Banco de Bogotá S.A. (BOGOTA) Earnings Call Transcript & Summary

Welcome to the first quarter 2020 consolidated results conference call. My name is Hilda, and I'll be your operator for today. [Operator Instructions] Please note that this conference is being recorded. We now ask that you take the time to read the disclaimer included on Page 2. When applicable, in this webcast, we will refer to trillions as millions of millions and to billions as thousands of millions. Thank you for your attention. Mr. Alejandro Figueroa, CEO of Banco de Bogotá, will be the host and speaker today. Mr. Figueroa, you may begin your conference.

Thank you, Hilda. Good morning, ladies and gentlemen, and welcome to Banco de Bogotá's Q1 2020 Results Call. Thank you to all of those who are able to join us today. We are witnessing a historical difficult health crisis and above all, I hope that you and your families have been able to stay safe. Our attributable net income for Q1 2020 was COP 738.8 billion, increasing 6% on an annual basis and 2.2% quarterly. This resulted into 1.6% return on average assets and a 14.3% return on average equity. The COVID crisis has started significantly affecting Colombia in March, so I will outline broadly how it impacts some of our Q1 indicators. Keep in mind that from December 2019 to March 2020, the Colombian peso experienced a devaluation of 23.7%, an increase of COP 4,054 per dollar. This increased the restoration of our dollar-denominated business into pesos, which is our reporting currency. Our net interest margin declined to 4.9% as a result of a decline in our net investment margin, driven primarily by Porvenir's quarterly results. Porvenir income was hit by the huge drop in global markets which have gradually been recovering over the past few months. Our net cost of risk for the quarter was 2.1%, remaining relatively stable versus previous quarters. Since there was still significant uncertainty regarding how the crisis was going to play out in the region, we ultimately decided to hold off of macro adjustment to our IFRS 9 model until Q2 while we expect the provision to increase. Our fee income increased 9.6% on an annual basis, while when excluding the impact of foreign exchange, grows only 2.9% affected by the decline in transactionality in the last few weeks of March. On a quarterly basis, the decline is 7.3%, but that we expected given seasonal factors. Our efficiency ratio came in at 51.5% for the quarter, which was above our Q1 2019 figure, but below Q4 2019. Moreover, as compared to the first quarter of last year, our cost to asset ratio improved from 3.5% to 3.79%. In terms of our balance sheet, gross loans totaled COP 134.8 trillion, while total deposits was coming at COP 143.6 trillion. This represented growth rate of 24.4% and 34.9%, respectively. Isolating for the impact of foreign exchange, annual growth was 10% in our loan book and 19.5% in our deposit base. As a result, our deposit-to-net loan ratio increased to 1.11x. This increase in deposits accelerated towards the end of Q1, illustrating business and consumer confidence the market is having for the deposits in this situation of economic unrest. Regarding capital adequacy, our Tier 1 ratio was 9.6% for Q1 2020, while total solvency reached 12.3%. Before proceeding, I would like to highlight the acquisition of Multibank in Panama, which we expect to close at the end of this month. Given that some of the closing conditions were not met before the date of April, we agreed to move term modification of the contract, which included a price reduction of 39% on the original agreed upon amount. As part of the financing of this transaction, our subsidiary BAC has issued an additional Tier 1 instruments such as Panamanian and Colombian regulation, which will more than offset the impact of the Multibank acquisition on our Tier 1 capital ratio. Now please turn to Slide 4, which outlines how we have responded to the challenges imposed by COVID-19. Before diving into the specific measures, I wanted to highlight how fortunately we are as a bank that we are going through this what we feel is a position of strength and one that will allow us to navigate the current scenario. In particular, as I just mentioned with our Q1 highlights and you will see in greater detail throughout the presentation, we have a well-diversified loan portfolio with robust asset quality metrics, ample liquidity with deposits to our core source of funding. Capital ratio is well above regulatory minimums and an attractive profitability profile that contributes organic capital accretion. As a result of this position, we believe we have the ability to think not just sorting about surviving this crisis, but also medium to long-term with regards to serving all of our stakeholders. Our first focus side by side with aforementioned, risk management metrics has been on ensuring the continued operation of our business during the quarantine as banking was deemed an essential business by the government, and we wanted to guarantee that we could continue to serve our clients while also safely protecting our employees. We as a bank understand the important role we play in the path to economic recovery. This involved swiftly moving over 95% of our administrative personnel to work remotely and proactively, implementing health and safety protocols for our employees working in branches. While we operate approximately 1/3 of our branches at the beginning of the quarantine, we are now up to about 85% with an eye toward fully reestablishing operation [indiscernible] continued reach. Additionally, we signed and implemented policies for relief measures for our customers to help them throughout these difficult times. As the oldest bank in Colombia with 150 years of experience operating in this market, we believe in the importance of relationship and our experience has taught us that relationships are essential during difficult times. Among the policies we have implemented, I will highlight. Grace period for commercial and consumer clients for which approximately 28% of our Colombian clients and 46% of our Central America clients applied and have been -- have applied and been approved. Removing our cost for ACH transfers, call center transaction, and up to 3 ATM withdrawals per month for clients. And championing the government federal lending program, which comes with a 90% government guarantee reserving up to COP 1.8 trillion at the current available COP 5 trillion program. Over this period, while we have had implemented prudential pullback on lending to 7:45 [indiscernible] safely -- currently have mix economic sectors and are proceeding with caution in many consumer lending products, we have at least found opportunity to grow with our clients as proven by the growth in our commercial loan book in March and April. Finally, we recognized our sole asset lending financial institution in the countries which we operate with better commitment, not just to our clients, but to our broader communities. This support extends from making significant donation to government initiatives, requiring funding for the acquisition of heath supply to a smaller action such as shortening our payment period to the small and medium suppliers. Ultimately, we are all in this together. And only with this mentality, we will be able to come out of this crisis. Now to provide more detail, I will hand over the presentation to Mr. Julio Rojas Sarmiento, Banco de Bogotá's Chief Financial Officer.

