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

Welcome to the second quarter 2020 consolidated results conference call. My name is Hilda, and I will be your operator during this conference call. [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 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 Q2 2020 Results Call. Thank you all for joining us today. As we continue to navigate the challenge imposed by the COVID crisis, I hope that you and your families are safe. Before I begin, I would like to clarify that our results for this quarter include the acquisition of Multi Financial Group, which we have started consolidation as of June 1 in our financial statement. Throughout the presentation, we will provide details on relevant impacts. Now let me provide an overview of our consolidated results. Our attributable net income for Q2 2020 was COP 387.8 billion, representing [ an annual ] decrease of 46.4%. Results were primarily affected by increased provision expenses in the quarter, [ which translated ] into a 0.9% return on average assets and a 7.5% return on average equity. Our key ratios for the quarter were the following: our consolidated net interest margin recovered to 5.6%, led by a rebound in capital markets, which supported investment returns for Porvenir and the bank's securities portfolio in the quarter. Our fee income ratio closed the quarter at 29.3%, reflecting lower consumer activity during periods of quarantine. On the expense fronts, our cost-to-asset ratio improved significantly from 4.12% last year to 3.51% this most recent quarter. This [ translates ] the fact that when -- shall lessen the impact of Multi Financial Group and foreign exchange, our operating expenses declined 1.8% on an annual basis. Despite the significant expense control and generation of operating leverage, our efficiency ratio came in at 53.1%, which showed a deterioration from previous quarters due to lower income. In terms of our balance sheet, gross loans total COP 141.8 billion while total deposits being at COP 148 trillion. This represented annual loan growth of 29% and 38.3%, respectively. Excluding Multi Financial, as well as the impact of foreign exchange, annual growth were [ 8.3% ] for loans, and [ 18.4% ] for deposits. With this, our deposit to net loan ratio closed at 1.3x as liquidity preservation remains a top priority in order to manage potential risk. From a credit perspective, net cost of risk for the quarter was 2.9%, up from 2.2% in Q2 2019. This increase in provision reflected the update of macro values in our [ mid-to-9 model ] throughout the increased analysis of our loan portfolio and continued provisioning of specific customers. Regarding capital adequacy, our Tier 1 capital came in at 9.8%, and our total solvency was 12.4%. The impact of consolidation of Multi Financial was more than offset by the issuance of $520 million additional Tier 1 instrument buyback. Finally, I would like to take a moment to congratulate Julio Rojas Sarmiento, as he has been appointed the Executive Vice President of Banco de Bogotá. His responsibilities will continue to include being Chief Financial Officer, [indiscernible], our operations, the [indiscernible] portfolio services and sustainability divisions. Now I will hand over the presentation to him to provide more detail on our results.

