drivers of that it sounds like you.
You are completely correct.
That said I could read of the situation.
We are expecting the loan book.
Book to accelerate its growth.
Okay.
I mean, not been very dynamic meaning.
We'll be better done the loan growth that we have in this year in 2023.
Okay perfect. Thanks, so much Don Carlos.
Thanks Peter.
Our next question comes from Yuri Fernandes of Jpmorgan. Please go ahead.
Hi, Juan Carlos will go medical company and everybody I have a follow up on top line and also for 2024 I'd like to start with your margin sensitivity or rates because I totally agree you're right. Our regular me hi, you had like some marketing.
Lower securities gains this quarter from New York's balls in 'twenty three we will continue to see a very solid topline, but my concern here is the new sensitivity right because although.
Rates will remain higher than historical in 2024.
You were forecasting about 400 500 units right going from 13 25 today to maybe eight and a half I think it is.
What do you have in your presentation. So my question is what is your rate sensitivity on every 100 bps a decrease on order rates and how quickly this translates into your margins because.
If you average rates go down by 200 to 150, maybe we are talking here based on best quarters like 60, 70 bps right. Deborah neighborhoods was studied each 35 bps every 100 years. So again just checking.
The city began how quickly these will hurt your margins in 2024. Thank you.
Yeah. Thank.
Thank you Judy let me, let me give you some general comments and I will ask our allowed AR to two people.
More color about how we are seeing the.
Development of the reference rates.
That we are gathering information every every week every month with the new debt and data that is that it's coming in so are allowed to we will give us some color regarding how we see the part of the Oh, David rates, the reference rates on and I am going to ask consumers.
O D sensitivity, but my general comments.
Our asphalt.
You mentioned.
We need to to analyze the margin.
It take us.
This quarter asset based D. The loan book margin and remains a stable high.
Seven 9% and what we had this quarter was a negative effect on the investments.
Margin, mainly due to some.
The particular issues.
Regarding FX.
As you as you know are deep deep peso appreciated.
I appreciate it during this quarter significantly so we need to.
Or are we what we did with that consideration we took our positions on U S dollars and when we reorganized and so that's.
In effect that was during the quarter.
But for.
The long term or if we look the average for the investment margin. We still believe that is going to be between one and 1.5%.
The loan book.
And then the margin on loans.
It will have some pressure probably.
From the cost side.
And because of the rates will start to decline by the end of the year have slowed I wouldn't want to tell US later, so we expect that the loan.
The margin to be around seven seven.
For 2024.
And will there be some pressure, but still the margin will be high and the average for the year should be around $6 seven I'm talking about the loan the loan margin. So that's a healthy margin.
That is the button.
Room to maneuver D. D. D. O. There are key aspects for 2024 will be the cost of risk.
And how.
How do you see a loan book.
Forms as I commented before to the Tito's question. So with this I am going to give it to.
The us allowed us that and tell us how we see the path of the of the reference rates.
Thank you Mark and indeed, the outlook for interest rates Central bank interest rates will be very dependent on what you've been seeing for inflation in the past few months, we've had four consecutive months of a declining inflation the latest figure out what's not so positive on the.
On the core installation.
Nevertheless, coming down as well so we've been inflation has been driven mainly by receding food prices and we do see some potential pressures for core inflation.
Coming from fuel prices are unregulated goods, such as housing tariffs and other types of public service Paris. So we do have a 9% inflation.
<unk> forecast for 2023.
Happy than upside risk, giving the potential pressures Dan mentioning also climate risk coming from phenomenon.
But in all inflation is and in fact receding and at least from the from the point of view of the Central Bank. This is being.
Well received and closely monitored and in that sense, we foresee the possibility of having a central bank rate cuts before year end, we're anticipating our first 25 basis point reduction somewhere between somewhere in the last quarter of this year and.
Again, very dependent on what happens with inflation and how economic activity continues.
In our market, but we are seeing that possibility too.
At the end of the year and in line with what I'm mentioning from inflation pressures are nonetheless, we see that interest rate cuts will be gradual and very driven by what happens with inflation and how it. It continues to come down we're still very far away from the central bank target. So in that sense for at least 22.
