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

Welcome to the fourth quarter 2020 Consolidated Results Conference Call. My name is Hilda, and I'll be your operator during this conference. [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.

Good morning, ladies and gentlemen. And welcome to Banco de Bogotá's Q4 2020 Earnings Call. Thank you all for joining us today. 2020 was a year of great challenge as we face unprecedented health crisis with over 117 million people infected worldwide with COVID-19, resulting in another 2.6 million deaths. While absolutely nothing is comparable in magnitude to the loss of life, the reach of this pandemic went beyond health issues as the global economy was also greatly impacted. This resulted increase in unemployment rates and the undermining of the financial stability of countless household across the globe. We hope that you and your families have been able to remain safe and our hearted voice out to the many victims of this crises to whom we extended our solidarity and support. Let me now share an overview of our 2020 results, beginning with our annual attributed net income, which reached a level of COP 2.2 trillion. This relates to a return on average equity of 10.5%. The 20.6% reduction in our total attributable net income was caused by impact of the pandemic. This is evidenced by the fact that our preprovision profit increased from COP 6.16 trillion to COP 7.55 trillion, actually represented a 19.6% increase. This is to state that our underlying business remained strong in the face of challenges. Moreover, we're including provisions, while our net income fell the aforementioned 20.6%. Our diversification and conservative approach allowed us to significantly increase our market share of net income impact. Our market share of net income grew to 53.2% in 2020, more than lower our 24.1% in 2019. Our 4Q balance sheet provided us with the capacity to demonstrate great resilience. Now I would like to go over our key performance ratios. Net interest margin for the quarter was 5.4%, representing a 16 basis point increase versus Q3. This was a result of our continued effort to reduce funding cost as well as returns from our investment portfolio, as both the bank and for [indiscernible]. Fee income continues to [indiscernible] COVID levels increasing to 30.4% during the quarter. Versus Q3, fee income grew by 16.5%, excluding currency effects, signaling that [indiscernible] improving in line with economic reactivation. We continued our various [indiscernible] cost control effort during Q4. with a efficiency ratio for the quarter of 48%, and annual figure, excluding multi financial group of 49.4%, better than initial expectations. Our business diversification also contributed to our yearly results with a strong equity method income from our investment in Corficolombiana and Porvenir. On the downside, profitability levels were pressured by significant increases in provision expenses throughout the year, reflecting our effort to establish provision coverage levels in line with our growing risk management approach. Moving into 2021, provision is expected to gradually normalize fully converted to historical levels by 2022, so long as the economy continues to recover. Regarding our balance sheet, gross loans reached COP 135.8 trillion. presenting a quarterly reduction mainly explained by an 11.2% devaluation of the Colombia peso, which led to a lower value of our dollar-denominated loan portfolio. The yearly loan growth was 4.3%, when excluding foreign exchange and Multi Financial Group. . For our liabilities side, total deposits grew 13.9% in 2020, when isolating foreign exchange and Multi Financial Group impact to COP 147.3 trillion. Our deposit to net loan ratio closed at 1.15x, above 1.11x for 3Q 2020, demonstrating our significant liquid profile to close the year. Moving on to create our 90 days past due loan ratio increased 23 basis points annually from 3.1% to 3.3%. We increased our provisioning expenses in Q4, particularly in Colombia, in order to even further improve our coverage ratio. This resulted in annual net cost of -- increase of 3.2%. Finally, capital adequacy ratio remains solid at Tier 1 capital and total solvency ratio closed at 8.9% and 20.1%, respectively. We are adopting Basel III as of January 1, 2021. So the first official reporting of these figures will be for the March 2021 quarter. Our estimated pro forma basic per capital ratio as of December 2020, we are 10.2% Tier 1 and [ 15.1% ] total capital, in line with the previously guided between 100 and 150 basis point pickup in Tier 1. To conclude, I would like to share with you our guidance for 2021. For loan growth, we expect an increase between 8% to 10%. Our net interest margin started at 5%. Cost of risk should start normalizing towards levels of 2.5% -- 2.35% and 2.5%. Our fee income ratio should be just north of 50%. Our efficiency ratio should be around 50%. And in terms of profitability, our return on assets and our return on equity should come in around 1.2% and 11%, respectively. Now I would like to 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. Last year represented an opportunity for Banco de Bogotá to stress test its business model and evaluate how it held up during these trying times. We are very thankful that we were not only able to weather this storm, but in many ways, emerge stronger. We're Colombia's longest enduring financial institution, celebrating 150 years of history in November 2020. And we're very excited for how well positioned we are for our next 150 years. I'd like to briefly walk you through the progress that we made on each of the components of our overall strategy during the past year. Starting with our customers, which are at the center of our strategy, our priority during 2020 was to be there for them when they needed it most. Beyond providing uninterrupted service throughout the entire year, both in-person and digitally, I'd highlight 3 concrete programs: First, debt relief. As lockdown measures led to an activity halt in most industries, we implemented loan for bearances for a fixed period as payments pressured income disruption for both corporate and households. At Q2 2020, first generation reliefs peaked at 42.8% of our loan portfolio. By year-end, they had dwindled to 8.2%, signaling that what our clients needed was just a respite for liquidity, not that they were facing a solvency issue. We have some second-generation relief programs still outstanding, but many of these are structural solutions, more into workout plans that are part of our regular course of business. Second, given the mobility restrictions that were enforced, we implemented temporary fee waivers for ACH transfers, call center transactions and up to 3 monthly ATM withdrawals. We wanted to ensure that customers felt they had free omnichannel access to their deposits in this time of need. As economic activity restarted, we have gradually reestablished regular conditions. Finally, I'd highlight our leading role in the government program, Unidos por Colombia, which in many ways was similar to the PPP plan in the United States. To support SME clients with their working capital funding needs and payroll obligations, we dispersed loans 80% to 90% guaranteed by the National Guarantee Fund to over 31,000 companies, totaling over COP 2.7 trillion in originations. We had a 27% market share in this overall program and a 