Thank you very much, Alejandro, and good morning to everyone who's joined our call today. If you turn to Slide 4, you can see an update on our response to the COVID-19. As of June 30, approximately 40% of our consolidated loan book has received some sort of credit relief measure. This is explained by 32.3% of our portfolio in Colombia and just above 50% in Central America. In both cases, as a percent of respective loan types, our consumer and mortgage clients have higher rates of relief than our commercial clients. Going forward, we will continue to support our customers with tailor-made programs depending on each individual situation. In Colombia, I'd like to highlight that we have been absolute leaders in disbursing loans to corporate and SME clients under the government's national guarantee fund payroll support lending program. Through this, we have provided almost COP 1 trillion of capital to thousands of companies, reporting more than 330,000 employees. We account for over 55% of the total loans disbursed under this line. This program comes with a 90% government guarantee and is focused on preserving employment within a key segment of the Colombian economy, a cause we wholeheartedly agree with and believe to be critical in paving the path towards the country's recovery. To date, we continue to operate the majority of our branches without interruption. Deemed an essential service, we have ensured that we are there for our clients. From an administrative and headquarter standpoint, the significant majority of our employees remain connected on a remote basis. We have started to implement certain pilots where we operate in shifts returning to the office, depending on the geography and how COVID trends are progressing. Ultimately, the health of our people is our most important priority, and have been very proud of their ability to deal with these challenging conditions as well as not have any decline in productivity over the last few months. Playing a role in our community throughout the health crisis is a responsibility we take seriously. And as such, we have continued to provide support through programs to improve the health systems capacity and provide aid to the most vulnerable populations. For example, most recently, we launched a debit card in partnership with UNICEF. This is the world's first co-branded debit card with UNICEF. 1% of purchases with the card are donated by the cardholder, while the bank matches with an additional 1% donation. The resources are being provided to Colombian children who are most in need, particularly for causes related to nutrition, health and education. Moving on to our macro overview. On Page 5, you can see that in the second quarter, the Colombian economy declined 15.7%, reflecting the impact of the confinement measures implemented against COVID-19. Monthly data showed the economy bottomed out in April, an annual contraction of 20%. While in May and June, activity began to show signs of recovery with the gradual reactivation of some sectors, such as industry, construction and commerce. Growth in these months was minus 16% and minus 11%, respectively. Leading indicators such as energy demand and Google mobility trends confirm the economy continued to recover in July and August, although the recovery had lost some strength recently as a consequence of the new confinement measures in Bogotá and Medellin that were taken by local governments in view of an acceleration in the contagion rate. Significant uncertainty remains with regards to being able to project a growth rate for the year. But our internal economic research team had a base case of minus 7%, with external estimates ranging from minus 4% to double-digit declines. This will be a significant contraction for the Colombian economy, but it is lower when compared to Latin American peers, which the IMF predicts will decline 9.4%. The Pandemic has led the Colombian government to declare 2 30-day economic emergency periods, a legal figure that allows us to take the necessary measures to offset the consequences of COVID-19, which has increased expenditure in the health care system, higher subsidies for specific population groups, formal job subsidies and credit guarantees for companies. In line with these actions and similar to steps taken by many countries during this period, the government requested the Fiscal Rule Committee to suspend the fiscal rule in 2020 and 2021, allowing for higher flexibility to face the emergency. The medium-term fiscal framework established a fiscal deficit of 8.2% of GDP this year, which would direct to 5.1% of GDP in 2021. To finance this higher deficit, the government has multiple sources, including, among others, issuance of dollar-denominated bonds, increased loans with multilateral entities and additional local public debt. The projected increase in the fiscal deficit, the drop in growth and the devaluation of the exchange rate would lead public debt to 66% of GDP this year, but with an expectation that it would moderate to 61% of GDP in 2021 if fiscal rule would come back into effect in 2022. Government measures have also had an impact on inflation. The suspension of increases in rents, subsidizing public services, exempting low-cost mobile plans from VAT and the monitoring of food prices attributed to the significant drop in inflation to 2.0% in July. Of course, however, the strongest driver in this decrease in inflation was a decline in demand. Projections for inflation for the rest of the year now stand below 2%, and our economic team expecting 1.7%. With the drop in inflation and expectations, the Central Bank continued to reduce its reference rate, although it moderated the magnitude of the cuts. In the last 2 meetings, the Central Bank cut its rate by 25 basis points each time, bringing it to 2.25%. Our economic research team expects an additional 25 basis point cut in the third quarter to 2% and stability thereafter. The Central Bank also implemented liquidity measures with new terms for liquidity options with public debt, opt private debt in the secondary market, and devise a new liquidity mechanism using loans. On the external front, the gradual reopening of the global economy and the rebound in oil prices moderated volatility and led the local exchange rate to levels below COP 3,700 per dollar. Additionally, the flow of dollars from the government, the placement of USD bonds and the increase in external debt from multilateral entities contributed to the appreciation of the exchange rate. In the second quarter, the Ministry of Finance sold $7.6 billion, of which $5.6 billion were sold to the market and $2.0 billion to the Central Bank. The increase in the government's external debt will result in greater participation in the financing for the current account in 2020, compensating for lower portfolio inflows and foreign direct investment. On Slide 6, you can see figures related to Central America, where the economy grew 2.6% in 2019. As a result of the global pandemic shock, the IMF is projecting the economy to shrink 2.9% this year before recovering in 2021 to a growth rate of 3.7%. As you can see from the figures mentioned previously regarding Colombia and the rest of the region, economists are projecting the impact of COVID-19 on the Central American economy to be significantly smaller. Nevertheless, Central American growth is being affected by the impact of the global economy. For example, the slowdown in trade impacts Panama, El Salvador and Nicaragua. Costa Rica is affected through the softening of tourism. Meanwhile, lower remittances affect