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

Welcome to the Second Quarter 2022 Banco de Bogotá's Consolidated Results Conference Call. My name is Hilda, and I will be your operator during this conference call. [Operator Instructions] Please note that this conference is being recorded. Banco de Bogotá is an issuer of securities in Colombia, and as such, it is required to comply with periodic reporting requirements and corporate governance practices. As a financial institution, the bank is subject to inspection and surveillance from Colombia's Superintendency of Finance. The financial information included in this report was prepared with unaudited consolidated financial information in accordance with IFRS as currently issued by the IASB. Details of the calculations of non-GAAP measures such as ROAA and ROAE, among others, are explained when required in this report. Banco de Bogotá executed a spin-off of 75% equity stake BAC Holding International Corp., BHI, to its shareholders on March 25, 2022. Prior to the spinoff, Banco de Bogotá was the direct parent of BHI. The bank has retained a direct stake of 25% in BHI. This interest in BHI is reported as discontinued operations for reporting periods prior to the spinoff and will be reported under the share of profit of equity accounted investees, net of tax, equity method, line item for subsequent periods. Furthermore, on July 28, 2021, a Banco de Bogotá ceded control of Fondo de Pensiones y Cesantías Porvenir to Grupo Aval, while retaining an unchanged 46.9% equity interest in the company. Consequently, Porvenir results were deconsolidated from Banco de Bogotá's financial statements starting on the results reported for the 3 months ended September 30, 2021. From this date onwards, Banco de Bogotá's stake in Porvenir is reflected as an investment in associates and joint ventures. While its results are reported under share profit of equity accounted investees net of tax, equity method. As a result, for comparability purposes, we have prepared and present supplemental unaudited pro forma financial information for the 3 months ended June 30, 2021, that assumes the consolidation of Porvenir and BHI spin-off was completed on April 1, 2021. The supplemental unaudited pro forma financial information does not purport to be indicative of our results of operations or financial position had the relevant transactions occurred on the dates assumed and does not project our results of operations or financial position for any future period or date. The pro forma financial information is unaudited and the completion of the extended external audit for the year ended December 31, 2022, may result in adjustments to the unaudited pro forma financial information presented herein. Any such adjustments may be material. For further information, please see the supplemental unaudited pro forma financial information in our second quarter 2022 earnings release. The Colombian peso/dollar end-of-period annual and quarterly devaluation as of June 30, 2022 were 10.7% and 10.5%, respectively. In this report, calculations of growth, excluding the exchange rate movement of the Colombian peso, use the exchange rate as of June 30, 2022, COP 4,151.21. This report includes forward-looking statements. In some cases, you can identify these forward-looking statements by words such as may, will, should, expects, plans, anticipates, believes, estimates, predicts, potential or continue or the negative of these and other comparable words. Actual results and events may differ materially from those anticipated herein as a consequence of changes in general, economic and business conditions, changes in interest and currency rates and other risk factors. Recipients of this document are responsible for the assessment and use of the information provided herein. Matters described in this presentation and our knowledge of them may change extensively and materially over time, but we expressly disclaim any obligation to review, update or correct the information provided in this report, including any forward-looking statements, and do not intend to provide any update for such material developments prior to our next earnings report. The content of this document and the figures included herein are intended to provide a summary of the subjects discussed rather than a comprehensive description. In this document, we refer to trillions as millions of millions and to billions as thousands of millions. Thank you for your attention. Mr. Alejandro Figueroa, CEO of Banco de Bogotá, will be the host and speaker today. Mr. Figueroa, you may begin your conference.