Thank you, Alejandro. I'd like to start by providing additional detail on the Multibank transaction on Slide 5. As a reminder, last November, we announced that through leasing Bogotá Panama, a wholly owned subsidiary of ours, had signed an agreement to acquire 100% of MFG's common shares. The acquisition was driven by our desire to scale our operation in Panama, which is 1 of the economies with the highest GDP growth and stability in Latin America, transforming us into the second largest bank in the country in terms of assets. In fact, as a result of this acquisition, Banco de Bogotá's consolidated balance sheet will now have almost 65% of its loan portfolio located in investment-grade countries, Colombia and Panama. From a business standpoint, MFG's well-run commercial lending platform complements back strong consumer lending, and there's an attractive opportunity to capture cost synergies, particularly from the middle and back office without compromising MFG's client relationships. Finally, we had successfully demonstrated our ability to generate value via bolt-on acquisitions in the region, with Banco Reformador in Guatemala and BBVA in Panama in 2013. On the bottom left-hand side of the page, you can see how this acquisition strengthened our position in Central America, increased our own market share in loans by 215 basis points and deposits by 156 basis points. As Alejandro already mentioned, due to the fact that the sellers did not meet the time line for completing certain closing conditions, the parties agreed to mutually modify the contract. The primary change was a price reduction of 39% from approximately $730 million, down to approximately $450 million, reflecting the current operating environment and the general valuation adjustments observed globally as a result of COVID-19. At the price of $450 million, the acquisition amounts to a book value multiple of approximately 0.85x total equity, which includes $110 million in preferred shares. Since we acquired only the common shares, the new acquisition price implies an estimated goodwill of approximately $35 million, a significant reduction from the estimated $280 million at the previous price. The transaction has received all regulatory approvals that are required and is expected to be completed by the end of May 2020. Now moving to Slide 6. You can see the transaction structure, which entails back making a $730 million dividend payment to its holding company Leasing Bogotá Panama. Of this dividend, $210 million was declared in 2019 and financed through a credit card securitization carried out by BAC. The remaining portion of the dividend, which amounts to $520 million is financed through the issuance of an initial Tier 1 instrument that was fully subscribed by Grupo Aval this week. From the dividend payment performed by BAC, $450 million will be used to fund the Multibank acquisition, and the remaining $280 million will be distributed as a cash dividend to Banco de Bogotá. As you can see on the bottom of the page, we've included a very simple pro forma estimation of the impact of the acquisition on our March 2020 capitalization ratios. The decrease in the price as well as the issuance of the aforementioned AT1 results in our Tier 1 ratio actually increasing 49 basis points post transaction. On Slide 7, we turn to a discussion of the macroeconomic environment. Similar to how individuals with pre-existing health conditions are disproportionately at risk with COVID, the economy tore the virus in parts more negatively impacts economies that were struggling before its onset. Thus, it is important to highlight the fact that Colombia is coming off of the year with GDP growth of 3.3%, its best performance in the last 5 years. Inflation closed 2019 within the Central Bank target range of 2% to 4%. The country's fiscal situation was in order, both from a deficit standpoint at 2.4% of GDP as well as from a debt to GDP ratio of approximately 50%. And what has proven to be a major differentiator between outcomes globally and regionally, we have a centrist technocrat president in President Duque who understands that lives must be saved, but that we also have the duty to protect livelihoods. However, it has also been shown that no economy is spared from this crisis, and Colombia is no exception. While on the positive side, the government in Colombia acted quickly and decisively to shut borders and quarantine the population, which was necessary to ensure a flattening of the curve and that hospitals were not overwhelmed. In the first quarter of 2020, the Colombian economy decelerated to a quarterly growth rate of 1.1% starting to show the quarantine impact in March after 2 strong months of economic activity in January and February. The economy has also been impacted by the sharp drop in oil prices, which pressures public finances, as well as the devaluation of the Colombian peso. The fall in activity continued in April although preliminary information shows a slight recovery in a few indicators like energy demand and population mobility towards the end of the month. For May, we expect to continue to see signs of increased economic activity as a gradual reactivation of the economy has commenced, favoring sectors that are drivers of employment and can prioritize social distancing, such as construction and manufacturing. Nonetheless, the Colombian economy