Guatemala, Honduras, El Salvador and Nicaragua. The weakening of domestic demand due to quarantine also plays an important role in the economy's performance, as evidenced by the correlation in the drop in activity indices and the decline in Google mobility indicators. Partially offsetting this negative impact is the lower price of oil, which serves as a buffer against a pandemic shock by reducing the local energy bill, an important contribution given its weight as an imported good. Lower fuel prices are the main reasons for the downward trend of inflation, which for the region stood at 1.3% in March. In countries with more recent information, inflation has decreased even further. With economic contraction and nonexistent inflation risks, in line with monetary policy around the world, the region's central banks eased their monetary stance and provided liquidity through different instruments. Since March, Central Bank have gradually reduced rates in Costa Rica, Honduras and Guatemala. Costa Rica and Guatemala went further and announced that they would purchase government bonds, a new measure in the region to ensure liquidity. In terms of fiscal positioning, almost all of the Central American countries have accessed funds from the IMF in order to finance the emergency derived from the pandemic, with only Nicaragua not doing so. Costa Rica, Honduras and Panama have turned to suspending or relaxing their fiscal rules while Guatemala and Panama have issued bonds in international markets. For the countries with available information, fiscal stimulus is just north of 3% of GDP. Policies adopted to face the pandemic range from higher public investment, tax deferrals, direct transfer to households and businesses, unemployment benefits, the suspension of public utility tariffs and loan guarantees, among others. Moving to the next section. On Slide 7, we've highlighted what we believe to be one of our key strengths during these more challenging economic times, which is our diversification across several different axes. Firstly, our geographical diversification, which includes a roughly 50-50 split between Colombia, which is an emerging market economy, net oil exporter and peso-denominated and Central America, which is tied very closely to U.S. growth, is a net oil importer and is predominantly U.S. dollar denominated. Within that context, almost 70% of our business is in Colombia and Panama, both of which are investment-grade countries. From a strategy standpoint, the ability to observe and benchmark different economic progressions and public policies give us flexibility with regards to the allocation of resources and where we believe we should be targeting growth. Secondly, and highlight our business diversification. Our banking business in Colombia and Central America each operated universal banks. However, even here is an interesting mix between being primarily a retail bank in Central America and a commercial bank in Colombia. And as we'll see in greater detail on the following page, we have a highly diversified loan book with regards to sectors and product exposures. Our banking businesses are complemented by our strong asset management franchises. Between our 46.9% stake in Porvenir, which is the largest private pension fund in the country and our 95% stake into [ FiduBogotá ], we consolidated over COP 200 trillion in assets under management. While the results of these businesses have some correlation to market movements, they also provide an attractive fee income stream, which during these more challenging times is a nice complement. Finally, our 33% stake in Corficolombiana is valuable amidst this new normal, given the businesses that comprise as primary focus. Infrastructure has been pointed to as a major driver in Colombia's expected economic recovery, and aside from the first few months of lockdown, construction has been able to operate at almost full capacity and meet budget. Corficolombiana's other major area of investment, energy and gas transportation, the stable utility that has performed well and should continue to do so for the most part. Turning to Slide 8. We present the continued positive results we've seen with our digital efforts. Over the last year, we've seen a 21% increase in clients actively using our digital channels. When analyzing this as a percent of total active clients, our 2.82 million digital users is more than [ 20 ]% of our base. This illustrates that the increase in users is driven not only by new clients, but also by a migration of a portion of our existing relationships. Combined with having more clients using digital channels, we also have a greater percentage of our total transactions occurring on these channels. This is a very important metric that illustrates our ability to continue to shift higher cost brick-and-mortar capacity towards digital infrastructure. In fact, for Q2 2020, 88% of total transactions occurred on digital channels. When analyzing this on the basis of monetary transactions, in other words, isolating primarily balanced consultations, we've seen a 31% increase. Among the improvements we've implemented that have driven these results are new authentication mechanisms and helpful on-boarding processes. Complementing our increased digital service, we continue to make very significant strides in our percent of sales that are conducted digitally. For the second quarter, 41.3% of our total consumer sales were 100% digital, not a single paper being required. This is up from a comparable 23.6% at Q2 2019. Not only does this very materially improve the customer experience, but it allows us to have real-time data for underwriting and permits us to reduce operating expenses that were previously required. We're very excited with this progress that we've seen on the digital front and are fully committed to continue investing in this transformation process. Regarding our consolidated balance sheet, on Slide 9, we present our asset and loan portfolio metrics. As of Q2 2020, our consolidated assets reached COP 218 trillion, with a year-on-year growth of 33.4%. When you isolate the acquisition of Multi Financial, which added approximately COP 18 trillion, asset growth over the period was 23%. When you further exclude the impact of foreign exchange, growth would have been 13.7%. Our loan portfolio represented 63.2% of total assets at June 30, followed by fixed income at 10.4%, equity investments at 3.4% and other assets at 22.9%. Our consolidated gross loan portfolio amounts to COP 129 trillion, which represented a 29% growth rate versus Q2 '19. However, when isolating MFG and FX, the growth rate was 8.6%. Here, it is important to highlight the quarterly movement, which when you exclude MFG and FX, illustrated a decrease of 0.5%. This reduction came primarily in the consumer book, which decreased 3.4% [ under this uptick ], as we pulled back originations and reconfigured our underwriting standards to incorporate numerous additional variables. Microcredit also declined 4.7% without FX and MFG. But as a percent of our book, it is only 0.3%. On the other hand, we saw growth of 0.4% in our commercial portfolio and 1.3% in mortgages. As presented on the top right, we benefit from an ample diversification across economic sectors, both in our commercial and retail portfolios. A few points to highlight. A significant majority of our retail portfolio concentrated in mortgages, credit cards, payroll loans and secured products, all of which tend to perform better during economic softness. Only 3.2% of the book is in consumer unsecured and until now, our conservative risk