Thank you, Hilda. Good morning, ladies and gentlemen, and welcome to Banco de Bogotá's Q2 2022 Earnings call. Thank you all for joining us today. After the 75% spinoff, Q2 '22 marks the first full quarter in which income from our remaining 25% equity interest is accounted via equity method. [indiscernible] are no longer consolidated. I would like to highlight the strong results obtained in the quarter. The unattributable net income of COP 642 billion, 2% return on average assets and 16.6% return on average equity. These results are supported by total net interest margin of 4.4% as helped by lending NIM that increased 26 basis points, taking in the positive repricing effect from higher market rates. Investment need was negative as a byproduct of market volatility. Gross fee income increased 7.1% quarterly, leading to a 21.9% ratio from continued transactionality growth, has reflected especially on the credit card business. Commitment to cost control was reflected on our efficiency ratio, which came in at 43.6%, while cost to assets remains at 2.4%. Quarterly balance sheet growth of 3.6% and 7.9% in gross loss total deposits. Respectively, when excluding foreign exchange, as a result of healthy loan demand and strong customer liquidity position. Deposit to net loan ratio continues fully matched at 1.02x. Payment performance continued to improve as the 90-days past due loan ratio contracted 22 basis points in the quarter to 3.5%. While in the context of economic growth, we recognize headwinds from inflationary peak presented in the past month, which we will closely monitor to maintain asset quality. Lower provision expenses pressure, positive share of recovery and less qualitative driving reserve after evidencing consistent payment behavior or loss period under variances led to a 1.3% net cost of risk for Q2 2022. Now regarding capital adequacy, total services came in at 12.8% and Tier 1 ratio at 10%, mainly impacted by Colombia peso devaluation in the period, increasing our U.S.-denominated reduction from foreign nonconsolidated investment and goodwill, as well as to risk weighted assets. To conclude, our updated guidance for 2022 is: We expect loan growth between 15% and 14%. Net interest margin target is 4.6%. Cost of risk should be around 1.7%, fee income ratio is expected above 20%. Efficiency ratio should remain below 45%. And in terms of profitability, return on assets should come in around 2.5%, while return on equity could be around 21% for the whole year, which includes extraordinary income from BAC spinoff. Now I will hand over the presentation to our Executive Vice President, German Salazar, who will provide an update on our digital strategy and on the macroeconomic environment.

Thank you, Alejandro, and good morning. Slide 4 presents details on our digital strategy performance during the quarter. Starting with digital sales. In Q2 2022, we sold over 511,000 digital products, reaching more than 4.1 million products in digital sales since we started a lot in 2017. Share of digital sales over total products increased to 77.6% from 75% in the previous quarter. During the quarter, we launched a cross-selling strategy for clients who open a new payroll savings account, offering them other products such as advanced payroll loans, digital credit cards or insurance products. This cross-selling experience allows for the stronger customer relationship by placing a comprehensive product portfolio at an earlier stage. Among our top performing products, digital credit cards reached a total of 117,600 new cards placed, an increase of more than 10,000 units when compared to 1Q 2022. Regarding deposit products, we observed a source in digital time deposits, growing 6% in the quarter, boosted by higher market interest rates. During the quarter, loans and liability products originated through the digital channels reached COP 4.5 trillion, reflecting a 230% annual growth as a result of improvements in the digital onboarding process. In terms of new digital products, in Q2 2022, we launched a loan consolidation product in addition to testing the pilot for digital vehicle loans. Strong quarterly digital sales have supported our adoption metrics. In the retail segment, we continue growing our digital base which reached over 2.2 million active digital customers, evidence in positive reception of enhancements on our virtual and mobile banking platforms, also fostering transactionality growth. Digital adoption has increased as more than 65% of customers have used either the website or the mobile app in Q2. As we continue to closely monitor client interaction with digital channels to identify value-generating opportunities during the quarter, we increased supporting caps for consumer and payroll loans, and we offer higher credit card balances, expanding into higher income segments. The lead recovery strategy launched in Q1 2022 continues to support client engagement with great results as we have recovered more than 6,700 credit cards and over COP 12.6 billion in additional personal loans disbursements during the second quarter, leading to a quarterly growth of 11.7%. As a consequence of higher adoption, we continue to focus on our service channel transformation which has been strengthened by important innovations such as [indiscernible], which has become one of the most important transaction features with an impressive performance, while in the first quarter of 2022, we had 458,000 transactions. In Q2 '22, we reached over 758,000 transactions, an annual increase of 65%. Our physical footprint decreased 14% year-to-date to 426 branches, 51 of them with new and digital facilities available. Lastly, I am proud to share with you that we have obtained for the second consecutive time, an important recognition from Global Finance, who named us as one of the best financial innovation labs in Colombia, particularly this year due to our collaborative efforts with external allies. Moving to Slide 5. We present our overview on the Colombian macro performance. The Colombian economy started the year stronger than expected. Positive for prices and economic activity continued in the second quarter with an annual growth of 12.6%. The acceleration is mostly explained by the