61% share of the disbursements made for payroll protection in particular. Moving to the top of the strategy diagram. In spite of the challenging economic backdrop, 2020 represented an attractive opportunity for sustainable growth in our business. In May, we successfully completed the acquisition of Multi Financial Group, which nicely complements our existing presence in Panama and further solidified our franchise as the leading Central American banking operation. We were fortunate to make this acquisition at approximately around book value, a rarity for a Panamanian bank and an attractive entry point, which should generate significant value over the long term. From an organic growth standpoint, in 2020, we gained market share in both Colombia and Central America in lending and deposits. In Colombia, we annually increased our market share by 25 basis points in both net loans and deposits to 12.4% and 13.6%, respectively. In Central America, BAC's regional share closed at 10.7% for net loans and 10.3% for deposits, up 35 and 63 basis points, respectively, from 2019. Including MFG, our market share in Central America was 12.7% for net loans and 11.9% for deposits. In terms of risk controls, the growth we were able to achieve came despite our conservative risk management culture and the fact that early on in the crisis, we fully pulled back to gain a better understanding for how the situation is going to unfold. During this time, we drilled down daily on risk management of liquidity, credit, capital and operations, among others. However, we worked equally hard to reinstate our business as quickly as possible, reconfiguring models and incorporating new data points. For example, on the credit side, we revamped our underwriting to include variables that were increasingly clear needed to be taken into account, such as industry and segment figures. We also closed the year with COP 7.3 trillion in provisions, 1.64x our 90-day PDLs, allowing us to feel comfortable that we had the appropriate level of coverage for 2021. Moving to expense control and operational excellence. Understanding the challenging times were likely to persist for a while, in 2020, we doubled down on our focus to generate operating leverage. We continued to streamline overhead by automating certain aspects of our business on the back office side as well as rightsizing our physical footprint. These actions allowed us to reduce our operating expenses when isolating the impact of FX and MFG by 4.8% on an annual basis. The digital transformation efforts we've been undertaking over the last several years played a significant role in our ability to grow and serve our clients effectively during quarantine periods. We are firm believers that the importance of data and digitalization will only continue to increase, and we provided further detail on the progress we've made on these fronts on the next page. Lastly, I'd point you toward the bottom of the diagram, employees and society. This is purposely positioned there, not because it is any less important, but rather because we believe it is what supports and catalyzes the previously mentioned plans to be undertaken and implemented successful. In terms of our employees, we are firm believers that investing in them is the best strategy to be successful over the long term. In 2020, we were certified by the third-party organization Great Place to Work. This certification is based upon a detailed survey of our employees and reflects their satisfaction and being part of an organization that promotes growth and supports its customers as well as provides training opportunities and empowers them in their personal and professional development trajectories. Finally, our role in the jurisdictions where we operate extends beyond our business, something that was highlighted even more amidst the challenges of 2020. To that end, we launched an initiative such as our co-branded debit card with UNICEF, which helps Colombian children that are most in need by contributing resources towards nutritional, educational and health programs. Another example is the issuance of our first green bond for a total of COP 300 billion in the second half of last year. The proceeds from this instrument are used exclusively to finance sustainable endeavors. For this reason, among others, Banco de Bogota is now a member of S&P Global's Sustainability Yearbook, which includes the top 15% companies across the world with the best ESG performance and metrics. Turning to Slide 5. You can see some of the key results around our digital efforts. Since 2017, when we launched our savings account as our first 100% digital product, we have continued to significantly expand the portfolio. Evidence of how well received this has been by our clients is the fact that we closed 2020 with over 1.25 million digital sales, representing a 94.1% CAGR. Digital solutions have steadily grown to represent our leading sales channel as now approximately 7 out of 10 sales of our main consumer products are sold digitally. This number is higher in Colombia than it is in Central America, given some more regulatory hurdles that need to be cleared across the 6 countries where we operate, but we see an opportunity that every day is more feasible to capture. With regards to new digital products launched in 2020, I'd highlight a few: term deposits, micro credits, mortgage products with government subsidies, fiduciary investment accounts and a payroll ecosystem we've denominated [ e plus E ], which stands for Employers plus Employees. Our digital users have increased over the last few years to a combined 2.5 million active clients between Banco de Bogotá and BAC. These customers conducted 506 million transactions in Q4 of last year through our digital channels, representing 86% of our total transactions, which clearly positions these options as the primary point of contact for an important portion of our customers. Our strategy has allowed us to achieve not only a significant number of digital users and increase our digital transactions, but also to attain greater customer satisfaction as our Net Promoter Score across our digital channels of mobile and online banking continues improving. Our focus remains squarely on providing the best customer experience possible. And to that end, in 2021, we will be enhancing features on our platform to both our retail and enterprise clients. Supporting our omnichannel strategy, at the end of 2020, we completed 41 digital branches with more to come in 2021. Our philosophy continues to be that physical storefronts are an important complement to our digital toolkit, but that we need to continue to improve the experience in-person. Based on the NPS of these new branches, it's clear we're moving in the right direction. The capital to invest in these locales is coming from the merger of several locations that are starting to have excess capacity as we continue to migrate users to our online platforms. Finally, during the first half of this year, we expect to release our new mobile banking app, developed 100% in-house. We have already released and tested a pilot that received very positive feedback. This should allow us faster time to market and lower maintenance topics. Now I will turn the presentation over to our Head of Corporate Development, SP&A and IR, Mr. Diego Rosas, who will provide a macroeconomic overview as well as review our financial results in further detail.