management has made it such that the majority of this portfolio is performing well. In our commercial book, our exposure to oil and gas outside of Ecopetrol and its subsidiary transportation business is very low, amounting to 0.3% of our total exposure. Other sectors, particularly impacted by the pandemic such as tourism and transportation, also have a relatively low share of our portfolio and are included in the other section. Multi Financial's strong commercial and mortgage portfolio led to a slight rebalancing in our loan composition towards these lines, which increased their participation in 78 and 64 basis points, respectively, against a reduction of 139 basis points in the consumer share of our portfolio. In terms of guidance, we expect to continue to be prudent with growth going forward. The numbers will depend upon the amount of recovery in the countries where we operate. Our commercial book showed strong growth during the month of March and April. In recent months, that growth has slowed down somewhat. The consumer portfolio has behaved with a different tendency. And initially, the pullbacks led to shrinkage in the book, but we've gradually started to reactivate opportunities. Turning to Slide 10, we'll move to our consolidated loan portfolio quality metrics. On the top left, we see a stable 30-day PDL ratio and a slight reduction of our 90-day PDLs as a result of the relief measures implemented that gave individuals a grace period and/or refinance. Our consolidated net cost of risk on the top right rose to 2.9%, reflecting the increase in provisions for the quarter. Net provisions totaled COP 1.06 trillion, an increase of almost COP 400 billion from last quarter. We'll see some additional detail that will constitute these provisions on the following page. On the bottom left, you can see that our charge-offs to 90-day PDL ratio for the quarter was 0.55x and that our charge-offs to average loans was 1.5%, slightly lower than previous quarters. As a result of our higher provision expense, our coverage ratio as a percent of PDLs increased and our allowance to gross loans grew 9 basis points versus last quarter. When excluding Multi Financial, allowance to gross loans grew 51 basis points versus Q1. Slide 11 presents a breakdown of the increase in provisions and our loan portfolio quality ratios broken down by segments. With regards to provisions, the COP 1.04 trillion expense can be segmented into the following buckets: first, COP 277 billion coming from an update to the macro parameters in our expected loss model. This was significantly higher than the provisions required at Q1 for the same item. In particular, as discussed previously in our macro overview, the impact was felt more so in Colombia as consensus growth expectations are more negative as compared to Central America. In fact, the IMF is expecting Central America to shrink 2.9%, while for Colombia, projected contraction is more than 2x that and the regional average is more than 3x that figure. Our corporate and SME provisions also increased, moving from COP 92 billion to COP 145 billion. Contrastingly, our consumer provision for the quarter were very similar to those observed in the previous periods. And finally, our individual provisions increased from COP 131 billion to COP 151 billion. Within this category, the most important credit to note is Avianca. As a reminder, our total exposure to Avianca is COP 667 billion at June 30. Of this exposure, by the end of Q2, we had provisioned COP 136 billion, or 20.4%, the COP 70 billion of that coming during this period. We have 20.1% of this credit guaranteed by the company's headquarters and an additional 71.2% guaranteed by credit card receivables. Our pace of provisioning going forward will depend upon how the restructuring continues to unfold. In terms of 30-day PDLS, on a quarterly basis, without including Multi Financial, our commercial and mortgage portfolio deteriorated 20 and 51 basis points, respectively, while our consumer book showed a slight improvement of 3 basis points. As our loan relief program continues to run its course, we'll likely see these figures reflect deterioration, but the extent of it remains to be seen. Regarding 90-day PDL ratios by business line, excluding Multi Financial, we saw an increase in the commercial book of 35 basis points. In the consumer and mortgage portfolios, we saw an improvement of 69 and 23 basis points as a result of the implemented relief measures that delayed bucket migration. Microcredit, which accounts for less than 0.5% of our loan book, experienced a decline in its ratios as most of these loans were covered by relief measures. Moving to Slide 12, we present the geographical breakdown of our loan quality ratios. Starting with Colombia, you can see a slight increase in our 30- and 90-day PDL ratios. With regard to 30 days, this was primarily due to a portion of the consumer portfolio that [ will request relief ], as well as certain consumer and mortgage credits starting to roll and collections being implemented. On the 90-day side, this is explained primarily by the commercial portfolio, partially compensated by consumer and mortgage loans. Net cost of risk increased to 3.6% in Colombia as a result of a net provision expense of [ COP 593.2 billion ]. This represented an 87.1% increase versus Q2 2019, with the additional provisions coming 59.8% in consumer, 31.8% in commercial and 9.6% in mortgages. The additional provisioning we've established is prudential in nature, given that our past due ratios have yet to illustrate deterioration and how much more necessary will depend upon how the economy continues to improve. All of our coverage metrics have increased when compared to Q1 as a result of our additional provisions. Regarding Central America, PDL ratios, evidence an improvement, explained mainly by the moratorium offered on consumer loans, credit card payments and mortgage loans. Net cost of risk for the quarter when excluding MFG, was 2.5%, which was 72 basis points higher than last quarter and 29 basis points higher than Q2 '19. A few factors to keep in mind are: first, as previously mentioned, the expected impact of the economic downturn in Central America is currently less adverse than in Colombia and other parts of the world. And as such, the macroeconomic component of the expected loss model is less impacted. Second, the decrease in originations and increase in payments in the consumer portfolio led to a drop in the overall size of the book and the slightly lower provisions were necessary [ via mix ]. Third, when making the comparison against Q2 '19, it should be noted that this figure is starting from a higher base, mainly explained by higher provision expenses made in Nicaragua due to the riskier economic environment that prevailed 1 year ago. And finally, as a clear leader in the region in payment and credit card lending, we think the business is well positioned on the consumer side. On the commercial side, we feel the loan book has strong collateral and is well underwritten from a quality standpoint. That said, nobody is being spared from the impact of COVID, and our ratios will likely continue to be under pressure, with an important degree of uncertainty until we see performance of debtors post-relief measures. Coverage ratios for Central America improved as a result of the effect of the aforementioned relief measures. Moving to Slide 13, you can find details of our funding structure. Our total funding amounted to COP 188.9 trillion, which represented an increase of 37.5% versus Q2 2019. When excluding MFG and the