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

Welcome to the 3Q 2020 consolidated results conference call. My name is Vanessa, 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, Vanessa. Good morning, ladies and gentlemen, and welcome to Banco de Bogotá's Q3 2020 Results Call. Thank you all for joining us today. I hope that you and your families continue to stay safe. I would like to start by sharing that Banco de Bogotá was founded in November of 1870. And all this month, we are celebrating our 150th anniversary. We are Colombia's oldest bank and most historic financial institution and are privileged to be celebrating such a landmark moment. Today, between the bankers and our subsidiaries on investments, we probably service more than 18 million clients in 11 countries, thanks to the dedicated hard work of over 46,000 employees. We are the second largest bank in Colombia, measured by total assets, and the Colombian bank with the most robust international presence. Even more than celebrating the past, we look forward to further contributing to the growth and progress of the regions where we operate. We will continue assessing our sustainability strategy and supporting the communities that we serve. In that regard and aligned with our corporate social responsibility, I want to highlight the main initiatives we have accomplished in the last months. Hence, Banco de Bogotá has been absolutely leader in disbursing loans to corporate and SME clients under the government national guarantee funds payroll support and lending program. With this, we have provided almost COP 1.4 trillion of capital to thousands of companies and hundreds and thousands of employees. We account for close to 60% of the total resource disbursed under this line. This program comes with 90% government guarantee and is focused on preserving employment within a key segment of the Colombian economy, a cause we all wholeheartedly agree with and believe to be critical in paving the path towards the country's recovery. Secondly, our co-branded debit card with UNICEF has been a complete success. So far, only a couple of months into -- since [ inception, ] we have issued more than 50,000 cards, accounting for almost 35% of newly dispensed debit cards. This partnership with our client is helping the children in this country who are most in need, with 1% of purchase being donated by clients and an additional 1% match being donated by the bank to UNICEF programs throughout the country for [indiscernible] I also want to mention that on September 24, Banco de Bogotá issued a COP 300 billion green bond. This is our inaugural green bond, and thus -- and we are thrilled with the investor confidence we received. The bid to cover on this issuance [indiscernible] and the pricing was achieved -- and the pricing we achieved was extremely attractive. In fact, I [indiscernible] some comparable nongreen issuance around the same period. Finally, I would like to share a few high-level points. It is still too early to say that the COVID crisis is a conclusion, but we are definitely encouraged by the progress we have seen with the creation of the vaccine as that is the only sustainable solution in the long run. We believe the value strategy in the meantime still remains [ high street, ] a regime of testing and failing, but we cannot continue to see business close and breaking people's livelihood. We are gradually seeing almost all the jurisdictions where we operate show stronger economic performance and recovery. It will be important to avoid [indiscernible] COVID sites and lockdown measures over the next months until we have a vaccine readily available. And finally, we are playing by and [ should play in ] the business [indiscernible] we have demonstrated over the last several months while despite challenging conditions, we continue to show the value of our strategy. While profitability has come down this quarter, we produced 10% return on equity and expect to have a double-digit return on equity for 2021 as well. Now I will hand over the presentation to our Executive Vice President, Mr. Julio Rojas Sarmiento, who will provide an overview of our results.