is expected to stay significantly in 2020, with estimates ranging from 0% growth all the way down to more than a 7% contraction. Consequently, the Central Bank has gradually cut its benchmark rate to 3.25% in order to support the economy. The duration and magnitude of the shocks will be decisive in future guidance of monetary policy. As inflation remains controlled, and in the short term, actually declining due to the demand shock, additional rate cuts are likely, at least according to what's being priced in by the markets. Further monetary easing measures taken by the Central Bank include a reduction in the reserve requirement for financial institutions, an expansion in the repo window to allow the participation of asset managers and a new repo function that permits utilizing loans as collateral. In terms of fiscal measures, the government in Colombia has been active in supporting liquidity needs by allocating resources to development entities such as Bancoldex, Finagro and Findeter. Perhaps the most significant support the government has provided is a capitalization of its National Guarantee Fund, which generally provides guarantees of up to 50% for SMEs. Now the FNG offers guarantees of up to 90% of loans as long as they are utilized to maintain employment and make payroll. In total, the fiscal stimulus package to date amounts to almost 3% of Colombia GDP. Due to the economic shock, the fiscal rule committee agreed to increase its deficit target for the year to 6.1% of GDP. Finances pending, the Ministry of Finance has been more keen to reallocate resources, tap multilateral organizations and dip into emergency funds rather than issuing dollar-denominated external debt. Of course, to the extent the slowdown continues and more social or economic stimulus is necessary, it may be the case that the government decides to tap additional resources. In many respects, Central America shared Columbia's recovering economic performance going into this crisis, having expanded 2.5% in 2019 and with a projection of 3.5% for 2020. Moreover, this year does not have any presidential election scheduled, which in the past few years, had generated some political uncertainty and a chilling effect on the economy in various countries. In terms of the impact of the crisis, Central America is affected by the reduction in tourism, and in the case of the Northern Triangle, a dependence on remittances for its current account. However, the decline in the price of oil and relatively strong international reserves helps mitigate the impact of these shocks. We have seen an implementation of fiscal stimulus packages ranging from 1.4% to 3.3% of GDP across the different countries where we operate. Government measures in Central America have focused on deferring tax and social contribution payments as well as monetary stimulus to at-risk populations. Governments across the region have also turned to multilateral international organizations for long-term funding options. Central banks have been active in reducing the benchmark rates to historic minimum of 1.25% for Costa Rica, 2% for Guatemala and 4.5% for Honduras as they also have supported liquidity by injecting resources through different mechanisms, including repo operations and a reduction of reserve requirements. The monetary measures benefit from a low inflation environment, which supports expansionary policies. Moving on to our consolidated results. On Slide 8, you can see our asset and loan portfolio metrics. Through our results, we will refrain from providing any forward guidance, given the significant uncertainty that remains as part of the crisis. In the first quarter of 2020, our consolidated assets reached COP 207.4 trillion, increasing 18.5% quarterly and 29.3% in annual terms. When excluding the FX impact, growth was 6.5% and 14.1%, respectively. From a composition standpoint, our loan portfolio represented 63.1% of our total assets, with fixed income investments at 9%, equity investments at 3.5% and other assets at 24.4%. Other assets increased their share, primarily driven by a higher cash and equivalent position, which grew 57.6% year-over-year. Geographically, due to the impact of the devaluation of the Colombian peso, which was partially offset by our strong growth in our Colombian business, our Central American operation now represent 50.5% of our overall asset mix, up from 47.4% in Q4 2019. At the end of Q1, our consolidated gross loans amounted to COP 134.8 trillion. This increased 24.4% annually, but when isolating FX, 10%. Over this period, excluding FX, our commercial book grew 12.9%, mortgages grew 6.8%, and consumer loans expanded 6.2%. A significant portion of the commercial portfolio growth took place in Q1 where you can see that when isolating FX, we grew 7%. This was concentrated in large corporate high-grade clients where we felt comfortable with the sector and business risk exposure. Almost the entirety of this growth was underwritten in Q1, not the result of committed lines being pulled as we have a very limited number of these. Over the past 2 months, we continue to underwrite and originate loans but are being very cautious from a credit risk management perspective, both in commercial and consumer loans. Analyzing our loan book, you can see that we have a diversified portfolio across different sectors focusing on the sectors that seem to be