For as well, we see gradual rate cuts.
In that sense from the Central Bank.
I think Carole Lauder, and now I'll say regarding the sensitivity that the.
Jewelry ask okay. Judy good morning regarding your question of how quickly the.
The margins were compressed we will be able to manage the reduction of interest rates next year because of three factors. The first one.
We today in our time deposits more than 60% of that time deposits will there are less than ideal which means that the repricing of those time deposits will be faster. The secondary Lindsay we still have a very good composition of funding.
So saving accounts that would be two days, 38% roughly we're going to maintain the same mix and be checking accounts. So because of these two factors the compression of the NIM next year would be less than or around 50 basis points and our sensitivity is for every 100 basis points our named.
With change 30 basis points.
Perfect. Thank you wholesale backhaul Juan Carlos Macau and everybody. Thank you very much guys. Thank.
Thank you Judy Thank you Gary.
Our next question comes from Carlos Gomez of HSBC go ahead.
Hello, Good morning.
I have two questions. The first one is on capital.
If you could read that eight I believe your target to be at 11% by the end of a piece a year and half to two two I guess two final questions around there.
You said, 11% enough you mentioned, a much more uncertain scenario slower economy and.
Would you feel more comfortable operating with a higher level of capital second when I look at the chart of your capital adequacy.
You have a comfortable position in tier one almost 600 basis points above the minimum but you're only.
Less than a 1% above total capital so it would seem like you'd need more tier two ease of tow and how do you intend to address it. Thank you so much.
Yeah.
Thank you.
Carlos.
Yeah.
For all of your question regarding if we feel comfortable around 11%.
Core equity tier one and the answer is yes.
With 11%, we feel that we can manage the risk that we are that we are facing so eh.
7%.
And I think is very very achievable for this year that that 11%, where we were we feel.
Pet Coke and comfortable.
Regarding your second question.
Adequacy on.
Total capital around 12, 5% on Joe's being at one point in light of all the core equity tier one we feel comfortable we always are.
We're looking.
For opportunities to manage our capital, but we the that 12, 5% with 11% core tier.
Equity tier one and with the <unk>.
Perspective that we have regarding a loan book growth.
The risks are.
Feel comfortable.
And on those levels.
I don't know how is it better to go halfway or additional comments on this regard, yes, I want to complement that the fucked countless times, we are having 11 two one but also we are having a very strong coverage ratio 90 day past due loans that gave us some protection. If you double check the numbers we are above the line up 200 basis points of core.
Average of 90 days past due loans, which help us to maintain a very solid tier one ratios with.
Yeah.
Mm Hmm, Okay, no, but I guess the tier one I mean your chart you only have 200 basis points and it is a total adequacy with cheez. It getting places if I read correctly. They many of them. Instead of them played five were at $12 45, I mean that you don't it doesn't look like like a lot more of them again, one would think that perhaps you want to have.
More tier two in the future corporate how should this too expensive to have it now.
Yes, Carlos obviously, all depends so if loan growth and we are expecting the low ROE next year 2020 for one single digit, but again, we have an opportunity to touch the market with the tier two structure for sure next year or in the next coming years, we have availability to do that.
Okay, and one final comment if it's like an abuse, you're saying it could be but again given the acceleration in capital D C or you pay the 50% certainly some of the previous year.
It seems like things are a bit tighter going into next year, where do you think you'll see them make them out on the 2019 TCE earnings.
And as you know that dividend is depending on the amount of capital that we want to grab next year, assuming no road and assuming macro conditions. So we do have today appear picture about what what he's going to be the dividend policy, but we are going to do the calculations to maintained at 11% but base.
On the condition that will be presented for 2024.
Yes.
Okay.
Thank you Kevin.
Our next question comes from Juan Raquel Day of Scotia Bank. Please go ahead.
Hi, Good morning, Thank you for the opportunity to ask questions. My questions are related to the digital initiatives Nokia Bancolombia a la Mano.
We've seen increasing engagement in terms of number of transactions like Lions.
Deposit growth.