Thank you, Alejandro, and good morning to everyone who has joined our call today. Our attributable net income for the period was COP 530.5 billion, which translates into a 1.2% return on average assets and a 10% return on average equity. This result represents a 36.8% increase versus Q2 2020 and a 14.8% contraction versus Q2 2019. The recovery in our net income versus last quarter was driven by several factors, including: first, the gradual economic reactivation of the jurisdictions where we operate, with the resulting increase in lending and higher transactionality fee income; second, rigorous cost controls and efforts to reduce operating expenses, particularly evident when you isolate the impact of FX and MFG, which illustrate a decrease in 9.4%; third, a strong quarter for treasury and fixed income gains; and fourth, robust results from our investments in Corficolombiana and Porvenir. As compared to Q3 2019, our results continue to be weighed down by higher provision expenses, which we expect to continue through the end of the year but should gradually start to normalize during 2021. Regarding our key ratios, I'd highlight the following. Our consolidated net interest margin closed at 5.2%. When isolating the incorporation of Multi Financial Group, it was 5.6%, in line with last quarter. Versus the previous year, our NIM has come down approximately 30 basis points due primarily to the reduction in the Central Bank rate in Colombia and in the U.S. That said, it's important to mention that when excluding MFG, our yield on loans has only dropped from 10.1% to 9.1%, representing a 10% decrease, while our cost of funds declined from 3.8% to 3.1%, representing an 18% decrease. This showed continued improvement in our loan portfolio mix and our ability to capitalize on our ALM practices. Our fee income ratio was 29.5%, up 20 basis points versus Q2, reflecting the growth of banking fees given an increased level of transactions as economies reopened. Our efficiency ratio improved materially to 47.3% as a combined result of our aforementioned expense control and income pickup. Moving to our balance sheet. Gross loans totaled COP 143.6 trillion, which represented an annual growth of 22.7%, while total deposits were $151.9 trillion, increasing 29.9% year-over-year. These growth rates include the Multi Financial Group acquisition as well as the impact of FX. When isolating these factors, annual growth were 5.7% and 13.7% for loans and deposits, respectively. Consequently, our loan-to-deposits ratio closed at 1.11x, evidencing our ample liquidity profile and the flight to quality that has resulted from the COVID crisis. In terms of credit and capital, our net cost of risk increased 56 basis points, resulting from additional provision in our credit portfolio, where we are being proactive and prudent in the buildup of reserves. Our capital adequacy remained very robust, with Tier 1 capital of 9.1 -- 9.7% and a total solvency ratio of 12.7%. Finally, with regards to guidance, I'd point you towards the following. For 2020, loan growth is expected to be between 11% and 13%, without including the impact of MFG's acquisition. Isolating FX, it should be around 5%. Consolidated NIM should be slightly above 5.25%. Cost of risk is expected to be between 3% and 3.25%. Our fee income ratio should be around 30%. Our efficiency ratio is expected to be approximately 50%. Regarding profitability, our ROAA and ROAE are expected to be around 1% and 9.5%, respectively. For 2021, assuming we continue to see economic performance improving in the countries where we operate, we're targeting loan growth of between 8% to 10%, consolidated NIM between 5% and 5.25%, cost of risk between 2.25% and 2.5%. Our fee income ratio should be north of 30%. Our efficiency ratio is expected to be approximately 50%. And regarding profitability, our ROAA and ROAE should come in around 1.2% and 11%, respectively. Now moving to Slide 5. I'd like to highlight the core pillars that have underpinned our performance this year. First, our operation is based upon a well-diversified model in terms of geography and business lines. Our regional presence, combined with our direct and indirect participation in banking, pension, infrastructure and gas transportation sectors, among others, afford us access to resilient net income stream that complement one another. This year, for example, where credit businesses have been more affected, we've been able to maintain almost double-digit return on equity numbers for the year due to other contributors. Beyond the value of lower volatility, this diversification feeds our second pillar of economies of scale and ecosystems. We firmly believe scale is a critical necessity in the businesses where we operate for several reasons. First, as everyone move towards more client-centric attention models, this provides us with a clear ability to build ecosystems. We have touch points with the same clients in several different spears, which permits a deepening in the relationship. Moreover, it gives us various unique channels through which we can acquire new customers and bring them into our broader space. The synergies that can be leveraged have been valuable to our results thus