Thank you, Julio, and good morning, everyone. I would like to start by providing a macro overview on Colombia presented on Slide 6. The Colombian economy exhibited the effects of the pandemic and the respective confinements with a contraction of minus 6.8% in 2020. Breaking down by quarter, the greatest contraction occurred in the second quarter when the lockdowns were stricter and longer. Subsequently, the gradual reactivation led to minor setbacks in the second part of the year. However, progress was temporarily suspended when localized quarantines were implemented in cities such as Bogotá and Medellin in July and August. The economy will resume its growth trend in 2021 with a forecast of 4.7% from our economic research team, partially due to a base effect, but mostly due to the rebound on activity levels. The downside risk remains flat in condition to the infections and the success of the vaccination process. In the first quarter of 2021, the economy will contract again due to the social distance measures implemented in January to face the second national peak of COVID-19. The chuck to the economy is spread to the labor market as unemployment rate surge above 20%, followed by gradual recovery on the second half of 2020. By the end of the year, unemployment rate was 15%, equivalent to a 75% recovery of initial loss jobs, a trend that is expected to continue in 2021. Additional impacts were on inflation, mainly in 3 ways: first, a reduction in the trading value of commodities were reflected in lower prices; second, government decisions to support households as subsets to public services, suspension of some taxes under rent freeze put a temporary downward pressure on inflation; and third, lower growth had -- and impacted on price through weak demand. With this, inflation closed 2020 at 1.6%, the lowest level for the end of the year and very close to historical loans that occurred in November 2020 of 1.5%. Inflation will rebound in 2021 due to a statistical effect returning again to the Central Bank's target range. However, price dynamics will still be limited by a weakened demand. So for the end of the year, our economic research team projects a variation of 2.5%. The slowdown in the economy on the drop in inflation allowed the Central Bank to reduce its reference rate by minus 250 basis points, taking it to a record low of 1.75%. The cuts were not beyond the tool of the Central Bank. It was accompanied by different measures to guarantee liquidity in the market. Fiscal policy was also active during 2020, and the government resorted to rapid trade in resources from sovereign funds and borrow in local and international markets to finance the emergency. New social and business assistance, mechanisms were implemented and existing ones were strengthened. Higher spending and lower tax revenue led the government to suspend the fiscal rule in 2020 and 2021 with forecasted fiscal deficit of minus 8.9% and minus 7.6% of GDP for each year. In March, an updated financial plan presented by the government increased fiscal deficit expectation for 2021 to minus 8.6% of GDP. The deterioration of fiscal metrics cause one notch rating downgrade by Fitch Ratings to BBB-, while Moody's and Standard & Poor's changed the outlook to negative. The COVID-19 pandemic exacerbated the deterioration of fiscal accounts, increasing the risk of losing investment grade on the sovereign rating. And agencies have stated the relevance of congress approval of a tax reform and adjustments to the fiscal rule outcomes, which will determine future rated actions. Moving to Slide 7. We present a macro evolution in Central America. The measures to contain the pandemic resulted in economic contraction in the region, estimated by the International Monetary Fund at minus 5.8% in 2020. The straight confinement in the region and the weakness from the global economy affected all countries. Although it was most notable in Panama, El Salvador and Honduras due to the greater exposure to international trade. Oil prices served as a buffer against the impact from the pandemic as the region is a net importer of the commodity. As in most of the world, activity was here hardest in the second quarter, but in the second half of 2020 activity in the region began to recover due to the reduction of mobility restructurings and partial recovery in the global economy. An additional element of support for Honduras, El Salvador, Guatemala and Nicaragua were remittances, which turned out to be far more resilient than expected. At the end of the year, the economic recovery lost momentum following new restrictions, although this eventually was short-lived and not as this as in April. The economic outlook changes for 2021, with a forecasted growth of 3.5% in the region. Country-level performance will vary depending on the efficient vaccine distribution, eventual virus containment measures and openness to the global economy. Tourism will take an additional time to normalize, a fact that will continue to impact Costa Rica and Panama. From an external perspective, the expected strong dynamism of the U.S. economy and the start of the global vaccination process support the improved growth prospect for the region due to the stronger return of international trade and remittances. Moving to monetary policy, in response to the tight financial conditions caused by the health emergency, all central banks in the region is their monetary policy stands and provide liquidity to the economy. Costa Rica, Guatemala, Honduras reduced their benchmark interest rate. Costa Rica cut its rate to 0.75%; Guatemala to 1.75%; and Honduras to 3%. Regarding the situation -- the fiscal situation, all continue to receive financial assistance from the IMF and by other multilaterals to face the pandemic emergency accompanied by bond issuance. For the countries that have information, the fiscal stimulus was above 3% of GDP. Now to provide more detail on our results, starting on Slide 8, we present asset and loan portfolio structure. At year-end, total assets amounted to COP 208 trillion, reaching a 19% yearly growth. Considering that our reporting currency devaluated 4.7% year-over-year, our assets grew 16.4% when excluding the FX impact. As a result of the Multi Financial Group acquisition in May 2020, we started consolidating its assets in our balance sheet in June. When isolating both currency and MFG effects, consolidated assets increased 8% annually, explained by growth of the gross loan portfolio, investments and cash. That loan portfolio represents 63% of consolidated assets, followed by other assets with a 21% participation, while fixed income and equity investments have a share of 12% and 4%, respectively. Elaborating on our gross loan portfolio at the end of 2020, it reached COP 135.8 trillion, which represents an annual growth of 16.6% and a 5.4% quarterly contraction caused by the peso devaluation. Isolating Multi Financial's portfolio and FX, gross loan increased 4.3% yearly and 0.8% in quarter 4. As a part of our strategy, we believe in the benefits of a highly diversified portfolio. And as a result, during 2020, we adopted our loan origination to be to the changing economic environment. First, as presented on the top right, we serve diversification across economic sectors as well as we continue to favor secured loans. Our commercial loan book grew 5.9% in the year, excluding FX and MFG impacts as a result of several factors. First, good activity during March and April; second, liquidity enhancement trends in the corporate segment that led to usage of revolving lines; and third, our prominent role in supporting unemployment and businesses operating cash flow through the National Guarantee Fund lending