statistical effect caused by the national strike in May 2021. Growth rates will moderate in the second half, converging towards long-term growth, leaving behind a statistical effect impacts. Full reopening after the pandemic has increased mobility levels, leading to greater dynamics in the service sectors, which, together with the industry, have driven economic growth in 2022. Strong momentum of the economy during the first half of the year has led market analysts, writing agencies, the Central Bank and the government to revise growth projections upwards. Our economic research team adjusted its forecast for economic growth to 6.8%. Employment continued to recover, but lag behind economic activity. In June, all jobs lost due to the pandemic were recovered at a national level, while in urban areas, recovery pace is around 90%, illustrating greater recovery of the labor market in areas different from the country's main cities. National unemployment rate was 11.3% in June 2022. Inflation maintained a rising trend in the first semester, reaching a 20-year maximum. In July, it was 10.2% due to more generalized pricing pressures. Food inflation remains in double digits, above 24% annually, while core classification has risen to 6.3%. Our economic research team expects inflation to fluctuate close to the current level, ending the year at 10.1%. Upward surprises in growth and inflation supported additional increases in the Central Bank's interest rate. In the most recent meetings, the pace of rate adjustments accelerated to increases of 150 basis points. Intervention rate in July reached 9%. Our economic research team forecast a year-end interest rate of 10.5%. Nonetheless, if upward pressures on prices and imbalance on inflation expectations continue, additional rate increases may occur. The Ministry of Finance presented the medium-term fiscal framework with important changes to macroeconomic forecasts. Better economic growth dynamics, favorable tax collection performance and higher oil prices led the government to revise downwards the fiscal deficit projection for the coming years with 5.6% of GDP for 2022. However, our economic research team forces a greater correction to 5.3% of GDP due to tax collection performance beating expectations. A lower fiscal deficit is comparable with a central national government net debt decreasing below 60% of GDP. In addition, the Ministry of Finance has indicated that in 2023 or 2024, the debt anchor of the fiscal rule around 55% of GDP will be reached. The widening of the current account deficit continued in the first quarter with a 6.3% deficit of GDP, the highest since 2015. However, most recent information has pointed towards a significant rebound in exports due to higher commodity prices. Imports remain high, but a lower growth rate is expected in the near term due to a generalized global economic slowdown. Correction on the goods trade balance would be the main adjustment factor of the current account in 2022. Our economic research team projects a current account deficit of 4.6% of GDP in 2022, improving almost a 4 percentage point from the previous year. Gustavo Petro was elected President of the country for the 2022-2026 period. And José Antonio Ocampo, one of the most prominent economists in the country, was appointed Minister of Finance. In the first week of government, a tax reform was presented to Congress, aiming at increasing fiscal revenue in around COP 25 trillion in 2023 or 1.7% of GDP. The bill proposes increased income tax contributions from high-income individuals, fewer tax exemptions for companies and continuity of the 3% income tax surcharge on the financial sector among other measures. The government is currently preparing 2023 general budget, which will provide clarity on the allocation of additional resources obtained from the tax reform. In late June and throughout July, the foreign exchange market was characterized by high volatility within an upward trend as the exchange rate reached a new historical maximum of COP 4,670. External factors such as worldwide interest rate increases, more restricted financial conditions and the risk of global recessions caused by the strengthening of the U.S. dollar. On Slide 6, we present the outlook for Panama's macro trends. The Panamanian economy grew 15.3% in 2021, partially recovering from the pandemic trough and approaching 2019's economic activity level. Growth in 2021 was favored by the greater dynamism of internal demand in the context of fewer restrictions to contain COVID-19 and the rebound in external demand given the economic recovery of trading partners. However, a limitation for this net oil importing country has been the recent increase in this commodities international price. Between December 2021 and April 2022 growth moderated. However, in May, economic activity in Panama accelerated, registering an annual variation of 26.3%, partly explained by a base effect, but also by the good dynamism of sectors such as mining, commerce, construction and hospitality services. Recent performance placed year-to-date annual expansion at 14.1%, creating an upward bias in growth projection for the full year. Latest available data shows that economic growth during the first quarter was supported by commerce and construction sectors, presenting 22.4% and 21.7% annual increases. For 2022, International Monetary Fund's projections point to a slowdown of economic activity to 7.5%, explained by lower global growth dynamics as a consequence of supply change disruptions and tighter financial conditions. In any case, forecasts stand out among the Central American economies where a 4.4% growth pace is expected for the region. Global shops related to supply disruptions, coupled with higher food and energy prices have affected inflation in Panama, as has been the case globally. Although Panama has stopped having negative inflation levels on early 2021 and prices have increased since then, it remains the country in the region with the lowest inflationary levels, standing at 5.2% in June 2022. Now I will turn over the presentation to Javier Dorich, Head of Corporate Development, Financial Planning and Investor Relations, who will elaborate on our quarterly performance.