far, and we're even more enthusiastic about the opportunities left to catch. Second, this diversified scale allows us to amortize our necessary investment and overhead spend, such as technology and operations, across a larger base without impacting bottom line results as much. Finally, this previous point makes it possible for us to fully ingrain our third pillar, transformation and digitalization. We'll see some more concrete results on the next page, but from a philosophical standpoint, we're more convinced than ever at the importance of this process. The COVID pandemic has only further accelerated digital adoption by our clients, both on the commercial and consumer side. The transformation of our core businesses as opposed to splitting our focus between traditional operations and new digital ventures was a challenging undertaking, but the rewards as we demonstrate success are greater. We truly believe the bank has innovation ingrained in its DNA. This is what led the institution to be the first successful private bank in the country and is what has allowed us to be by our client side for the last 150 years. This pillar of transformation and digitalization is undoubtedly core when we think about our next 150-plus years. Turning to Slide 6. You can see some of the key results around our digital efforts. Our primary focus initially was on the creation of a new sales channel. The benefits to this are clear, not only from a customer experience standpoint, but also from the perspective of efficiency. We launched our first 100% digital product in 2017, a pioneer product in Colombia, and we were the first bank to demonstrate that it was possible to have a fully digital savings account without restrictions that came with a debit card. At that point, we had set an objective to getting to 25% of total sales of our primary consumer products via digital channels by 2020, thinking this was an aggressive goal. Today, in Colombia, 69% of our total sales as of September of our savings accounts, credit cards and consumer term loans were conducted 100% digitally without a single paper. Similarly, we've made tremendous progress in Central America on this point. While some of the countries where we operate still have some lower levels of digital penetration, BAC Credomatic is leading regional efforts to increase its adoption. The second and third quadrants illustrate the rapid adoption we've seen in terms of mobile banking app users and total digital transactions. As digital trends have solidified the new normal in banking, over the last 2 years, we've seen a very significant increase in mobile app users. Moreover, growing at an even more accelerated pace, total digital transactions have become by far the primary channel that our clients use to interact with the bank, illustrating the well-received nature of these channels. Proof of this are the 4.3- and 4.5-star ratings our app has received on the Android and App Store, which compares very favorably versus the average of 3.3 and 3.6 stars received by comparable banking apps. This growth in our digital channels not only gives us more interaction with our clients on a day-to-day basis, but also has allowed us to capture efficiencies by reducing our physical footprint. Our thinking around banking branches is very clear. We absolutely believe in their value from the perspective of being able to offer our clients an omnichannel experience. As opposed to seeing branches as a legacy disadvantage, we believe they are a critical piece of our distribution and client service strategy. However, we are also certain that we need to continue to materially improve the in-branch experience and that we'd likely have an opportunity to continue to reduce the number of storefronts we operate. To that end, by the end of this year, we should have 38 digital branches, with an eye towards growing these. And in turn, we should continue to see a decline in the number of total branches. Now I will turn the presentation over to our Head of Corporate Development, FP&A and IR, Mr. Diego Rosas, who will provide more detail on the economy and our quarterly results.

Thank you, Julio, and good morning, everyone. Moving on to Slide 7. We provide our macro overview, starting with Colombia. The economy contracted again in the third quarter with a drop of minus 9%, showing a lower decline compared to the minus 15.8% registered in the second quarter. Monthly activity data show an economy that maintain a recovery path, with a temporary pause in August due to the strict confinements in main cities. Real-time indicators such as energy, demand, Google, mobility and full deliveries show a further acceleration of the economy in the top indicator, a greater reactivation of the economies in September. Our economic research team referenced its projection of a minus 7% contraction for this year. It is worth mentioning that the confinement in August caused a downward revision on the International Monetary Fund and Central Bank forecast, which now expects falls of minus 8.2% and minus 7.6%, respectively. Even the government revised its downwards with an estimate of minus 6.8%. Nevertheless, forecast in the order of minus 8% of contractions seem too pessimistic. The