How whether the loans are shrinking in both Nike and Bancolombia a la Mano. So I was wondering first if he said we sold the competition and lower demand or did you see some from from yourselves coming from yourselves.
And two if you can provide us any color in terms of the asset quality trends over there.
The loans originated doesn't make him a colombian them on thank you.
Yeah.
Yeah. Thank you Juan.
As you mentioned the dynamic of make him on Columbia the mono.
Its very positive I mean, we keep growing and the number of clients and the number of transaction.
Usage is from our customers. It's it's growing in Nikki close to 70% of our users are active users.
And the number of transactions here.
It is growing.
And so I'm thinking in Bancolombia in Bancolombia LMR rigor.
Regarding to your point of the loan book on those digital banks and <unk>.
And to your question it was our decision to slow down the new originations.
Yeah those.
Those two initiatives are focused mainly on the middle to low income individuals.
And we are providing them a banking.
The solution.
According to their needs.
But what we are doing is learning more from them.
And then in the sense that we need to originate loans that are in the range of our.
Risk appetite.
And that's why we are not growing as fast as we were growing before.
Asset quality is in those two platforms.
It was a little a bulk of what we were expecting that's why we decided to take a break and originate.
Differently.
Those are as I mentioned.
The groups that are new to the banking system, mainly so we need to be careful in how we originate what are the digital process alright, eh, sometimes say they are new.
New for them on how to manage.
Our interactions with these platforms need need time.
This is to say that we will it will continue.
Advancing in new ways.
With the information that we are gathering from the transactions that they are doing as a platform to continue growing our our path to.
Monetization to profitability.
Definitely go pass.
Yeah.
Or the loan book and we.
I was expecting for the second quarter.
It started originating in a different way with different models.
We now have a new well calibrated.
Scoring model that we are going to use those to originate and during the second quarter, but also we need to Uh huh, yeah in consideration the economic situation that is tougher now that it was there and in the past at the beginning of the year or last year.
When we started originating in this blood for them so we to summarize.
We have a slow down there the origination we calibrate the models and we gather new information, we will start restart with a new strategy originated loans and we will be monitoring how they are going to behave.
And then it.
Depending on bad behavior on the economic condition, we will we will accelerate for the next year.
Right.
Thank you for the comment.
Thank you.
Our next question comes from Andres Soto offending air.
Go ahead.
Good morning, and thank you for the presentation.
I would like to to help us.
A little bit about your pillar number three and number four regarding your strategy what what exactly you. You think you can do in terms of corporate structure our efficiency how.
How are investors can expect that are being reflected in the term long term result for bancolombia.
Thank you Andre.
[laughter].
As I mentioned, we have four pillars.
And we have.
Airports to promote sustainable development to achieve for everyone's well being and you mentioned that certain date in the four pillar.
We are we are.
We have.
Very strong corporate corporate structure and governance, we have been.
Working on that corporate governance for for a long time so.
As you know and we have mentioned this during this call about also in the bus we are very focused on profitability, so that corporate structure, meaning our presence in the different countries in which we operate how we organized by the current competitive corporate governance that we have.
Our focus on getting that profitability.
With that we are talking about on a on an environment of risk control.
Regarding the <unk>. We look forward, we are very clear that efficiency of productivity our key I at the beginning a seat on Judy you were asking about 2024, and we have very clear that.
One of the key aspects.
On top of the other there are others that I mentioned, it's how we manage.
The efficiency on the productivity of the bank and we have had some pressures from the it from inflation from a from a complete competition issues that we need to tackle but we have clear that that.
Focus on efficiency is key during the two.
2024, and we will be.
A part of how we achieve the results that we were talking before <unk>.
Yes.
Okay.
Yeah.
Thank you I have a couple of if I may follow up when I look at your represents evolution I see it it's the central American operations, the one but appear significant.
Significantly above a.
What you have at the consolidated level, what what exactly can you do in those operations is just somebody drove operating leverage Chinese is growth what is going to drive it.
From an efficiency or are there any specific measures that you can implement in order to accelerate our efficiency improvement.
As you said we have a.
The ratios in our Central American operations are higher than the one we have in Colombia.