program. During the quarter, we noticed a slight reduction in the commercial portfolio due to sluggish demand for credit as well as liquidity management leading to payments on working capital and general purpose loans. On the retail side, started with the consumer portfolio, our lending strategy favors secured loans with a strong focus on outdoor and payroll loans. During the quarter, consumer loans increased 3.9% when isolating currency fluctuations and MFG's portfolio. We observed higher dynamics in Colombia with a 5.1% quarterly growth, while Central Americas is low and reactivated with a 1.8% increase. Regarding the mortgage portfolio, annual growth came in at 6.1% when adjusting for FX and MFG. Our intention in increasing market share in this segment coupled with home ownership stimulus by the Colombian government led to a 15% yearly growth in our local book. Consequently, 58.3% of the gross loan portfolio is in the commercial segment; 27.3% in the consumer book; 41.1% in the mortgage portfolio; and 0.3% is represented by micro credit. Assuming a steady pickup of economic activity for 2021, we expect loan growth to be between 8% and 10% as only split among our operating regions. On Slide 9, we present consolidated loan portfolio quality metrics. Starting on the top left, the 30-day PDL ratio shows a 13 basis points quarterly improvement, mainly explained by the Central American operation as implementation of second-generation resilience continue. The 90-day PDL ratio grew 16 basis points on a quarterly basis as first generation relief expiration started to show a real migration on our loan portfolio as we had expected. Moving to the right, the trend in net cost of risk reflects continued provisioning efforts, resulting in a quarterly increase of 44 basis points, closing the quarter at 3.9%. This translate into a COP 1.35 trillion net provision expense during the quarter. For the full year, net cost of risk increased 82 basis points to 3.2% from 2.3% in 2019. Going forward, we expect provision expense levels to gradually return to historical levels, leading to a net cost of risk for 2021 between 2.25% and 2.5%, with further reductions in 2022. Moving to charge-offs, as grade spirits on loans temporarily stop our real migration, in 2020, we observed a reduction on charge-off levels, decreasing to 1.8% in 2020. For quarter 1 2021, we expect that our charge-off activity will pick up as the conditions of the loans book normalize. At the bottom-right corner, we present our coverage metrics, which increased from last quarter as a consequence of our prudent provisioning approach. At the end of quarter 4, our allowance sales cover more than 1.6x our 90 days past due loans and close to 1.2x our 30 days PDLs. As a percentage of total loans, allowances coverage increased to 5.4% from a level of 4.7% in the previous quarter. Turning to Slide 10. We present a geographical detail of our loan quality ratios. In Colombia, at the end of quarter 4 2020, our loan portfolio quality show a quarterly deterioration of 38 and 25 basis points in its 30 and 90 days PDL ratio. As almost all first generation forbearances have expired and second-generation relief demand has stabilized, most of the portfolio is under the obligation to resume payments. As a result, we are starting to incorporate into our metrics, a real migration of those borrowers most impacted. As we have previously shared, the most significant exposure is Avianca. At the end of quarter 4, our consolidated exposure is COP 600 billion or roughly $175 million, with 72% guaranteed by credit card receivables, 19% secured by a real estate guarantee on the company's headquarter and the remaining 9% being unsecured. During the fourth quarter, we continued provisioning this exposure, reaching a 44.2% coverage. I would like to add that we continue to have productive conversation with Avianca in order to reach a convenient solution for both parties since business conditions are deemed to be improving for the airline. Cost of risk increased to 4.9%, given a prudential COP 802 billion net provision expense in the quarter, which adds to a total of COP 2.44 trillion in 2020. Our Q4 charge-off ratios for Colombia decreased when compared to previous periods. As in quarter 4 2019 and quarter 3 2020, we charge-off our Electricaribe and Ruta del Sol exposures. Now regarding Central America. In this region, 30 days PDL ratio represented a 70 basis points quarterly contraction as requests for second-generation release increase. Our 90 days PDL ratio decreased 5 basis points to 1.8%, driven by better performance on the commercial and mortgage portfolios. Net cost of risk decreased 9 basis points in the quarter, reaching a level of 2.9%, equivalent to COP 544 billion provision expense. For the full year, the cost of risk increased 22 basis points to 2.5% ratio. Charge-off ratios increased quarterly as expiration of deferral periods and most of Central America led to charge-offs on our retail portfolio. Lastly, coverage ratios increased in both Colombia and Central America as a result of our continued provisioning efforts throughout the year. Moving to Slide 11, you will see details on our consolidated loan portfolio quality metrics broken down by segments. Starting with the commercial loan book, we observed stability on the 30 days PDL ratio, while the 90 days PDL increased 12 basis points in the quarter. Regarding our consumer and mortgage portfolio, a quarterly improvement under 30-day metric of 13 and 17 basis points, respectively, is driven by second-generation release applications in Central America, as explained before. Consumer 90 days PDLs deteriorated 32 basis points explained by expected migration while the mortgage portfolio remains stable. On Slide 12, we present an update on the performance of our long release program. Fourth quarter was marked by mass expiration of breakthroughs across the countries where we operate with the exception of Panama, where local regulations provide the possibility that forbearances could remain in place until the end of June 2021. On our consolidated portfolio, at the end of quarter 4 2020, we had 8.2% of loans under an active first-generation relief measures. Most of them are in Central America with Panama accounting for 12 percentage points out of the 15.6% loans with active relief observed in the region. In Colombia, most of the release measures granted had already expired by the end of 2020 with only 0.1% of the loan portfolio is still under a grace period. As of August 2020, we adhered to the Programa de Acompañamiento a Deudores, PAD, following regulation issued by the superintendents. Under this program, we provide structural solutions to those customers that saw their payment capacity most impacted by the pandemic. At the end of the quarter, 6% of the loan portfolio had renegotiated its credit conditions, mainly extending remaining terms in order to adjust monthly payments to an updated income level. In Central America, 8.2% of our portfolio has been subject to renegotiations, mainly in Honduras and Costa Rica, which contribute to 3.9 and 2.3 percentage points, respectively. At the bottom of the page, we observed that on a consolidated basis, 87.1% of the loan portfolio is performing at the end of quarter 4, increasing from an 80.4% level registered during the Q3 2020. Now please move to Slide 13, where we present our funding structure. Funding totaled COP 179.7 trillion by year-end, growing 22.1% year-over-year. Excluding FX and MFG effects, annual growth was 9.8%. As a result of increased market liquidity, we have focused on optimizing our funding services, reducing the participation of bank financing and increasing the share of deposits when