shock to economy extended to the labor market, with the greatest deterioration in May when the unemployment rate reached 21%. Reactivation has contributed to a gradual recovery in jobs. In September, the unemployment rate fell to 16%, still higher than the observed in 2019 of 11%. The greater need for government spending to face the emergency led it -- to a request of partial disbursement of the flexible credit line with the International Monetary Fund. The government requested $5.3 billion to cover financing needs. In addition, the line was increased to $17.2 billion from $10 billion by the IMF. Colombia is the first country to make use of this instrument, which also represent a recognition of good macroeconomic management and provides support against shocks like the current one. Inflation continued its downward trend until August, falling to 1.9%, while the measure that excludes food fell to 1.1%. The temporary monetary subsidies that the government and cities granted have now been completed, causing a rebound in prices in September, with inflation picking up to 2% in the headline and 1.3% in the quarter. For October, inflation fell again to 1.7% and 1.1% in each case as evidence of weak demand surfaced. We expect inflation to end 2020 at 1.7% and to rebound next year to 2.7% within the target range established by the Central Bank. The decline in inflation and its expectations gave the Central Bank room to continue cutting its reference rate. In the third quarter, the Central Bank cut its rate by minus 75 basis points to 1.75%, reaching a new historical low. Our economic research team considered that the cut cycle has ended and the rate will remain at this level for a year. In addition, the Central Bank continued to renew its dollar forwards to provide liquidity to the market. Volatility of the exchange rate moderated compared to the second quarter due to a higher demand for risky assets in July and August. Nonetheless, in September, the exchange rate rose again above COP 3,900 due to the reversal in risk appetite and uncertainty about the presidential elections in the United States. Meanwhile, the government continued to sell dollars to the market, with $3 billion in the third quarter below the $5.8 billion in the second quarter. In October, the government was almost neutral in the FX market, while the exchange rate fluctuated around COP 3,800. Finally, imports and exports continue to show the weakness of the economy. However, the fall has been more evident in imports, which has allowed for a correction in the trade deficit. In August, the 12-month deficit decreased to minus $10 billion below the one registered in the second quarter at minus $11 billion. Finally, the current account deficit significantly reduced in the first quarter semester to minus 3.3% of GDP, below the figure for 2019, which was minus 4.1% of GDP. The adjustment was mainly due to a lower deficit in factor income delivered from the fall in oil prices. We are projecting that the current account deficit will be minus 3.5% of GDP at year-end. Now on Slide 8, you can see the macroeconomic evolution in Central America. The pandemic led to stringent national lockdowns in Central America, especially in the second quarter, reducing domestic demand. The strong turn in global economic activity compounded the pandemic's domestic impact. In this context, the International Monetary Fund forecast growth in the region of minus 5.8% in 2020 and 3.5% in 2021. The sharp recovery in remittances and low oil prices will contribute to a milder contraction in Central America compared to the rest of the region. The country projections reflect the structure of each economy, how activity was performing before the pandemic dropped and the effective confinement to contain the spread of the virus. Precisely, due to the strict lockdown at the beginning of pandemic, measured by the strong reduction in mobility, Panama and El Salvador list as the economies with the sharpest expected activity contraction, with minus 9% in each case. In particular, the reopening of the economy has been more gradual in Panama than in the rest of the region due to their relevant virus outbreak phase. In contrast, since June, El Salvador diverge from Panama's mobility trend, with a quicker reduction of confinement measures. Nevertheless, Panamanian and Salvadorian economies have started to signal recovery. For example, the rebound in -- on international trade has benefited the canal operation, while in El Salvador, a significant rebound in remittances has been registered since August. Honduras GDP is forecast to fall minus 6.6%. Exports impacted the economic performance after a minus 13% annual contraction in May. However, activity has improved, and in July, its falls moderated to minus 5% annually. Nicaragua's activity contraction is foreseen at minus 5.5% for this year, according to the IMF. However, this exceeds the drop observed to date in the mobility activity indicator, which reflects a contained confinement in the country compared to the rest of the region. The economy will reflect the impact of lower remittances and, to a lower extent, of tourism. Although the pandemic impact is generalized in the region, differences