Thank you, German, and good morning. Starting on Slide 7, we present our consolidated asset structure. Consolidated assets totaled COP 130.4 trillion by Q2 2022, presenting a quarterly 6.9% increase or 5.2% when excluding the 10.5% Colombian peso devaluation in the same period. Growth in the quarter is explained by net loans and leases, which represent 63.6% of consolidated assets, as well as by increases in other assets which accounts for 15.9% of the total, namely a higher cash position. Investment portfolios in fixed income and equity represent 10.2% and 10.3% of total assets, respectively, increasing 1.1% and 3.9% in the quarter. Quarterly growth of the gross loan portfolio was 5.4% and 3.6% when excluding FX fluctuations, reaching COP 87.5 trillion. Loan mix continues to reflect our strategy to rebalance composition, with the commercial book explaining 66.3% of the loan portfolio and annual reduction in participation of 1.6 percentage points. Conversely, retail lending has increased its participation with mortgage loans representing 11.2% of gross loans, while consumer loans remained stable at 22.3% in Q2 2022. Summing by segments, mortgage portfolio grew 8.6% quarterly, 5.1% if isolating by FX depreciation, led by the Colombian portfolio where we have continued to observe positive market dynamics favoring home ownership. In Panama, MFG's mortgage portfolio increased 2.2% in dollar terms during the quarter. Consumer loans increased by 5.4% in Q2, 3.5% excluding FX mainly in Colombia as originations in unsecured products picked up, reflecting healthy loan demand and increased usage of credit cards, while payroll and auto loans also presented positive lending performance. In Panama, growth in this segment was close to 1% in the quarter. Regarding the commercial portfolio, quarterly growth of 3.4% after FX movements was even between Colombia and Panama. MFG's book in this segment increased 3.3% in dollar terms reflecting higher sectorial activity in Panama. In Colombia, growth was driven by liquidity products, capturing market opportunities in medium corporates and SMEs, as well as increased financing for the construction sector which represented 10.2% of our gross loan portfolio. All in all, quarterly performance was on track in order to reach our full year guidance between 13% and 14% loan growth. Better-than-expected economic behavior supported lending dynamics, which have continued on July and August. We will monitor in the second semester headwinds from a probable generalized international recession, high local inflation or increased benchmark interest rates. Moving to Slide 8, we present our consolidated loan portfolio quality metrics. In Q2 2022, we continue to observe an improving trend on our PDL ratios. Quarterly contracting 33 basis points for loans over 30 days past due and 22 basis points for the 90 days metric to 4.6% and 3.5%, respectively. This performance is supported by favorable overall economic conditions, leading to lower unemployment levels as well as continued recovery strategies implemented within our risk management framework aimed at controlling PDL formation at early delinquency stages. As a consequence of improving PDL ratios, gross provision expense for the quarter contracted 26.4% to COP 354.3 billion, leading to a 1.7% annualized gross cost of risk. Factoring in charge of recoveries, net cost of risk reached 1.3% for Q2 2022. In addition to lower PDL ratios during the quarter, we reversed some provisions constituted by qualitative factors primarily in Panama on loans with expiry reliefs after consistent evidence of successful payment resumption. For 2022, we expect a cost of risk around 1.7%, aligned with our historical operational levels and anticipating inflation-driven pressures in the second half of the year. Regarding loan relief programs, by Q2 2022, 0.4% of our consolidated loan portfolio was still under an active forbearance, reducing from 0.6% past quarter, all granted in Panama. Loans under restructural release represented 10.4% of gross loans, increasing 1.6% touch points from a quarter ago, explained by continued implementation of second wave renegotiations in the Panamanian portfolio following forbearance expiration during the quarter. Annualized charge-offs for the quarter were 0.55x our average 90-day PDLs, leading to a 