the most directly impacted by the current economic shock. First, with respect to oil and gas. Our total exposure at March 31 was COP 1.3 trillion. Of this amount, close to 80% is with Ecopetrol or its subsidiary pipelines that due to their national importance and their ship-or-pay style contracts do not necessarily concern us. Second, with respect to transportation and communications, there are several subgroups that continue to perform well, such as communication businesses and cargo transportation. However, here, I'd like to give you a brief summary of our exposure to Avianca, which at March 31, we had a peso equivalent consolidated exposure of approximately COP 705 billion calculated at a COP 4,054 USD exchange rate. As was publicly announced on May 10, 2020, Avianca Holdings made a formal voluntary petition to reorganize under the Chapter 11 of the U.S. bankruptcy code. Given that the filing was just over a week ago, this is a situation that is still developing. We currently have 3 different structures of debt outstanding to Avianca. First, COP 512 billion guaranteed by a trust agreement on a credit card receivables generated in Central America, which also serves as a source of repayment. In other words, we have a first claim on ticket sales paid for via credit cards. Second, approximately COP 145 billion guaranteed by Avianca's corporate headquarters building in Bogotá. And third, COP 48 billion in unsecured working capital lending. On a consolidated basis, as of the end of Q1, we had approximately COP 65.9 billion provision and have continued provisioning this credit during Q2. Turning to Slide 9. We will move to our consolidated loan portfolio quality. As previously mentioned, you do not see an impact of COVID-19 to these figures and ratios as of Q1. However, beginning with Q2, we will likely see a significant increase in our cost of risk, particularly as a result of updating our macroeconomic drivers in our IFRS 9 model. On the top left, we see an improvement in our 30- and 90-day PDL ratios of 35 and 21 basis points, respectively reaching 3.9% and 2.9%. This is explained by the healthy growth of the commercial loan portfolio in Q1 as well as the impact of the COVID client relief measures which keep clients as current during their grace period. That said, it is important to highlight that while these clients are classified as current, we do not reverse any provisions associated with those cases. Our net cost of risk, shown on the top right remained relatively constant at 2.1% when compared to 4Q '19. Our total gross provisions for the quarter reached COP 690.5 billion, with provisions in Colombia increasing $91.8 billion, mainly explained by our provisioning of COP 50 billion per Avianca in March and the growth in our portfolio. Central America showed a decrease in provision expense as a result of the recovery trend seen for the month of January and February, with the economic reactivation that was being observed in Costa Rica and Panama. On the bottom left, you can see that our charge-off ratio for the quarter was 0.64x. This was lower than the 1.3x from 4Q 2019, which included the charge-off of Electricaribe. Coverage ratios remained relatively constant as a percent of PDLs when compared to last quarter. And additional detail on our loan portfolio quality can be found in the annexes. On Slide 10, you can see our funding structure. Total funding at Q1 2020 amounted to COP 177.8 trillion. Excluding FX, its annual growth was 16.5%, and its quarterly growth was 9.1%.. This important increase in funding was led by deposits, which, excluding FX, grew 19.5% year-over-year. As we previously mentioned, this very robust growth observed in Q1 reflected a flight to quality during turbulent times. From a composition standpoint, there was a slight mix change away from time deposits toward checking account. At Q1 over 80% of our funding was composed of deposits. And perhaps most importantly, our deposit to net loan ratio closed at 1.11x, illustrating our conservative liquidity strategy during these times. Slide 11 lays out our equity and capital adequacy levels. Total equity in the first quarter of 2020 was COP 21.8 trillion, increasing 13.9% in annual terms and slightly decreasing 0.4% quarterly. The main driver of annual growth was net income generation, which led our tangible common equity to increase by 9.4%. Regarding solvency ratios, our Tier 1 was 9.6%, which increased as a result of the capitalization of 30% of our 2019 earnings into our legal reserve as per our shareholder meeting in March. Despite the increase in our Tier 1 ratio, our total capital ratio declined because of a decrease in our Tier 2 ratio from 3.8% to 2.7% within our Tier 2 aside from the reallocation of earnings into Tier 1. The decline was due to a roll-off of capital credit for our subordinated bonds with capital treatment and non-realized losses in our fixed income portfolio partially offset by the devaluation of the Colombian peso and thus the higher reexpression in peso terms of our dollar-denominated subordinated bonds. Nevertheless, in terms of our total capital ratio, as mentioned earlier, our Q2 figures will reflect the acquisition of Multibank and the AT1 issued by our subsidiary, BAC Credomatic, as it was structured with a double trigger and thus is computed into our regulatory capital ratios for both BAC and Banco