Yeah.
Volume is very important to dilute some fixed cost in those operations. So that scan you mentioned it but also we are investing in new technologies that are allowing us to work.
Work on that on that efficiency for example in Panama, we are investing in a new core banking system.
Now it is driving the expenses.
Hi, Bob will produce results in the future, making us more productive and more efficient on the like that we are also investing in our in the news and El Salvador on.
What tomorrow, so yeah, it's mainly through the volume but also.
The digitalization of new.
Platforms that we are implementing in the different countries that we will achieve that improvement on the efficiency on on day, one on the on the different countries, but.
Same days it is important to take into account that.
What drives mainly the group efficiency, it's Colombia.
And you know that around 70% of our operations are in Colombia 70, 75%. So the main driver at the end on the consolidate basis upkeep of the efficiency of all.
Oh, one Columbia, it's it's Colombia.
Of course, the deficiency of the other operations the impact the overall.
The ratio, but but Colombia is key on that.
On that ratio.
Of course, thank you have a couple.
Thank you.
Our next question comes from cooling ethic of Debbie Beta go ahead.
Hi, Hi, everyone and thank you for my question I would like to ask you on it's a little bit of a follow up on the <unk>.
Because I've found because as we saw in the presentation. We saw an increase in the fall.
Funding cost in Colombia.
Due to the restriction of liquidity that we are having in the financial sector I would like you to ask you. How are you seeing these pressures and the liquidity in Colombia, and what are your expectation of the upper the next quarters in the cost of funding and also and then the mountain of Colombia.
Okay.
Thank you Julien.
Bancolombia, it's it's in.
Good position in the Colombian market.
We have a a.
<unk> that is very well known we have a branch network of digital channels that allow us to reach many retail customers and also we have access to corporate funding.
As you mentioned there are and there have been some pressure from liquidity pressure from the Colombian on the Colombian market.
What has happened in our case is that we are.
Some funds were moving from savings accounts.
Yeah. They were moving to two C. DS ER, mainly one year Cds maximum one year Cds so that.
Means that we have to pay so much additional interest rates for those fix.
Posits.
But I think that bancolombia in the Colombian market is as I said very well positioned in the market. We we capture the many opportunities regarding the liquidity that is in the market, but those pressures in there in the lab.
If I look at the levels of the of the interest rates that we have from the market that we discussed before also.
The drive that the cost of funds.
Increases.
And with this I will I will ask what's embedded too if he has any additional comments regarding liquidity between better. Thank you well yeah, let me put it in two different ways. The first one is in terms of the bank.
As we mentioned previously we have any strength and if you check the numbers, 50% of our funding comes from checking and savings accounts, which gave us certain level of comfort in terms of liquidity and only we have 35% in time deposits. So we are expecting a kind of.
Plateau in terms of cost of funding for time deposits at least the next two or three months and waiting for the storm seeking out from the central bank, reducing interest rates. Meanwhile, we had not seen any particular change neither going up or going down those cost a week, which means time deposits.
From beginner perspective, the industry, obviously because of the net stable funding ratios all of us for the banking industry are colliding with 10.
Deposits in our case, we have the the strength that we have a deeper and source of funding and not only time deposits. So again as we mentioned previously we are expecting to sustain the NIM at least for these next two quarters and next year, we are obviously expecting a compression of any.
And because of change of Peter's right some central bank.
Okay.
This concludes the question and answer session I would like now to hand, the conference back over to Mr. Juan Carlos Mora for any closing remarks.
Thank you everybody for participating in this third quarter.
Our results conference call.
As we discuss during the call.
The environment has some challenges, but we are.
You then in Bancolombia, we are very well prepared to truckload to managed all of the challenges that we are facing for the for the second semester of the year, we will see a dynamic.
We will continue in the trends that we're seeing but we think that in terms of how we will manage them will achieve we will.
Lead us to achieve those.
The targets that we mentioned during these calls so with this I conclude this conference call and I hope.
Hope to see you on our third quarter results.
Have a good day and thank you very much.
This concludes today's conference. Thank you for participating you may now disconnect.
Okay.
[music].