emerge among countries in terms of the magnitude of the decline expected, with Costa Rica and Guatemala in a better position as a result of their performance at the height of the pandemic crisis. A minus 5.5% contraction is foreseen in Costa Rica, mainly explained by the weaker external services demand, including the income from tourism. As of August, the economy presented a downward trend of minus 8% growth due to the impact of adopted confinement measures, which were tightened in July as cases increases. However, it is noticeable that mobility was not affected as much as in other countries at the beginning of the pandemic. Finally, Guatemala is on the opposite side of the spectrum, with the lowest activity contraction expected for 2020, with a forecast of minus 2%. Among the economies of the region exposed to remittances, Guatemala stands out as their income has had the best performance. In the 12 months through August, remittance annual growth was 6%, with a solid recovery after the fall between March and May of minus 15% on average. Besides, the country experienced modest lockdowns with respect to the region, deriving on a mild reduction on the economic activity base. In light of current events in Guatemala, we are observing the evolution of the present social unrest and analyzing its potential effects on our operations. Regarding monetary policy, all central banks have been proactive and have provided liquidity to reduce market tension during the pandemic. Costa Rica, Guatemala and Honduras have cut the interest rate significantly since March. Additionally, Costa Rica and Guatemala announced asset purchases. For all the countries, the fiscal position has deteriorated, with higher deficit and public debt. For the countries that have information, fiscal stimulus is just north of 3% of GDP. Policies adopted to face the pandemic range from higher public investments, tax deferrals, direct transfers to households and businesses, unemployment benefits, the suspension of public utility tariffs and loan guarantees, among others. These physical -- these fiscal deficits have been funded by IMF financing and international bond issuances, while some countries have suspended or relaxed their fiscal rules. Finally, I wish to mention that just recently, Central America has been affected by Hurricane Iota, which hovered over Nicaragua, Honduras and Guatemala for days. Afterwards, Hurricane Iota affected mostly Nicaragua and Honduras as it slowed down moving towards El Salvador and Guatemala. These events have the potential to affect the economy in the very short run, particularly, that would take cultural activity where we do not have a significant exposure. Nevertheless, it is still too early to assess the potential economic effects at this stage. Moving on to Slide 9. We present our asset and loan portfolio composition and evolution. At the end of quarter 3, total assets amounted to COP 219.9 trillion, growing 26.9% on a year-on-year basis. Excluding FX, annual growth was 20.3%. Isolating the acquisition of MFG and FX, annual growth was 10.7%. Our operations are roughly even between Colombia and Central America, with a slight concentrations toward the later given the effects of the 2.9% quarterly devaluation as well as from the increased participation in the Panamanian market through Multi Financial. Nonetheless, 66% of our loan book is in investment-grade countries. Our asset breakdown is led by the loan portfolio, which represented 62.9% of total assets, followed by other assets at 21.8%, fixed income investment at 11.8% and equity investment at 3.5%. On the top right, we present our portfolio diversification across economic sectors and products. As you can see, we have a well-diversified book in both the commercial and consumer space. A couple of highlights I will mention. Our consumer unsecured exposure, excluding credit cards, which have a different behavior and profitability characteristics, is only 3.2% of our total portfolio. COVID-affected sectors such as tourism and -- only have a share of 1.12% and 0.46% of our loan book, respectively. And within there, a good portion of those credits are with solid borrowers. Within transportation, the majority of our exposure is to ports that have seen a recovery in their activity. But one aim we have lighted in the past is Avianca. Avianca successfully secured the IP financing this past quarter, and we have continued to have conversation with them regarding our credit, which we believe are progressing satisfactorily to now. At the end of quarter 3, our total exposure amount to COP 680.1 billion, with 72% being backed by credit card receivables, 19% by a real estate guarantee on the company's headquarters. The remaining 9% is unsecured. During the quarter, we increased our provision in COP 104 billion, leading to a 35.3% coverage on principal. By the end of the year, we expect to increase our coverage to approximately 40%. At the end of the quarter, our consolidated gross loan portfolio was COP 143.6 trillion, increasing 22.7% in annual terms. Excluding Multi Financial's portfolio and FX impact, total loans grew 5.7% annually, led by a 9.1% yearly growth in Colombia and 2.6% in Central America, mainly