de Bogotá on a consolidated basis. This should add approximately 50 basis points to our Tier 1 ratio, net of the increase in RWAs and goodwill and is a meaningful milestone as Banco de Bogotá is the first bank in Colombia to obtain capital treatment on an AT1 instrument, thus strengthening our capital ratios and optimizing back capital structure. Turning to a review of our income statement. On Slide 12, you can see the evolution of our net interest income and margin. Net interest income in Q1 2020 reached COP 2 trillion, having grown 12.1% annually. Excluding FX, our net interest income grew 5.1% over this period. Our quarterly NIM was 4.9%, which was 97 basis points lower than in the first quarter of 2019, predominantly as a result of a lower investment NIM, which moved from 3.4% to negative 2.0%. The 541 basis point reduction in investment margin is explained by negative returns from Porvenir stabilization fund and to a lesser extent, from the bank's investment portfolio. Both entities were impacted by the sudden decline in markets, which hit their troughs in March. It is worth mentioning that since then during the second quarter, both entities have seen an important recovery in their investment returns to date. Our NIM on loans decreased 25 basis points versus Q1 2019, explained primarily by our Colombian operation. Slide 13 illustrates fee and other operating income. Gross fee income for the quarter was COP 1.25 trillion. Originating 70.3% from banking fees, 24.5% from pension fees, 3.3% from fiduciary activities and 1.8% from other sources. While fee growth was 9.6% on an annual basis, when excluding FX, fees expanded 2.9%. Part of the reason for this muted fee growth was the fact that with the onset of the quarantine in March, we started seeing diminished credit and debit card transactions as well as lower income from our bancassurance business. This trend has continued during Q2. At the bottom of the page, you'll find details on other operating income, which decreased 9.8% when compared to Q1 2019. This decrease is mainly explained by the aforementioned decline in income from portfolio investments, which decreased COP 326 billion, given the challenging market conditions observed in March. This was partially offset by a positive result from derivative and foreign exchange gains of COP 245.2 billion. Our equity method income contributed primarily by Corficolombiana, increased by COP 13.3 billion in Q1 2020. However, Q2 has commenced slowly for Corficolombiana as construction on its infrastructure projects was paused, for a significant portion of the month of April. Slide 14 presents efficiency metrics measured as a percentage of income and average total assets. Our efficiency ratio of 51.5% this past quarter shows a slight deterioration when compared to Q1 2019, primarily explaining the denominator side of the equation. As our income in Q1 2020 was positively affected by -- was negatively affected by the aforementioned forces, including lower portfolio revenues. Proof of our commitment to cost control is evidenced in our cost to assets ratio, which decreased by 16 basis points to 3.79% when compared to Q1 2019. However, due to the COVID-19 crisis, we are cognizant of the need to be even stricter with expenses and are implementing additional reductions across our businesses in both Colombia and Central America. Turning to Slide 15. You can see how the continued implementation of our digital strategy has supported our results. Monetary transactions through our digital channels have increased 34.5% year-over-year, reaching 30 million transactions on a consolidated basis during Q1 2020. These monetary transactions include everything from transfers to bill payments and illustrate that the COVID crisis has served as a catalyst to continue moving our customers to utilize our digital platforms. In fact, for the first quarter of the year, digital transactions comprised 79.9% of our total transactions, demonstrating our clients are actively adopting these channels as a medium to provide timely solutions for their everyday financial need. In addition to serving our current customers, our digital offering to sell products and either acquire new customers or cross-sell to existing ones continues to increase at a very rapid pace. During Q1, we saw an increase of 140.4% in digital sales on an annual basis, reaching more than 388,000 units sold, with saving accounts, credit cards and insurance policies being the primary products. In fact, during this past quarter, digital sales accounted for more than 50% of our total consumer product sales. These high usage figures and increasing sales number confirm our strategy of investing heavily in our digital transformation as an institution and validate our thesis that this can serve as a differentiator, not only against our peers, but also versus nonbank technology players, who are interested in competing in the financial services space. Finally, Slide 16 summarizes our main profitability ratio. Net income attributable to shareholders was COP 738.8 billion in Q1 2020, illustrating an increase of 6.0% versus the first quarter of last year and 2.2% as compared to Q4 2019. These results led to profitability ratios during the quarter of 1.6% for our return on average assets and 14.3% for our return-on-average equity. And with that, we are now open for any questions.