2% ratio over average loans. Lower quarterly ratios when compared to Q1 2022 are explained by a normalized charge of activity as far as quarter metrics included charge-offs related to loans coming off from relief periods in Panama. Coverage metrics for Q2 2022 slightly increased to 1.27x coverage of 30-day PDLs and 1.67x coverage on 90-day PDLs, driven by lower PDLs overall. In terms of allowances of our gross loans, we reached a 5.8% ratio, reflecting loan growth as previously explained. Continuing on Slide 9, we present the regional breakdown of our quality metrics. In Colombia, PDL ratios quarterly decreased 26 basis points for the 30 days metric and 30 basis points for the 90 days high to 4.9% and 3.8%, respectively, reflecting adequate recovery strategies and improving payment performance from our borrowers. As a result, net cost of risk reached 1.4% in Q2 2022, given lower provision expense pressures and high charge-off recoveries of nearly COP 79 billion in the quarter. Charge-off ratios slightly declined in the quarter to 0.60x over 90-days PDL, which represented 2.3% of our average loans, reflecting normalized operations. Coverage metrics remained stable with allowances over 30 days PDLs reaching 1.37x and 1.78x over 90 days PDLs. As a percentage of gross loans, provision reserves reached 6.7% in Q2 2022, explained by loan growth. Regarding MFG operations in Panama, reinforced collection strategies led to a sharp 57 basis points quarterly contraction on the 30 days PDL ratio, mainly driven by commercial loans. The 90 days PDL ratio increased 31 basis points in the quarter, led by the consumer portfolio as most impacted borrowers whose relief periods expired during Q1 2022. Net cost of risk decreased to 0.8% in the quarter because of the following factors: First, qualitative provisions were reversed for borrowers who, after ending a forbearance period, complied with timely payments between 6 and 12 consecutive months, evidencing a reduction on the probability of the fund. And second, due to charge-off recoveries mainly on guaranteed exposures on the commercial books. Charge-off performance for the quarter normalized to 0.12x over 90-day PDLs, equivalent to 0.2% of average gross loan portfolio. In terms of coverage, lower 30-day past due loans led to a coverage improvement to 0.6x, while increases in loans delinquent over 90 days led to a coverage metric of 0.8x. As a result, allowances to gross loans were 1.8% for Q2 2022. To close the loan portfolio quality section, please refer to Slide 10 for a breakdown by segments. Starting with the commercial portfolio, 30-day PDLs improved 29 basis points quarterly to 4.3%, while 90-day PDLs contracted 27 basis points during the quarter, reaching 3.8%, reflecting loan normalization. Regarding consumer loans, 30-day and 90-day PDL metrics decreased 41 and 9 basis points in the quarter, respectively, to 5.2% and 2.7% due to positive payment performance and reinforced action and recovery strategies. Mortgage loans quality at 30 days high was 4.8% for Q2 2022, 22 basis points lower than Q1 level. 90-day PDLs remained stable at 2.9%. Continuing with consolidated funding on Slide 11, we present our liabilities structure. Total funding grew 7.4% in the quarter, or 5.6% when isolating FX fluctuations, reaching COP 111.5 trillion by Q2 2022. Driving quarterly growth, we observed deposits increasing 9.5% in the period or 7.9% excluding FX, as higher demand in time deposits was explained by surges on interest rates, which favored institutional funding. This product now represents 42.3% of total deposits, while saving accounts had a 38% share and checking accounts decreased to 19.5%. Deposits represented 75.7% of total funding in Q2, followed by banks and others with 12.4% long-term bonds with 10.1% and interbank borrowings with 1.9%. Please note that on our long-term bonds, we observed a mixed effect of lower balance in dollar-denominated issuances, reflecting the $128 million tendered on our senior 27s past April, offset by a higher value in pesos due to quarterly devaluation of our reporting currency. Deposits to net loans ratio increased to 1.02x in Q2 2022, following our conservative approach of maintaining a fully matched ratio. Moving to equity and solvency metrics on Slide 12. Total equity increased 2.6% quarterly, reaching COP 