on our commercial and mortgage segments. The commercial loan portfolio increased 23.6% year-on-year and 12.9%, excluding MFG. On a quarterly basis, we have noticed a slight contraction in this portfolio due to a decreased demand for credit on the back of economic reactivation just starting to unfold. On the contrary, consumer and mortgage loans have increased 16.6% and 32.5% on an annual basis as we had very successful quarters in 4Q '19 and 1Q '20. Payroll loans are the main driver in the consumer portfolio growth, while mortgages, public subsidies promoting home ownership have increased dynamics. On a quarterly basis, these portfolios increased by 2.1% and 3.5%, respectively. This is the result of a gradual reactivation in lending activity after thorough revision and fine-tuning of our origination models that has given us the confidence to continue supporting our clients through this new operating environment. Under this revised framework, we are prioritizing lending in secured loans, such as for residential mortgages, auto and payroll loans. In terms of guidance, we expect the loan book to grow in 2020 between 11% and 13% when excluding the impact of Multi Financial's acquisition. Isolating FX, growth will be approximately 5%. On Slide 10, we present our consolidated loan portfolio quality metrics. Starting with PDLs, we see a 46 basis points yearly increase on our 30 days PDLs ratio. 27 basis points come from our commercial loan book, principally due to the deterioration of our Avianca exposure and partially offset by the charge-off Ruta del Sol. In addition, these new PDLs reflect the expiration of relief measures, mostly on our retail portfolio. Our 90 days PDLs grew 11 basis points on a yearly basis, which is very much in line with the expected impact of relief measures expiration. Consolidated net cost of risk, shown on the top right, rose to 3.4%. Our net provisions in the quarter reached COP 1.23 trillion, increasing 47.5% yearly as we keep making prudential provisions on current loans based on our permanent credit risk monitoring. Net provision expense allocation by region is COP 653 billion in Colombia and COP 576 billion in Central America. The charge-off to 90 days PDL ratio, shown on the bottom left, was 0.73x for the quarter, increasing due to the charge-off in July of over COP 475 billion exposure on Ruta del Sol. Our coverage metrics were impacted by a faster increase in PDLs than provisions, mainly in our consumer portfolio as a result of the expiration of automatic relief. Even so, our consolidated coverage over 90-day PDLs is approximately 1.5x, in line with previous quarters. When looking at allowance coverage of our total loans, it increased to 4.7% as a result of our provisioning efforts and prudent gross loan portfolio growth. For 2020, we expect a net cost of risk close to between 3% and 3.25%. On Slide 11, you can observe geographical breakdown of loan quality ratios. In Colombia, 30 and 90 days PDL ratios deteriorated 73 and 41 basis points annually, mainly due to our commercial loan book performance, resulting from the Avianca exposure and reduced loan growth. On a quarterly basis, 30 days PDLs increased 40 basis points, reflecting the impact of relief expiration on our consumer portfolio, while the 90 days ratio increased 16 basis points, with 10 basis points coming from our commercial portfolio. Cost of risk increase for quarter 3 was 4%, given the previously mentioned drivers. Regarding charge-offs ratios, in July 2020, we charged-off our Ruta del Sol exposure, which explains the increase. Coverage ratios have remained stable as a result of our continued provisioning efforts. In Central America, PDL ratios have experienced a yearly deterioration of 44 and 40 basis points under 30 and 90 days ratios, respectively, due to the impact of relief expiration. Its increase in net cost of risk is largely explained by loan deterioration on the consumer portfolio. Charge-off ratios presented quarterly and annual reductions as a result of forbearances containing arrear migration into defaults. Coverage ratios in Central America decreased as a result of the relief expiration pace. Moving forward, we expect to transition to lower provision expense. Although not exactly to pre-COVID levels, we do anticipate a significant reduction, which would lead to a cost of risk in the range of 2.25% and 2.5% in 2021. Turning to Slide 12. You'll see details on our consolidated loan portfolio quality metrics broken down by segments. As you can see, the temporary improvement in past due metrics, driven by the relief measures, has started to wear off, with PDL ratios now slightly above where they were at Q3 '19. Ratios for the commercial loan book deteriorated annually 44 and 32 basis points, respectively, under 30 and 90 days metrics. On the consumer and mortgage portfolios, the 30 days PDL ratio increased 50 and 63 basis points on a yearly basis. Turning to Slide 13. We present an update on the performance of our loan relief program. On the top of the page, you can see the evolution of our relief implementation. On an accumulated level since the crisis started, we reached a peak of 42.8% of our total loan portfolio being subject to a forbearance