[Operator Instructions] We have a question from Carlos Rodríguez from Ultraserfinco.

I have 3 questions. I mean the first 1 is I want to know your opinion, and the reason of the huge difference in -- that we are seeing in provision expenses across different banks in the country or should we expect a catch-up in the second quarter for Banco de Bogotá. My second question is if you could give us more detail about Porvenir stabilization fund and how it affects the negative NIM on investments? And my third and last question is what has been the treatment for nonperforming loans in Central America and how different is it compared to Colombia as grace period here in Colombia does not -- don't account to as nonperforming loans?

Sure, Carlos, thank you for your questions. Thanks for joining us today. Going in order, your first question around provision expenses. I think it's important to delineate between what you've seen on some provisions that were made in Q1, I think, as usual, had to do with the deterioration of some loans that had nothing to do with the COVID-19 crisis. And obviously, you see that across different banks, and of course, that applies to us as well. I think you saw different banks utilizing different methodologies to start provisioning from a forward-looking perspective. And the reality of that is January and February, I think, just reflect the underlying performance. I think March is when you started to see some banks think about -- or not think about, but actually update their IFRS 9 drivers, particularly their macroeconomic drivers. We, as a bank, chose to hold off on that and do that in the second quarter. As per IFRS rules, you can do it either every quarter or every semester. So we would be doing that at the close of our Q2 numbers. As we mentioned on the call, yes, we think provisions will increase. The reason we didn't update Q1 was for, no other reason than that the crisis had just started in Colombia, and the range of outcomes was so wide in terms of what you were hearing from GDP contraction or non-contraction, unemployment, et cetera, the key variables when you look at that model, that it seemed like it made more sense to wait to see and have a little bit more certainty, although there's still a lot of uncertainty and to provision as such. But yes, you will be seeing more provisions in Q2 and likely throughout the year depending on how this continues to play out. Your second question on Porvenir's stabilization fund. Part of the regulation and how pension -- the private pension funds are required to hold a proprietary portfolio and to generate a minimum return over that. Since the bank consolidates Porvenir, remember, we own 45% roughly Porvenir directly and indirectly. But since we consolidate Porvenir, what you see is the impact of that portfolio throughout the lines of our P&L and in our ratios. But then through the minority interest, a deduction of the 55% equivalent that we do not own. And I'd say and then highlight, as I mentioned on the call as well in the script, which is that Porvenir has seen a significant rebound, along with other market participants over the last few months as you've seen markets really come back and you've seen a more risk on profile. Finally, for your third question around grace periods and client relief measures, in Central America to now we're seeing similar treatment to how we've seen in Colombia. So when you grant a grace period or relief period, by its very nature, that means that the loan stays current, is no longer past due. But neither in Colombia nor Central America, are we reversing any provisions associated with that, which may have been already past due. So that is following the regulation here in Colombia and following the consolidated financial statements as we should be.