compared to Q3. This optimization is also reflected on our cost of funds, which we have been able to actively manage in order to mitigate the impact of a persistent low rate environment. Zooming in on deposits, this increased 25% year-over-year and 13.9% when excluding FX and MFG impact. Our deposits to net loans ratio closed at 1.15x, up from 1.11x at quarter 3. This result, as explained before, was mainly driven by a reduction in net loans stemming from our proactive reserve build-out. In 2021, we expect a convergence of this ratio towards historical levels, slightly above 1x as economic reactivation support loan origination and increased activity achieves our clients' liquidity preferences away from cash preservation. Furthermore, as part of our funding strategy mentioned above, we have in place a bond issuance program in Colombia, which will execute throughout 2021 as necessary in order to optimize the funding of our operations. Let's continue with Slide 14, where we present our equity and solvency levels. Total equity closed the year at COP 22.5 trillion. This represent an annual growth of 2.9% and a 3.2% quarterly reduction. This decrease is explained by lower common equity from a 56.3% contraction in other comprehensive income that includes the currency translation of our foreign operations. This was partially offset by a 32.6% earnings rise. Tangible common equity remained stable at COP 13.8 trillion as the aforementioned reduction in common equity was balanced by an 8.7% decrease in intangible assets, mainly the goodwill of our Central America operation, which are expressed in dollars. Regarding solvency ratios, our total Tier 1 was 8.9%, which includes CET1 of 7.8% and an AT1 of 1.1%. The Tier 2 was stable at 3.1%, where a lower express balance of dollar-denominated subordinated debt was neutralized by the recognition of 30% of our Q4 earnings and by the increase of our general additional provisions as local regulations mandates. At the bottom right of the slide, we present a pro forma estimation of our Q4 2020 capital adequacy under Basel III standards. In line with the guidance provided last quarter, our calculation revealed an increase of over 100 basis points in total Tier 1 to 10.2%. The total Tier 1 growth is explained by 2 main factors: first, a reduction on credit risk-weighted asset's density more than compensates the inclusion of operational RWA; secondly, under Basel III, retained earnings, other reserves and other equity components are now considered capital, which coupled with a more efficient treatment of our nonconsolidated significant investments, offset the full goodwill deduction. In addition to this, next March 25, we will hold our Annual General Shareholders Meeting, in which we have proposed a dividend distribution of COP 1.1 trillion, roughly 50% of our IFRS attributable net income in 2020. The remainder will be capitalized between legal and occasional reserves in order to strengthen the bank's equity position. Now on Slide 15, we show the evolution of net interest income. In quarter 4, net interest income was COP 2 trillion, showing an annual growth of 3.8% and a 2.8% quarterly contraction. When excluding the impact of FX, the contraction was minus 0.5% and minus 1.7%, respectively. Quarterly total NIM closed at 5.4%, increasing 16 basis points versus Q3, supporting by an uptick in the investment NIM from 2.6% last quarter to 4% in Q4 2020. This -- giving higher deals on investment portfolio supported by momentum on market dynamics. Contrastingly, a 50 basis point quarterly reduction in [indiscernible] loans was due to a persistent low rate environment. In addition to the repricing of our floating rate commercial portfolio, consumer loans have also been impacted as average rates contracted in the quarter, driven by a pullback from riskier segments with higher yielding products. The aforementioned impact on our yields on loans was largely mitigated by an efficient management on the cost of funds, which decreased 39 basis points quarterly to 2.7% as we capture the benefits of increased market liquidity. As a result, lending NIM decreased 8 basis points in the quarter, closing at 5.7%. As economies stabilize in 2021, we do not foresee additional rate cuts. Therefore, 2021 NIM is expected to be around 5% as current interest rate levels are reflected on our loan book for the whole year. On Slide 16, we provide detail on fees and other income. Gross fee income reached COP 1.3 trillion in quarter 4 for a yearly total of COP 4.7 trillion. Out of total fee income, 17% comes from banking fees; 23.5% from pension fees; 3.4% from CDCR activities; and 3% from other services. Isolating FX, gross fee income increased 10.8% on a quarterly basis, fueled by higher transactionality volumes, which were reflected on income increase in banking and pension fees with a 10.7% and a 5% growth, respectively. Regarding other income, the innovative and foreign exchange gains amounted to COP 329.1 billion in the quarter, while gains on investment totaled COP 247.5 billion, as a result of positive market dynamics as previously mentioned. Other income closed at COP 153.4 billion, decreasing 36.9% quarterly. As in Q3, we revealed some profits throughout our available for sale portfolio. Equity method income is mainly explained by Corficolombiana's satisfactory progress of its infrastructure projects and good dynamics on the energy segment, leading to a 43.3% quarterly increase to COP 209.5 billion. In terms of guidance, as economic reactivation evolves, we expect to reflect the impact of increased transactionality on a fee income ratio that should remain above 30%. Now let's continue with our efficiency metrics presented on Slide 17. Efficiency ratio closed at 48% in Q4, increasing 7 basis points quarterly. Administrative expenses slightly increased due to seasonal expenditure, partially offset by a 6.7% growth in total income when isolating FX and MFG effects. In 2020, we observed 169 basis points annual improvement on our efficiency as a result of the following: first, an annual reduction of minus 4.8% of our total operating expenses when excluding the effect of MFG and FX led by lower administrative expenses, mainly from our branch network optimization and continued digitalization among other initiatives; second, amid the pandemic impacts our income generation capacity proved to be resilient, with a slight decrease of minus 0.2% when isolating FX and MFG impacts. Our cost to assets ratio decreased annually by 61 basis points to 3.7%, reflecting our efforts to efficiently improve our operations. In 2021, our strict expense control will continue to support a target efficiency ratio of approximately 50%. Finally, on Slide 18, we present our profitability ratios. Net income attributable to shareholders was COP 540.8 billion in quarter 4 with a quarterly increase of 1.9%, demonstrating the resilience of our business model. As a result, return on assets remained stable at 1.2%, and we maintain a 2-digit return on equity of 10.1%. In 2020, our annual attributable net income reached COP 2.2 trillion, reflecting the value of our strategy, which allowed us to accrue capital organically in the midst of a highly challenging year. For 2021, our ROAA and ROAE should come in at around 1.2% and 11%. For 2021, assuming we continue to see economic performance improving in the countries where we operate, we are targeting loan growth between 8% to 10%; consolidated NIM around 5%; cost of risk between 2.25% and 2.5%; fee income ratio north of 30%; efficiency ratio to be approximately 50%; and regarding profitability, our return on assets and return on equity, should come in around 1.2% and 11%. And now we are open to questions.