15.7 trillion, explained by higher net income for the current period as second quarter earnings more than compensated negative impacts on OCI from volatility in our investment portfolio. Also significant was the dividend payment performed on June 28, which had a net impact on equity. Shareholders of 95.9% of our common stock agreed to a dividend payment in shares, increasing our paid in capital by COP 1.1 trillion, which were reallocated from reserves. The owners of the remaining 4.1% received a cash dividend payment which amounted to COP 45 billion. Tangible common equity increased 2.5% in the quarter, in line with the aforementioned changes in equity and more than compensating for the higher peso value of our U.S. dollar-denominated goodwill due to currency devaluation. As a result, tangible capital ratio was 11.2% and total equity represents 12.1% of total assets, reflecting higher asset growth. Regarding capital adequacy, total solvency for the quarter was 12.8%, distributed in a CET1 of 10% and a Tier 2 of 2.8%. Movements in the quarter are mainly related to FX fluctuations as follows: Peso devaluation in the quarter led to an increased deduction of dollar-denominated nonconsolidated investments, namely BHI's 25% equity interest, while higher goodwill substraction increased capital usage. On the other hand, devaluation increased Tier 2 as it currently consists of the 23 and 26 subordinated bonds issued in U.S. dollars. Organic capital accretion through quarterly profits offset headwinds for the quarter, compensating in value terms. However, in terms of the solvency ratio, such increase was diluted by higher RWAs, mainly from our dollar-denominated operations. Following with P&L metrics on Slide 13, we present NIM ratios. Net interest income for Q2 2022 increased 3% quarterly and 10.9% annually when excluding FX movements to COP 1.13 trillion, reflecting loan growth in high-yield products, as well as incorporating repricing from our variable rate assets. Total NIM was 4.4%, contracting 19 basis points in the quarter, impacted by investment NIM at minus 1.4% as market volatility had a negative effect on fixed income investments, mainly sovereign debt, which yielded 2.2% in the quarter. Lending NIM increased 26 basis points quarterly to 5.4%, explained by a 9% yield on loans, moving in line with increases on benchmark interest rates. An increase of 111 basis points on our yield on loans, more than compensated increased funding costs of 81 basis points in the quarter, which reached 3.7%, mainly driven by increases on time deposits as previously explained. As further increases in the Central Bank rate are expected to be limited, coupled with persisting market volatility, our revised NIM expectations is 4.6% for 2022, driven by a stable lending margin and a pressured investment need. Moving to Slide 14, we present details on fees and other income. Gross fee income for the quarter increased 6.9% excluding FX, to COP 402 billion, leading to a fee income ratio of 21.9%. Growth in the quarter is explained by higher income from banking services and credit card fees as we continue to observe positive transactional dynamics. Total banking fees represented 82.6% of quarterly fee income, while fiduciary activities followed with 9.8% and other fees completed the mix with a 7.6% share. Regarding other operating income. In Q2 2022, we registered a net loss on derivatives and foreign exchange instruments as peso devaluation led to a COP 653 billion loss on exchange differentials, which were mostly covered by a COP 615 billion gain on derivative instruments for trading. Valuation of the trading portfolio was impacted by market volatilities and interest rate increases which led to a net loss of COP 28.2 billion for Q2 2022. Other income decreased to COP 32.9 billion. In Q1 '22, this item included the total of COP 1.3 trillion extraordinary income from BHI spinoff. In order to improve comparability, first quarter other income now only includes COP 137.4 billion from the spin-off as it relates to investment valuation of the 25% equity stake [indiscernible] in BHI. The remaining COP 1.2 trillion was reclassified as a discontinued operation as it relates to income from OCI realization following IFRS. Equity method income for the quarter was COP 376.1 billion, of which COP 225.5 billion came