Our next question comes from Julian Ausique from Davivienda Corredores.

My first question is about Corficolombiana. As we saw in the results, we didn't have any impact directly for the Corficolombiana operation. But I would like to know how it's been the dynamic in Corficolombiana during April and during May. And also, if you may repeat please the condition of the provision and the exposure that you have to Avianca?

Sure, Julian. And going in order as well. Thanks for joining us. With Corficolombiana, it's correct to say that the -- that we did not see any meaningful impact in Q1 of this year, but naturally, Q2, as you're seeing, I think, across every other industry, you start to see some level of results affected. But it's important to -- with Corficol, keep in mind, the primary sector is where it operates. So in order, infrastructure -- with the 4G infrastructure projects, which Corficolombiana is building, the month of April when the quarantine was the hardest, you saw a reduction or a complete shutdown in those projects. But since then, you've started to see, actually, towards the end of April, you started to see a reactivation of those projects. And the government has been very explicit, announcing that the infrastructure sector is 1 which will be a key driver for the recuperation of the economy as it provides significant employment and it's doable with -- by following -- while following social distancing mechanisms. So infrastructure was hit, and we think we'll gradually start to reactivate; in fact, it already has. Energy is via Promigas. So it's not really at risk the same way any of the broader oil and gas exposures, as perhaps one would think are. It's got a take-or-pay contract in place, and Promigas has continued to perform well. Obviously, had some lower consumption and some lower transportation in early Q2. But again, it's a fairly stable business that should continue to have that resilience. Agro industry, another focus for Corficolombiana is primarily located, in fact, in municipalities where the gradual reopening has started to happen more quickly, provides employment, provides equitable growth. And again, so we would think -- and in fact, some of the agro products where Corficolombiana operates, such as rice and a few others have actually had an increase in their prices. So agro should be relatively okay. I think where Corficolombiana has been hit and will continue to likely be hit throughout the year is in the hotel business in Hoteles Estelar. But when you think about the contribution of Hoteles Estelar to the broader portfolio, it's very small in comparison to the top 3 sectors that I just mentioned. And I think I'd go ahead and say, I think from our perspective, our investment in Corficolombiana in times like these does provide some nice diversification and access to a broader exposure to the economy, which we think is valuable. In terms of Avianca, as I mentioned on the call, Avianca filed for Chapter 11 on May 10. So it's still an ongoing situation. And what I can tell you is what our exposure is and how we're thinking about it. So our total exposure is approximately COP 705 billion. Our -- the majority of our exposure is actually dollar denominated. So just translating that at the exchange rate is where you get the COP 705 billion. For that calculation, I'm using COP 4,054, which was the exchange rate at the close of Q1. Of that exposure, you break it down to sort of 3 main subsegments. The majority of COP 512 billion or so is guaranteed by a trust agreement on credit card receivables in Central America. So ticket sales via credit card for the Central American business, we have a first claim on that. And that is the guarantee for that portion of the credit. This is structured as a patrimonio autónomo and has -- is structured as a true sale in the moment from Avianca to the patrimonio autónomo. The second piece of debt that we have is roughly COP 145 billion, which is guaranteed by Avianca's corporate headquarters, which I think most people in Colombia know, which is right over [indiscernible] is a prime location and a relatively new building. And that also was structured as a separate patrimonio autónomo, and a leasing product. And then we have roughly COP 48 billion in unsecured working capital. And at the end of Q1 of that total exposure, we had provisioned roughly COP 66 billion. And we've continued to provision that in Q2.

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

My question is you have this slide on your capital ratios following the announced acquisition of Multibank. It looks like your Tier 1 ratio is slightly increasing. But I guess the focus for the Colombian bank is going to be more on common equity Tier 1 CET1 as we move to Basel III, and I see that your Tier 1 is again slightly increasing. You have some goodwill generation and then the issuance of an AT1 bond in [indiscernible] 44:30 market, which you can count as AT1 also at the level of Banco de Bogotá. My question is how do you see that CET1 after acquiring Multibank but also pro forma for Basel III, because from memory, you have about $1 billion in goodwill from the acquisition of BAC Credomatic back in 2010. And also, what you say is that there are some high triggers for this AT1 bond, which allows you to count that bonus of AT1. Can you tell us -- and I guess that refers to principal right on triggers at a level of Tier 1 or CET1. Can you tell us what would be those triggers for that bond?

Of course, and thank you for your questions. So you're referring to Slide 6, where, as you mentioned, we provide a pretty simple pro forma cap table. How do you think about that Tier 1 line item where you're saying you can open that between core equity Tier 1 and additional Tier 1. Core equity Tier 1 falls slightly. As a result, it's really -- the goodwill at this point is much smaller, $35 million is pretty small when you think about it in relation to our total regulatory capital or our risk-weighted assets. Core equity Tier 1, in this case, falls by the addition of the risk-weighted assets that come with Multibank, which is a little bit -- it's around -- an estimation around at $3 billion to $4 billion and translating to pesos is what's included there. The flip side to that, obviously, is our additional Tier 1 instrument, which is issued -- which was issued by BAC, it's $520 million. That $520 million is fully subscribed already by Grupo Aval. It provides capital treatment, like you mentioned at the BAC level and at the consolidated level because it has a double trigger. So double trigger, it's correct, what I'm referring to, is the write-down or, in this case, conversion of the instruments from a perpetual hybrid instrument to 1 that is capital. The double trigger functions, if BAC were to cross the 7% core equity Tier 1 threshold it converts, and if Banco de Bogotá were to cross the 5.125 threshold it converts. Those numbers were picked as a result of what the regulation in each jurisdiction requires, plus in addition, the high trigger, which refers to the 7% at the BAC level was chosen from a rating agency optimization decision standpoint. So Tier 1 ratio in conclusion, core equity Tier 1 dropped slightly, additional Tier 1 increases. Thus, our total Tier 1 increases to the pro forma on March. Again, obviously, the transaction is closing in Q2, so June figures will move organically as they do. But pro forma in March, I wanted to give you some idea of how the figures move. With respect to your question around Basel III, we still aren't providing guidance there simply because there are still some open conversations that are important with the superintendency around how Basel III is implemented and regimented in Colombia. So we expect to have some more guidance on that over the next several months.