[Operator Instructions] We have a question from Sebastián Gallego from CrediCorp Capital.

I have 3 questions today. The first one, you show on Page 14 of the presentation, your pro forma on Basel III standards. I understand or we understand that you are currently negotiating with the regulator just to clarify how to account for Corficolombiana and some other stuff. Is that pro forma considering the final outcome of those negotiations? Or are you still negotiating with the regulator? That would be the first question. The second question is, if you could provide the data that we couldn't see it, at least in the presentation on Stage 2 and Stage 3 clients under IFRS 9 for asset quality indicators, given the results or the data shown by Grupo Aval, we fear that Banco de Bogotá data is higher than peers. Just if you could clarify on that data. And lastly, on the digital front, I would like to understand your opinions or your insights regarding the recent decision by Davivienda and Rappi to enter into a license banking for a digital bank. We -- as you obviously know, [indiscernible] is also entering. I just want to get more understanding on your strategy to compete with this kind of new vehicles. That will be the questions.

Thank you, Sebastián. All very good questions, and let me walk you through them in order. To your first question, you're correct in saying that -- I wouldn't call it negotiations, conversations are still ongoing with the superintendency to understand how Corficolombiana and [indiscernible] should be accounted for. The number that we provided for pro forma at Q4 '20 does not include anything different than what is textually in the regulation today. So it does not have any assumed outcome to those conversations. To your second question around stage 2 and 3. At Q4, I can give you the number that stage 1 is roughly at 80%, stage 2 was roughly a little over 14%, and stage 3 was a little bit under the remainder, which is a little bit under 6%. The -- I would tell you that part of that is kind of a prudential migration into stage 2, just as we wait to see how some of the longer-term structural payment plans perform, but that's kind of the data, I think, that maybe you were asking for. And then finally, on digital, where maybe I'll spend a little bit more time. I think what you're seeing in the market is what we've expected, which is the pace of digitalization and innovation continuing to accelerate. We've had a very clear strategy over the last several years where, from our end, we've been extremely focused on transforming our core banking operations understood as: first, establishing a digital sales channel; second, ensuring that our digital service channels, understood as online banking and mobile banking, are as good as possible; and third, really having an omnichannel digital experience, which I think differentiates us from a couple of the names that you mentioned and from digital-only players. I think we think it's a mistake to think that it's an advantage only to have one channel, whereas an institution like ours can actually help clients independent of channel in very different ways. I think maybe what you're driving at with your question, and those are 2 very different plays. One is kind of a standalone neo bank. The other is more of like an association from a customer acquisition perspective, and I think we have strategies that compete head-to-head with both. And first, I think the numbers speak for themselves in terms of the traction we've been able to generate, the digitalization of our primary consumer products. I think, secondly, we have also set up a number of strategic partnerships with different retailers and different other customer acquisition vehicles, if you will, that we think helps feed and grow our customer base. And I think the market in Colombia has always been competitive pre the incursion of new digital players that will continue to be competitive going forward. Surely, these digital players will gain share, but we think we're well positioned to continue to gain share as well. I mean, I think some of these have already been operating in the market for a while, and even then we were able to gain market share for the second year in a row. We continue to gain share in consumer. And I think we have a lot of benefits that perhaps are underplayed around the franchise that we've built over the last 150 years. And while that can be a double-edged sword in terms of it's harder to transform something that's been around for a while than it is to start something new, we've always thought that if you're able to transform the significant base and not just carve out a new entity that's a digital player, then the prize is much larger. So we're really excited about the progress that we're seeing on the digital front. We think there are a lot of opportunities that we still have to take advantage of. We think that, particularly on the commercial side or the enterprise side, the benefits we have of playing in that space are enormous, and that's something that is unique to our base. And also when you think about the scale of Grupo [indiscernible], both in Colombia and Central America, but also our participation with -- in the pension fund, in the merchant banking operation and kind of what that entails, I think you're seeing some players try to build a new ecosystem. And I think what I would say is, we feel like we already have a really attractive, extremely large ecosystem, and there are opportunities. And I think you'll see over the next coming period of time, a lot of those being rolled out. Several of them are already operational, we just haven't made a lot of noise around them. We prefer to sort of execute and then share the news, but we're really excited about the progress that we're seeing on that front.