impact of FX, year-on-year growth was still a robust 16.5%. Our funding composition was led by deposits, which amounted to 78.6% of total funding at the end of the quarter. Within the category of long-term bonds, it included our $520 million additional Tier 1 instrument that was issued by BAC last May, tied to MFG's acquisition and the optimization of our internal capital structure. From a deposit competition standpoint, as compared to Q2 2019, was a slight decrease in time deposits towards checking and savings account. Given the accelerated growth of our funding base, promulgated by a [ slight ] quality in our banking business and conservative liquidity management, at the end of Q2, our deposit to net loan ratio stood at a very resilient 1.1x. On Slide 14, we present our equity and capital adequacy levels. Total equity for the quarter was COP 22.5 trillion, increasing 11.6% in annual terms and 3.4% quarterly. Part of this growth is explained by an increase in noncontrolling interest of COP 500.7 billion, mainly driven by the preferred stock of MFG, which was not acquired as part of the transaction. Our attributable equity also increased during the quarter due primarily to our earnings for the period, slightly offset by a reduction in our AOCI as a result of the pace of revaluation. Our tangible common equity for the period was COP 13.2 trillion. Regarding solvency ratios, total Tier 1 was 9.8%, which includes a core equity Tier 1 of 8.6% and an additional Tier 1 issuance of 1.1%. It is worth mentioning that even with the Multi Financial acquisition, we were able to increase our total Tier 1 by 22 basis points. Tier 2 decreased by 8 basis points due to a lower subordinated debt balance, impacted primarily by the revaluation of the peso in the quarter, partially offset by the capital recognition of 30% of our Q2 net income. As a result, total solvency stood at 12.4%, improving 14 basis points when compared to the previous quarter. Now moving to Slide 15, you will find the evolution of our net interest income and margin. Net interest income for the quarter of 2020 totaled COP 2.1 trillion, with quarterly and annual growth of 4.5% and 13.9%, respectively. Isolating the impact of FX, these growth rates were 3.3% and 0.6% negative. Our NIM for Q2 was 5.6%, increasing 66 basis points versus Q1 of this year. This improvement is mainly explained by a better result from our investment NIM, which rebounded from negative 2% last quarter to a positive 3.5% after Q1's particularly challenging market conditions. This improved performance came from Porvenir's stabilization fund as well as the bank's investment portfolio. Excluding Multi Financial, the total NIM showed an even greater increase to 5.8%. Multi Financial slightly weighed down our NIM due in part to its higher concentration in commercial lending as well as the lower NIMs generated in the evidence in Panama. This impact is counterbalanced by a lower cost of risk and other positive factors that are seen in Panama. NIM on loans, excluding Multi Financial, remained stable at 6.1%. That said, it should be noted that as the Central Bank rate in Colombia has dropped significantly and labor rates are near 0, going forward, we will likely start to see some margin pressure. This is partially offset by our ability to reprice funding to lower costs and our fixed rate products in our retail portfolio. On the top half of Page 16, you can see detail on our gross fee income, which in Q2 2020 totaled a little over COP 1 trillion. This represented a clear reduction from our usual level between COP 1.2 trillion and COP 1.3 trillion. On a quarterly basis, this decline was 17.9%, and on an annual basis, it was 16.2%. Banking, pension and credit card fees were the income streams most affected by the pandemic, showing decreases of 22.6%, 15.2% and 13.7%, respectively. Lower transactionality, combined with temporary fee waivers and lower originations impacted the consumer business. That said, we've gradually seen our fee income start to recover over the last few months as activity restarts and conditions are reestablished. At the bottom of the page, you can see the execution of our other operating income. When compared to Q2 2019, other operating income increased 17.5% to COP 497 billion. On a quarterly basis, it grew by 32%. This is mainly explained by the positive returns generated by our investment portfolio, both from the bank and from Porvenir. Our equity method income, derived mainly from Corficolombiana, showed a negative impact in Q2 as a result primarily of the following factors: first, infrastructure was stalled in the month of April due to the strict nationwide lockdown. And thus, Corficolombiana was unable to accrue income from progress in constructing its forward projects. As one of the first sectors to reactivate, this gap has closed over the recent months. Additionally, gas distribution income from Promigas was affected by lower nonregulated consumption at the beginning of the quarter. On a smaller scale in terms of impact to overall results, the agricultural businesses have suffered some supply chain disruptions, which are gradually recovering. And even less impactful, the hospitality business has basically had to shut down, which had an attributable loss to Banco de Bogotá of COP 4.9 billion in the quarter as opposed to an attributable net income of COP 0.4 billion when compared to Q2 2019. Slide 17 presents efficiency metrics measured as a percentage of income and average total assets. Total operating expenses for Q2 2020 were COP 1.86 trillion. When isolating the impact of consolidating Multi Financial and FX fluctuations, total operating expenses illustrated a 1.9% annual decrease. Compared to Q1 2020, expenses fell 5.1%. The fact that we've managed to reduce operating expenses when analyzed on a normalized basis illustrates our significant commitment to expense control. Maintaining this discipline is a clear focus for our business going forward. In terms of cost to assets, excluding Multi Financial's impact, we continue to show the ability to generate operating leverage, illustrated by the reduction in this ratio of 56 basis points to 3.55%. When analyzing the efficiency ratio, you see a deterioration from 51.5% to 53.1%. However, excluding Multi Financial, it would have been 52.6%. As seen above, the deterioration of this ratio, excluding MFG, is not a result of increased expenses, but rather due primarily to a contraction in fee and other income. Finally, Slide 18 summarizes our main profitability ratios. Net income attributable to shareholders was COP 387.8 billion in Q2 2020, with an ROAA of 0.9% and an ROAE of 7.5%, producing a positive net income result in spite of increasing our provisions more than 61.6% on a year-over-year basis and 49% when isolating FX, shows the value of our diversified platform and the robustness of our business model. In particular, what allowed us to have an increase of COP 133 billion in our earnings for provisions, taxes and fee income was, among other factors, a COP 26 billion increase in interest income, a positive contribution of COP 27 billion from other income, savings of COP 34 billion in recurring expenses and a COP 20 billion positive operational contribution from our new subsidiary, MFG. On the other hand, decline in our fee income of COP 315 billion and our equity net income of COP 76.3 billion, weighed on our results for the quarter along with provisions, but our expectation is for these assets to gradually come back as economy starts operating again. And with that, we're now open for questions.