Our next question comes from Natalia Corfield from JPMorgan.

I have a follow-up on capitalization from Nicolas' question. So first, just to get it right, you were expecting on your Tier 1 is like a 50 basis point increase. I'd like to confirm that. And secondly, the transaction involving the issue of this AT1, if you could like just refresh our minds on how exactly it happened, it was like issued by BAC bought by Aval, how exactly -- how exactly did that happen? I don't know if you can disclose the price? Was it all bought by Aval? Any color, that would be great.

And yes, let me address both of those questions. So your interpretation is correct that when you look at our Tier 1 ratio on a pro forma basis of March, so and it will obviously vary a few basis points here or there, depending on, on what the June figures look like. But directionally, there is an increase in our Tier 1 ratio. As I was mentioning to Nicolas' question, what you see is the increase in risk-weighted assets. And the slight increase in goodwill, offset by the issuance of the $520 million AT1. So to get to your second question around the AT1 transaction. Page 6 shows the financing structure. And maybe I'll just walk through that in 1 minute, which is BAC pays a $730 million dividend to its holding company, which is Leasing Bogotá Panama. Leasing Bogotá Panama takes $450 million of those dollars to pay the sellers for Multibank as Leasing Bogotá Panama is the acquisition vehicle of Multibank, and as we've mentioned several times, there's not going to be a merger of BAC and Multibank initially, but rather it will operate under the banca compartida structure that is approved by the Panamanian regulator. And the remainder of the $730 million, which amounts to $280 million, will be given mid up from Leasing Bogotá Panama to Banco de Bogotá. So when you think about a sources of funds for BAC being able to pay those $730 million, $210 million came from a securitization -- credit card securitization that BAC did in 2019. So it took additional funds to be able to recompose its capital structure. And the same is true of the $520 million in the sense of BAC was significantly overweight core equity Tier 1, and we thought that a capital optimization transaction such as this one, where BAC maintains capital treatment for Tier 1, but can distribute some core equity Tier 1 made sense. So the $520 million are fully subscribed by Grupo Aval. Grupo Aval has those funds -- or had those funds, as was mentioned in the use of proceeds at the time from the bond -- the 2030 bond it issued in January. That is roughly 50%, a little bit more, but roughly 50% of that use of proceeds. So BAC subscribes to the AT1 that BAC -- sorry, Grupo Aval subscribes the AT1 that BAC has issued. And the way that the note was structured -- that the AT1 was structured, provides capital credit, both at the BAC level and also at the Banco de Bogotá consolidated level. So at the end of the day, we think it's a well-structured way to finance this acquisition that accomplishes several objectives that we've had and gets us to where we think we need to be.

[Operator Instructions] Our next question comes from Francisco Olivares from CAF.

I have a question regarding your Colombian operation. I would like to know also at this moment, the amount of your credit portfolio that has been refinanced after the Superintendencia norms regarding the COVID? And also a follow-up question on Basel III capital ratio. I would like to know after you implement the Superintendencia norms, what will be your improvement in the capital ratio approximately, what's your best view?

Starting with your first question. On Page 4 of the presentation, we actually provide the figures for the release measures. What it says is on May 15, approximately 28% of our portfolio in Colombia has had the relief measures implemented. As a reminder, obviously, each bank has its own -- or has had its own policies. Ours is a grace period of 2 months on loan payments for clients less than 60 days past due. On the consumer side, it's a grace period on both capital and interest and on the commercial side, it's a grace period on capital payments, but while still remaining current on interest payments. So that's at least the generalized policy that we're implementing. On Basel III, I would tell you the same thing I told Nicolas, which is that there's still items that are important that are outstanding and so at this point, it would be premature to give you any particular figure, but we expect over the coming months to be able to have that finalized and be able to give you a number.

We have no further questions at this time. Now I will return the call to Mr. Figueroa for final remarks.

Thank you very much to all of you for attending the meeting, and we hope that you and your families to stay safe. Thank you very much, everyone.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Bye-bye.