period. At the end of quarter 3, loans with active grace period were only 14.7% of our loan book balance. Zooming in by region, in Colombia, loans with active reliefs represent 9.4% of the portfolio. While in Central America, they represent [ 19%, ] mainly driven by Panama, which explains 13 percentage points. Regarding our consolidated loan book at the end of the period, you can see that 80.4% of our portfolio is performing, which illustrates that a significant majority of the loans that entered into a relief program are back to making payments on time. Only 4.8% is currently 30 days past due. We expect a portion of the portfolio that is currently under a relief program to gradually return to performing, with only a portion of that going into past due. Slide 14 presents details of our funding structure. Total funding is COP 190.4 trillion at September 2020, growing 30% year-on-year. Excluding FX and the MFG effect, annual growth was 12.6%. Our funding structure mix is led by 79.8% in deposits, followed by 10.4% in banks and others and 7.3% in long-term bonds, which increased given our first green bond issuance of 3 -- COP 300 billion. This issuance reflects a new funding source for our bank as well as our interest in financing green projects that will have a positive impact on the environment. Moving to deposits. This funding category increased 29.9% year-on-year. Excluding FX and MFG impact, yearly growth was 13.7%. Time deposits contribute with 42% of our deposits, while checking and saving accounts represent 29.8% and 28%, respectively. Our deposits-to-net loans ratio closed at 1.11x, which demonstrates the continued preference of our customer in preserving liquidity during this crucial time. On Slide 15, we present our equity and capital adequacy level. Total equity, defined as attributable equity plus minority interest, was COP 23.3 trillion. This represents a 9.1% and 3.3% expansion in annual and quarterly basis. Consequently, our tangible common equity reflected a 20 basis points increase in the quarter. Regarding solvency ratios, our total Tier 1 was 9.7%, which includes a CET1 of 8.5% and an AT1 of 1.2%. Tier 2 was 3.1%, increasing 44 basis points when compared to last quarter. Now moving to Slide 16. We will show the evolution of our net interest income and margins. In Q3, our net interest income amounted to COP 2.1 trillion, growing 13.3% and 0.2% in annual and quarterly terms. When excluding the impact of FX, these growth rates were 4.5% and 2.2%, respectively. Our total NIM was 5.2%, decreasing 35 basis points quarterly. This result was mainly influenced by a reduction in NIM on loans due to the repricing of our commercial portfolio following the rate cuts on central banks as well as lower consumer rates on credit cards, specifically in Costa Rica. The -- this loan yield reduction has been partially offset by an active management of our funding cost, which has resulted in a timely transmission of the low rate environment to our wholesale funding. Furthermore, our focus on profitable growth is based on our appetite for increasing secured lending, mainly on our consumer portfolio and SMEs, backed by currencies either issued by the Fondo Nacional de Garantías or provided by the client. With this approach, we are reinforcing loan origination in the segments where we identify economic stability, leading to a rebalance of our loans mix and higher net interest margins, without taking on disproportionate risk. During Q3, NIM on investments closed at 2.6%, in line with an overall good performance on our portfolios during this year. For 2021, we expect lower yields as a result of our persistent low rate environment. For 2020, we expect our consolidated NIM to be slightly above 5.25% while for 2021, we are targeting levels between 5% and 5.25%. Moving to Slide 17. You will find details on our gross fee income. In quarter 3 2020, fee income presented a quarterly increase of 13.6% to COP 1.17 trillion, showing healthy transactionality reactivation and a consequent increase of 17 basis points in our fee income ratio to 29.5%. Banking fees increased 14.8% in the quarter, leading to a fee income participation of 69.4%, while pension fees grew 10.3% in the same period. Income from fiduciary activities remained stable at COP 46 billion, presenting a quarterly growth of 17.7%, while other fee income continues to hold a participation close to 2%. Regarding other income, our derivative and foreign exchange gains amounted to COP 224.4 billion, explained by exchange fluctuations on Central American currencies as well as gains on our derivatives strategy. The other income closed at COP 243.1 billion, increasing 34.5% quarterly, led by net gain on investment sales in both Colombia and Central America, which contributed with COP 184.5 billion. Lastly, our equity method income presented a significant quarterly increase of 159% or a 19.3% annual growth. This increment is mainly explained by Corficolombiana's performance where infrastructure projects benefited from construction development. We have also positive performance in energy and agro business. For our fee income guidance, we expect to close the year at around 30%. Slide 18 presents our efficiency