[Operator Instructions] Your next question comes from Nicolas Riva from Bank of America.

I have 2 questions or 2 subjects, actually. The first one, capital -- just a follow-up on the prior question. So thanks for the pro forma estimates for Basel III. So you mentioned a pro forma Tier 1 of 10.2%. You mentioned a pro forma CET1, should we expect also an increase of roughly 130 basis points for your CET1 in line with the expected increase in the Tier 1? And also -- so I guess, when you report first quarter numbers, you are already going to report the lower risk-weighted assets, right, which is going to drive the increase in the capital ratios. But I understand that the reduction of goodwill from your CET1, it's going to take place over the next 4 years, I believe. So in other words, the positive impact from Basel III/IV you -- is going to be immediate, I guess, but the negative impact, we are going to see that over the next few years, if I am correct. And also in general on capital, do you still think your CET1 ratio is going to be adequate in 2021? Any plans to capitalize Banco de Bogotá? I mean I just heard the announcement about that dividend payout of about 50% on the 2020 net profit. So I guess from that, that you are comfortable with your capital ratios, but I wanted to hear your thoughts on that. And then on -- the second question or topic I have, the debt relief programs. So you mentioned the breakout for the relief programs in Colombia and in Central America. I see that in Colombia, basically, none of your loan portfolio is under active debt release, it's only 0.1%. But you also say that 6% of the loan book has been granted a release under the PAD program. I guess that's the Programa de Acompañamiento a Deudores, but if you can explain what is this -- that program? And how is it different from the other relief programs? And also, you provided guidance for the cost of risk in 2021. We are expecting a decline in the cost of risk and improvement there. What's your outlook or guidance for the NPL ratio for year-end? Because I guess that while you're expecting a decline in the cost of risk, we should see an increase in the NPL ratio as the relief programs come to an end, but I wanted to hear your thoughts.