[Operator Instructions] We have a question from Julian Ausique from Davivienda Corredores.

I would like to know about what are the macro assumptions that you were using to do the expected losses model and why this provision are so high due to the macro assumptions. And the other question is that you can clarify how much do you have provisioning already for Avianca?

Julian, thank you for your questions. Starting with the first one around macro scenarios for IFRS 9. I'd say a couple of things. The first is, as you know, the macro section includes both a forward-looking perspective, plus also picks up the impact that we've had to date. And obviously, this is done on a regional basis. So starting with Colombia, as you can see from our macro section today, Colombia showed a GDP decrease in the first half of around negative 7%. And then going forward, IFRS 9, what you're looking at is the next 12 months for Colombia. And so when you look at the next 12 months, you were expecting an about flat to slightly positive impact to GDP given by further contraction this year and a recovery next year, very much in line with external estimates. Similarly, when you look at Central America, in fact, what you see is a slightly less negative impact given not just because of what's been seen to date, but the expectation is going forward, when you look at, for example, IMF estimates where the region is decreasing 2.9% for this year, for example, versus Colombia at 7.8%, you see a lower impact in Central America to date, which is not to say that necessarily the impact will be lower, but that's just where we are today. So I think that gives you a little bit of guidance as to what we're using for IFRS 9 and for that macro indicator. And at the end of the day, what that macro indicator is meant to us any additional or latent risk that isn't reflected by a change in stages for the loan book. With regards to Avianca, at June 30, our total exposure is COP 667 billion. I'd note that there is an important portion of this debt that is dollar denominated. So the peso translation shifts, depending, obviously, on what the end-of-period number is. By the end of Q2, we had provisioned over 20% of this credit, so approximately COP 136 billion. And roughly around half of that, we did during Q2. So at this point, it's around 20%. I think it's incredibly important to highlight the structure around that credit, which is that more than 20% of the credit is guaranteed by the company's headquarters, which is AAA office in Bogotá and an additional 70% of that credit is guaranteed by credit card receivables. I think going forward, our pace of provisioning is going to depend upon how the restructuring continues to unfold. But it's important to notice, obviously, the structure when thinking about the provisioning that we've had to date.