metrics measured as a percentage of income and average total assets. Efficiency ratio was 47.3% in Q3 2020, improving 345 basis points annually and 578 basis points quarterly as a result of 2 key facts: on the one hand, decrease on our total operating expense of 9.4% annually and 1.7% quarterly, both when excluding the effect of MFG and FX. The Colombian operation has led this reduction through a strict control on administrative expenses. And our Central American business is also very carefully managing headcount and overhead. On the other hand, efficiency ratio benefited from growth on our total income in annual and quarterly terms, 17.8% and 5.5%, respectively, when isolating FX and MFG effect. Our cost-to-asset ratio reflects our ability to generate operating leverage, in Q3, decreased 12.4 basis points, illustrating a reduction to 3.38% and 3.47% when excluding MFG. Our efficiency ratio is expected to be around 50% for the full year 2020. Lastly, on Slide 19, we summarize our main profitability ratios. Net income attributable to shareholders was of COP 530.5 billion in Q3, leading to a pickup in return on assets to 1.2% and in our return on equity to 10.2%. These results are supported by a net fee income growth of COP 141 billion and a positive contribution of COP 255 billion from other income, reflecting the benefits of our business diversification. In addition to this, our efficiency control is proved by an expense reduction of COP 12.8 billion. Before taxes and net provisions, our operating income increased 25.2% quarterly, showing the resilience of our business model. Finally, before moving to Q&A, I will briefly summarize our guidance for 2020. Loan growth is expected to be between 11% and 13% without including the impact of MFG acquisition. Isolating FX, it will reach 5%. Cost of risk is expected to be between 3% and 3.25%. Consolidated NIM is expected to be slightly above 5.25%. Our fee income ratio should be north of 30%. Our efficiency ratio is expected to be approximately 50%. And regarding profitability, our return on assets and our return on equity are expected to be around 1% and 9.5%, respectively. And with that, we are now open for questions.

[Operator Instructions] Our first question comes from Julian Ausique.

I would like to know if you can give us some color about the Central American operation. What are your expectation due to loan growth and PDL ratios? And also, I would like to know why you are expecting that the efficiency ratio will be higher, like, 50% for the end of the year. Why are you expecting that this indicator will deteriorate for the end of the year?

Sure. Julian, thank you for the question. Let's start with your first question around Central America and when you think about loan growth. So when you think about next year, I presume the question's around 2021, and we mentioned that we're targeting consolidated loan growth of around 8% to 10%. I think you should potentially see a pretty similar growth from Colombia and Central America in that range. I think you're going to have to open it between different types of loans for each of the jurisdictions, so I'd say in Colombia. And then you should see higher growth in consumer and mortgage loans and more muted growth on the commercial side, which are a little bit of the tendency that we're seeing in Q3 and through Q4 plus also, just generally, what we've been seeing in Colombia as we grow more quickly in those retail lines. In Central America, on the other hand, I think you're going to see faster growth in commercial and consumer and probably more muted growth around the mortgage portfolio in certain countries. But I think at this point, the 8% to 10% consolidated loan growth shouldn't be that different between the 2 jurisdictions. To your second question around efficiency, what I would say would be -- it's not necessarily that it's a kind of a deterioration in expenses or anything of that nature. What it is, is 2 things. First, the efficiency ratio for this quarter, there were some additional income items that helped bring that down. It's the first thing that I would mention, like, for example, the fixed income gains that we had and a few of the other income line items that came in. And the second point I would say is just even seasonality, Q4 tends to be higher from an expense standpoint. So generally, I think an efficiency ratio around 50% is what we're looking at. But I think probably the best way to see our cost controls is when you look at our operating expenses line. And when you isolate Multi Financial and FX impacts, we'll close this year with a decline in operating expenses, which is something that we think is critical, given the operating environment we're in. And when we think about 2021, we're looking at muted expense growth. And we're going to be targeting in the 2% to 4% range, which should be -- that's really the only way, we think, that we can continue to see the results that we've been able to produce. And that, by no means, indicate that we're not investing in several areas where we think investment is warranted. It's rather that we're being thoughtful around the reallocation of capital.

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