from Corficolombiana and COP 150.2 billion from our 25% equity interest on BAC Holding International. Porvenir registered a COP 2.8 billion loss in Q2 '22. Asset portfolios were affected by the aforementioned market volatilities. As we continue to expect favorable activity dynamics in line with forecasted economic growth, fee income ratio target is north of 20%. On Slide 15, we continue with our efficiency ratios. Operational expense totaled COP 772.7 billion, increasing 6.2% quarterly excluding FX, while total recurring income increased 5.6% for the same period, excluding one-off BHI's spinoff income in Q1 2022. As a result, cost-to-income ratio reached 43.6%, explained by a pickup in advertisement expense, as well as increased costs in data processing services related to higher transactional volume in the quarter. Cost to assets ratio remained at 2.4% for the quarter, illustrating that expense incurred in the quarter is supported by balance sheet growth. For 2022, we continue to expect an efficiency ratio below 45%. To conclude, on Slide 16, we present our profitability metrics. Q2 2022 attributable net income was COP 642 billion, supported by a 3.4% quarterly increase in net interest income, a sharp 33.2% contraction in provisions, 8.6% higher net fees and a 6.7% increase in operational expense. All of the above reflect a solid core banking business performance. In terms of profitability, quarterly earnings led to a 2% return on average assets and a 16.6% return on average equity, annual increases of 28 and 58 basis points, respectively. For 2022, we expect to reach an ROAA of 2.5% and an ROAE of 21%, including BHI's extraordinary income. Before moving to Q&A, I would like to summarize our 2022 guidance updated with our second quarter results and our expectations for the second half of the year. Loan growth is expected to be between 13% and 14%. Net interest margin target is around 4.6%. Net cost of risk is expected to remain controlled at 1.7%. Fee income ratio should come in above 20%. Undergoing efficiency efforts should be reflected in a cost-to-income below 45%. Regarding profitability, ROAA should be around 2.5% and ROAE close to 21%. And now let us begin the question-and-answer session.

[Operator Instructions] We have a question from Nicolas Riva from Bank of America.

I have 3 questions. The first one on the pro forma financials that you report for 2021, I want to make sure I understand them. So if I look into total assets or net income, there we see a contraction in total assets because of the spinoff of Central America. But I want to make sure, for each line in the balance sheet, for example, loan portfolio deposits, you are excluding BHI. So we can compare apples-to-apples every single line in the balance sheet, except for the total assets. And the same thing for the P&L. Net interest income on loan loss provisions are apples-to-apples, but the net income, we do see the difference. I want to make sure I understand that. That's my first question. Second question on the subordinated bonds, on the Tier 2s, if you can remind us the contribution to capital of the 2023 and 2026 bonds, and if you can comment on the refinancing plans for the 2023 bond maturing in February for $500 million? That's my second question. And then the third question, thanks very much for the guidance that you just provided for 2022 full year. We know that the first quarter was impacted because of these one-time item from the spinoff of Central America. If I look at the ROE for the second quarter, so it was 16%, and this was the first full quarter after the spinoff of Central America, is that a reasonable sustainable long-term ROE for the bank that's 16%?

Thank you, Nicolas, for your questions. The first one is going to be answered by Javier, and I'll get to the second one as far as the refinancing plans that we have.

For your first question, the answer is yes. In the construction of the financial statements, we exclude BHI line by line, and we only include a line both in assets and liabilities in the final lines of gold, which set deconsolidated assets and deconsolidated liabilities in order to ease the comparison in the financial statements. And that happened also in the P&L, where we have a line of the continued discontinued operation. So I'll turn it to German to the second question.