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

Yes. I have one question. You mentioned the debt relief program, which, of course, has been quite significant for you and for other banks in Colombia, you said it's about 40% of the loan book that has been renegotiated because of the economic conditions. If you can talk about the [ up-close ] debt relief measures where it's been ramping, grace periods, extending valuation of the loans, starting some coupons on the loans. And also, some clients have already resumed paying this loan, what's been the payment behavior of those clients? And then finally, maybe on the regulatory front, if you can remind us what's been the treatment of these loans renegotiated because of COVID-19, if you continue to keep them as performing loans? And when would that policy end?

Nicolas, thank you for the questions. I'll go ahead and start with the debt relief program. So I think you've hit it spot on, and it's an important clarification to make, which is that the numbers which we shared on Page 4 around a little bit over 32% of loans in Colombia and over 51% of loans in BAC, having a relief measure it's important to highlight that this is an accumulated total. It's not that today, you still have that percentage of the loan book in a relief program. In fact, if you were to look at numbers today, you're seeing 1/3 or less of that still in some sort of relief or grace period. To your point and to your question around the resumption of payment, we've actually been pleasantly surprised to know, with the performance of our clients post coming off of these grace periods. To provide a little context, our philosophy was that during these times, we obviously need and want to be there for our clients, those who are loyal clients of ours. But the way that we've structured these relief programs is we felt that it was important to go, call it, step-by-step, not provide one, too long of a period for a relief measure; and two, do it on a case-by-case basis and those who really need it. There are a few exceptions to that. But for the most part, we felt that, that was important and it was fair for our clients but also gave us significant data and allowed us to not be in the dark for several months in terms of what was going on. So I think you've seen for those that have started to resume payments, effective performance anywhere between 70% to 80%, depending upon the loan type that have started to resume payments with absolutely no issues. And when you think about what's included in those relief programs, it's a combination of, in some cases, grace period, short grace periods of 1 month or 2 months. But on the other hand, it could also just be a lowering of the quota of the payment that's due monthly in terms of helping from a cash flow standpoint. In terms of the regulatory front, particularly in Colombia, there was a carve-out given to these grace periods in terms of not having to reclassify them as restructured for now. Towards the end of the year, we'll have to reevaluate where those are. And I think that that's appropriate because by the end of the year, we'll start to have even more data on performance. But I think in summary, we felt it's important to provide this support to our clients. We've seen our clients to now performing relatively well given the circumstances. And this is something that we're going to have to obviously continue to monitor. Because naturally, we'll only have the actual data once they start performing.

Our next question comes from Daniel Mora from CrediCorp Capital.

I have several questions. The first one, can you repeat, please, the details regarding the provision expenses recorded during the quarter? What percent was due to Colombia and what percent to Central America? And beyond the macro perspectives that you already mentioned, do you perceive more risk in the local economy, considering that the relief that you provided to clients were larger in Central America? The second question is, do you believe that peak in provision expenses was reached in this quarter? Or can we expect a similar performance in the coming quarters? And the third one, if I may, is regarding capital. In the last presentation, you mentioned that the impact of the acquisition of Multibank will be 50 basis points increase in the Tier 1 ratio, but in this quarter, the increase was lower than expected. Can you explain why was this?