Sure, Nicolas. Good to say hi to you. Let's take those also in order, and thank you for the question. Starting with capital. I would actually just start to make sure that there is no confusion, and it's very clear for everybody on the call. 100% of goodwill will be deducted immediately. There is no phasing or gradual deduction of the goodwill process. That happens day 1. And so the numbers that we'll report, Q1 2021, will have all the goodwill stripped out of our core equity Tier 1 and total Tier 1 numbers. I just wanted to make sure that, that was clear and that we didn't have any confusion there. Then the second point, I would let you know that you do -- you should expect a roughly similar increase in the core equity Tier 1 as in total Tier 1. The other way to put that is, our additional Tier 1 -- we're not going to have any additional Tier 1 between the Q4 pro forma number and the Q1 number. So if additional Tier 1 is the same, what's driving the increase is core equity Tier 1. And then when you think about what drives that increase in core equity Tier 1, you mentioned part of it, which is the reduction in risk-weighted assets. There is another component, which is around, as you know, how earnings are included. And in Basel II, there was this sort of archaic way of only 30% of earnings went into Tier 2 until the capitalization at the shareholder meeting and then it came in. So that's like Q4, like seasonality has a bit of a lower number. And Basel III now, all of that is included. Plus there is kind of a more efficient treatment of consolidated investments. So it's several factors that go into the Q1 number. But to answer your question concretely, the approximate 100 basis point increase is in the core equity Tier 1 number. AT1 is accountable the same and continues to be the same in both. And again, I wanted to really clarify that goodwill number. In terms of debt relief, for your second question. In terms of debt relief, be -- I understand the question, and it's a good one around how should we think about the difference between first generation and call it second generation. So first generation is where the release that we're granted particularly kind of during the height of the crisis, and those tended to be more grace periods, more kind of just liquidity, temporary things. I would tell you that the PAD program is more of like structural -- restructuring, if you will. And that's kind of -- that's obviously common in an ordinary course of business. Here is just as a name for it, and there's a program for it. And so there's -- that's just loans that have been worked out in a way that makes sense for our debtors. Around cost of risk, what I would tell you would be, we do expect, effectively, for cost of risk to come down during 2021. I think the guidance that we've shared on the consolidated basis should be 2.25% to around 2.5%. Part of that cost of risk is that it will be using some of the provisions that have been built up over last year, and you should see roughly, probably similar numbers around Colombia and Central America. I would tell you, there's still a lot that needs to play out. This is our initial view on how this year will progress, but it will also depend on how the jurisdictions in where we operate continue to deal with the virus, and how the vaccine rollout continues to evolve because that's ultimately going to be the main driver around whether this gets resolved or not, right? And so I think it was mentioned on the call already, but Q1 started out with kind of quarantines again still in Colombia, and there -- you had kind of ups and downs there. So I would tell you, we're in a little bit of a situation where it just depends on how this continues to evolve from that perspective. I think you will -- on kind of your NPL question, I think the data for that's on at least where we are today. If you'd turn to Page 9 of the presentation, you'll likely see some uptick over NPLs over the course of this year. I think the flip side to that is, you'll also see some more charge-offs as kind of NPLs mature. What happened last year was NPLs were very low because of the relief programs, but as relief programs start to roll off, you see kind of an increase in NPLs. But then also, there hadn't been charge-offs and then [indiscernible] come through. So I think you should see slight upticks in NPLs, but we feel -- to your question of we feel comfortable with where we are with capital? We do not have currently any plans to capitalize, and we feel that we're in a good position from coverage ratios and from our provisioning levels to be able to see how these relief programs continue to roll off and see how the economy continues to evolve.

[Operator Instructions] We have a question from Natalia Corfield from JPMorgan.

Question is also on capital. You mentioned that you're still in conversations with the superintendency with regards to how to consider Corficolombiana. So I am wondering, based on the conversations that you have had so far, do you think there is going to be much change from this 13.1% number, that pro forma number that you presented and 10.2% for your Tier 1 ratio? And also -- and another question that I have is -- the capitalization declined in this quarter, in the 4Q quarter, and I'm wondering the reason for that. And my last question was related to capitalizations about your subordinated notes that are 23 and 26 that are already losing regulatory capital treatment. If you have any thoughts of liability management on those notes. And this is all.

Sure. Natalia. I can take those in order. I think the first point on Corficolombiana. I want to be very clear that if there is any change to the way that it's currently calculated, it would be accretive to capital, not dilutive. And there is still several conversations there around whether that's day 1 or whether that's over time, and there's some sort of phase-in, but those are still really ongoing. And just to respect the nature of those would -- leave it at that. To your second question around the fourth quarter, I think part of it is seasonality, what I mentioned around how under Basel II fourth quarter is the seasonal low point. Under [indiscernible] Colombia fourth quarter was low because all of the net income of the year, which for us was a COP 2.2 billion. All of that was -- only 30% of that was captured and that was captured in Tier 2. So it was not included, but -- not included in Tier 1. So that just over time. If you grow, capital goes down over time until the shareholder meeting which happens in March. There is also an impact of FX movements, which -- with the revaluation of the peso, which hit the number. And finally, the reality is that we -- given that Basel III is a reality, it is in effect, we are reporting that as a -- post January 1, 2021, and our March numbers. Basel II disappears and Basel III is the capital standard that matters. And I think you all and us are happy that there is that convergence to the right standard globally, but really focuses on our Basel III numbers and our Basel III capital management strategy. So that's, I think, on your second question. Your third question regarding our subordinated debtor 23s and 26s, which you correctly mentioned, are starting to roll off capital credit. It's something that we're always monitoring and being thoughtful around when would be the right time, if it does make sense to do some sort of liability management or not. And we think about it like how do we see our total capital stack. So I would tell you, it's something that we keep our eye on. And our decision to do something or not will just depend on market conditions, and it will depend on when we think is the right time from like a capital that we believe that we need.

Thank you. We have no further questions at this time. Now I'll return the call to Dr. Figueroa for closing remarks.

Thank you very much to all of you, and we hope that you and your families stay very well in the near future.

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