Nicolas, we do expect to replace -- to substitute the bonds that are expiring in February 19, 2023. We are expecting to begin shortly the selection of banks that are going to be required ranges in this transaction so that we have, on a timely manner, the whole process being started hopefully accomplishing about half a year time. So that is the expectation that we have for those bonds. Most likely those are going to be new tie-ups that will replace the ones maturing at the moment in time. As to the contribution of the '23 from the '26 -- for this year, in terms of the '23, it's 20%, so that's roughly $100 billion. And in terms of the '26 is 50%, and that is a $1.1 trillion emission issuance. So that means $550 million for our capital in Tier 2. And finally, for question number 3, in terms of our guidance, yes, as you know, in the first quarter, we had an extraordinary income from BHI deconsolidation and that gave us an extraordinary income and higher-than-usual ROAE in the second quarter. That 16% is still a little bit higher than usual. So what we gave was a 21% guidance for a whole year, and that is consistent with our second half between 14% and 15% in terms of ROAE.

Our next question comes from Daniel Mora from CrediCorp Capital.

I also have 3 questions. The first one is regarding NIMs. What are the NIMs that you consider going forward? I know that you mentioned the guidance of 4.6% for this year. But I guess, what could be the performance, for example, in 2023, we see the repricing of the commercial loan book having a positive impact reflected in the [indiscernible] loans. But I also observed that time deposits have increased materially and it feels that it could strongly compensate the positive impact of the cost of funds. So what could be the normal figures of NIM in the long term. And if you see that in 2023, the cost is impacted by the decrease in interest rates. My second question is regarding capital ratios. We observed that the CET1, the Tier 1 decreased again to 10% given the positive increase in loan book in assets. But considering this strong pace of growth of the loan book, it feels that the Tier 1 can also decrease below 10% at least in the coming quarters. Do you see that happening? And what could be the medium-term target of the Tier 1 for Banco de Bogotá? And my third question is regarding provision expenses. Do you feel some pressures in the coming quarters and also in 2023, considering the economic deceleration, the high inflation and the high interest rates? In line with this question, what could be the normalized figure of cost of risk in the long term?

I'm going to address the first one that you formulated. There was, at the moment in time, in connection with sensitivity -- asset or liability sensitivity regarding to the conclusion that we are for this period, in particular, reflecting a neutral span. And let me tell you that it is a little difficult sometimes to correct the conclusions because what I could also say is that we have very much the same amount of loans and liabilities in different categories, which we price either fixed or float in a very similar amount. So you can get to the conclusion that we are very much neutral. After we compare the quarters, we very much ratify that conclusion that these changes in interest rates, which began September last year, in other words, we have very much enough time to sort of realize what the impact in our bottom line and neutrality has been what we could, at the moment, tell you. The little difference that we have is that while liabilities reprice a return of about 2 months' time, assets take about 2.4 months to reprice. That means that whenever interest rates are going to peak, and we believe that's going to take place sometime at the second quarter, at the second half this year or maybe by the end of the year, we may have some time, maybe a couple of months at 15 months or so to have some assets still further repricing upwards -- and we might have a certain additional NIM but because of that situation. Having said that, the analysis of the -- still the consideration that we've had undertaken internally basically is in connection, and that's also part of your question. What's going to happen afterwards? What's going to happen when the Central Bank begins the change of signs towards interest rates? And we believe that that could take place sometime in the third semester next year. It all depends on inflation mainly, but we're going to have in this cycle rates in relatively high levels for maybe longer time. We have seen recently a market anomaly because the spreads have risen much more than we expected for the level of interest rates. And that has -- as a result of what is happening internally and externally in the world because of inflation and other matters that have to at a certain risk aversion in markets. So what we believe is that at some time the spreads that we are paying, and you had a good point with time deposit, that we are recognizing at this moment in time and also in certain institutional funding, in savings accounts, we believe, are bigger than they should perhaps adjust, and as a consequence, we might have, because of velocity, a little advantage that will provide certain benefits to our NIM. But that would be maybe mid-next year or little further down the road depending on the whole monetary policy activity from the Central Bank.