Daniel, again, thank you for your questions. To go in order, if you -- for your first question around the breakdown between Colombia and Central America, what you can see based on the cost of risk that we've provided on Page 12 is that cost of risk for Colombia for the quarter was higher than that in Central America. Colombia, we had a 3.6% cost of risk, whereas in Central America, when you exclude MFG, it was 2.5%. The overall provision number for the quarter was a little bit over COP 1 billion. And that COP 1 billion, if you were to split between the 2 regions, roughly comes out to 60-40 split, Colombia versus Central America. In your question around what are we expecting from Colombia and Central America going forward, I think it's probably not unreasonable to think that Central America's cost of risk will tick up slightly over the next couple of quarters, whereas in Colombia, you may see more of a stabilization perhaps. This is highly speculative, of course, and will depend just upon how these economies continue to perform with everything that's going on. And I think it will depend really upon how accurate, for example, IMF projections are and external economists' projections are in terms of the shock that this is going to represent for the economies. I think when you move now towards provision expense, in terms of what are we thinking for the next following quarters, I think you'll likely see -- on Page 11, we provided in the presentation, we provided a breakdown of where that COP 1 trillion of expenses and provisions came from. And what you saw is a significant expected loss model contribution and more on an individual basis and on a corporate and consumer basis, numbers more in line with slight increases versus historicals. Going forward, what you can probably expect is to see the expected loss model contribution come down slightly over time. And then what you'll see is the consumer or the SME and individual provisions particularly come up. Just as in those buckets, what you'll see is changes from stage 1 to stage 2 or Stage 2 to stage 3. And those changes are driven by, for example, PDLs or driven by other factors that will likely start to play out over the course of the year. But the macro model is at this point, if you will, integrated in this. And the only thing that would increase that would be changes in perspective. So I think on the whole, you're going to continue to see pressure in provisions. I don't think that the worst is behind us. And I think that's going to be, like I said, there's a lot of uncertainty around it, so it depends on how it evolves. Those were your provision questions, I believe, and now moving to capital. I highlight that actually, at Q2, our total Tier 1 was 9.8%, which again was 20 basis points higher than Q1, and that already incorporates the inclusion of Multi Financial Group, which I think is a very positive development. I think your question is perhaps what we showed last quarter was just a simple, a very simple pro forma to give you directionally the impact of what the acquisition would be. But I think by no means that, that include all of the purchase accounting, and frankly, it was an all things equal perspective. And as you know, what moves capital is a lot more than just that acquisition, but rather higher growth, for example, that we saw in the commercial book during the period and several other factors that contributed as well. But I think those were your 4 questions.

[Operator Instructions] Our next question comes from Natalia Corfield from JPMorgan.

I have a question with regards to your bonds, the '23s and the '26s. I believe they are already losing capital treatment. So I'd like to know your thoughts around those. If you have any -- if you think about tendering them on international markets. And also, your thoughts about the new issuance going forward in the year, if you think about issuing subordinated notes, Basel III compliant as some of your peers have done it. And lastly, on your capitalization, if you already have an idea of how much the impact of Basel III will be? As I understand from you would -- the impact -- there wouldn't be too much of an impact, it would be more or less flat. So if you have any other development on that front, that would be great as well.

Natalia, thanks for your questions. Starting with your questions around our Tier 2. You're correct in that our 2023 and 2026 subs are already starting to roll off on capital credit. Our 2023s are rolling off 20% per year. And our 2026s are rolling off 10% per year, just given the transition that was established by the superintendency. So as those start to lose credit, and 2023 is roughly around 40% and 2026 is around 60% left. As we start to look credit -- lose credit, we certainly will analyze opportunities around those. But I think more than looking at those on an absolute basis, what we think about is how do we feel with our total capital ratio and then how does that split between Tier 1 and Tier 2. As you can see with our numbers today, our Tier 2 is 2.6%, which we feel is adequate, and we feel comfortable with where that is. But I think to answer that question as well as your second question around any new issuance, we look at that opportunistically. It will depend upon market conditions, it will depend upon the growth prospects we're seeing going forward. So I don't think there's any concrete plans necessarily, but it's certainly something that we're always thinking about and looking at. With regards to your question around Basel III. As you know, in Colombia, Basel III is set to be adopted on January 1, 2021, so beginning of next year. And we will be compliant with the requirements established in the regulation. Our internal calculations are actually that this adoption will initially bring a positive contribution to our capital position. But that over time, it will depend upon how the economy and the environment continues to evolve as well as the transition period that's ultimately established. But like I said previously, I think at the end of the day, what we look at with our capital levels are a function of our growth opportunities and a buffer for any potential losses. And we think we're at a pretty good level given the 9.8% we're showing today. And the Tier 1 instrument, the AT1 instrument that was issued last quarter by BAC, which is $520 million, we think further solidifies the capital position.

We have no further questions at this time. Now I would like to return the call to Mr. Figueroa for closing remarks.

Thank you. Thanks to all of you for joining us today, and I hope that you and your families keep safe. And see you next quarter. Thank you very much again.

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