Grupo Cibest S.A. (CIBEST) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Bancolombia's Second Quarter 2024 Earnings Conference Call. My name is Christine, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session during the question-and-answer, please press * then 1 on your touch tone phone. Please note that this conference is being recorded. Please note that this conference call will include forward-looking statements, including statements related to our future performance, capital position, credit-related expenses and credit losses. All forward-looking statements whether made in this conference call, in future filings, in press releases or verbally, address matters that involve risks and uncertainties. Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy and various other factors that we describe in our reports filed with the SEC. With us today is Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Julian Moore, Chief Corporate Officer; Mr. Mauricio Botera Wolff, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mrs. Catalina Toba, Investor Relations and Capital Markets Director; and Mrs. Laura Covia, Chief Economist. I will now turn the call over to Mr. Juan Coles Mora, Chief Executive Officer. Mr. Wan Kolos, you may begin.

Good morning, and welcome to Bancolombia's Second Quarter Results Conference call. Please turn to Slide 2. As the year progresses, we continue to see modest economic growth across all the regions where we operate. Despite the low demand for credit for our quarterly results demonstrated strong operational performance to achieve a loan growth of approximately 3% and maintained a stable net interest margin at 7.1%. This was underpinned by a robust financial strategy that enabled us to accelerate the reduction of interest expense, thereby fostering credit origination and increasing our net interest income. Nevertheless, our net income saw a 13.5% decline from the previous quarter, and our return on equity fell to 15.3%. This was primarily due to an increase in provision charges by 23%. which we will discuss in more detail, along with our onetime impairment charge associated with the joint venture. On a year-over-year basis, net income remained relatively stable, thanks to a slower rate of credit deterioration that contributed to improved asset quality and a stronger balance it covers. Our capital ratio is strong firm with a total solvency ratio of 12.6% and a core equity Tier 1 ratio of 10.9%. In other significant developments this quarter, I would like to draw attention to a few key parts. Firstly, the appointment of Mauricio Botero as the new Chief Financial Officer of Bancolombia, effective August 1, succeeding as inverters retirement. Secondly, the initiation of our reduced rate mortgage loan program on July 20, designed to boost the housing and construction sector. And thirdly, take successful execution of liability management and a new Tier 2 issuance in the international markets aimed at optimizing our capital and funding structure, we will flow in more detail place. I will now hand over the presentation to Laura Clavijo, our Chief analyst who will provide a deeper analyst on the macro economic environment. Laura?

Thank you, Juan Carlos. Now please let us turn to Slide 3. The Colombian economy expanded at a better-than-expected pace of 0.7% during the first quarter of 2024 and have continued to show signs of an economic upswing during the following months, in line with improving macro conditions. Leading monthly indicators such as the ISE and Bancolombia's NowCast suggests the economy may have expanded somewhere between 2% and 3% during the second quarter. Consequently, we have revised our growth forecast upward from 0.6% to 1.3% for 2024 and from 2.4% to 2.6% for the following year. Even though key economic drivers are still lagging, such as investment levels, household demand and credit conditions, some sectors are thriving and leading the path towards the recovery. For example, the agriculture sector grew at an annual rate of 5.5% as the sector surpassed adverse weather conditions and has benefited from improving commodity prices and rising traditional exports. Moreover, the public sector, which contributes close to 15% of total GDP has continued to thrive, expanding 5.3% during the first quarter of 2024 and has managed to bolster employment figures. Nonetheless, this support emerging from the public sector may be hindered moving forward as fiscal pressure has escalated. Even though the medium-term fiscal outlook presented by the government that's a far more realistic setting, including lower expected tax collection, non-feasible additional revenues, higher interest payments and expenditure cuts worth PHP 20 billion increasing debt levels and the fiscal deficit forecasted at 5.6% of GDP in 2024 compared to last year's 4.3% reflects the fiscal policy challenges that lie ahead. Policy challenges are also being tackled on the monetary side, even though inflation has continued its decent to the 7.2% level as of June, bringing down inflation to the Central Bank's range of between 2% and 4% is proving to be quite difficult, considering the indexation effect on services and housing prices. Hence, the Central Bank's cautious approach to easing its policy interest rate, which still stands high at 11.25% at the end of the first semester. We anticipate the Central Bank may begin to accelerate to 75 basis point cuts before year-end and low rates will continue defending boosting consumer demand. Finally, in other events, Congress closed its legislature during June with the approval of the pension reform and the advancement of the labor reform. Furthermore, the government has announced its intention to press through its reform agenda during the remaining 2 years in office, including a failed health reform, public services and an economic recovery package, which may include tax amendments. Now please let me turn it back to Juan Carlos Mora, who will present Bancolombia's quarterly results.

Thank you, Laura. Please proceed to Slide 4. Before we dive into the results of the quarter, I would like to highlight strategic advantages that Bancolombia has cultivated to remain competitive as capitalized on growth opportunities within the dynamic financial landscape. At the core of the first value train cellar for comprehensive value proposition, which merges both financial and nonfinancial basis models catered to a diverse range of spec. This is delivered through a universal banking model that currently serves over 20 million customers in Colombia. Our integrated complementary and scalable approach not only facilitate for selling opportunities and diversification, but also enables the bank to adapt to emerging market trends and encase our value proportion. A prime example of our capabilities into recent introduction of Juan, a digital asset company that offers a gateway from traditional financial systems through the emerging digital asset economy. This position us at the forefront of financial innovation, providing a platform for learning and iteration. Building on this, our second driving pillar involves an inter-parallel multichannel platform designed to serve our customers efficiently through an ecosystem model. This platform has proven to be proper tool for attracting new customers, especially those who are on bank or underbanked by offering accessible money transfer services and convenient passing and cash-out options. As a result, we have significantly expanded our distribution reach and witness exponential growth in transaction volume, which has contributed to an increase in base income and accumulation of low-cost PQ deposits that posted profitability. For instance, NEC has seen a remarkable source in monthly transaction volume with a 20% increase quarter-over-quarter and a 70% increase year-over-year. This growth is driven by a phase in the average monthly transaction activity per user, which has grown nearly 15% quarter-over-quarter and 33% year-over-year. The Colombia financial system advances to our great interoperability and Colombia is well positioned in the market with the technological and operational capabilities to further products and integrate our financial services into new marketplaces. This will promote financial inclusion, increase our proposition and improve the client see. Indeed, Colombia has been transitioning over the past decade into an interoperable market with real-time payment solutions like tastes, PSC and ACH. And Colombia, leader with the successful implementation of per-core technology, which is now used over 1 million merchants across more than 1,100 units at more than 3 million units payers and currently accounts for approximately 90% of inter-approval incoming payments. This, combined with our strong foothold in the transactional domain and a solid customer base of over 20 million customers at Bancolombia and north of 20 million users affected us with a unique opportunity to potential features of our payment infrastructure and distributions and sales opportunities. Now please turn to Slide 5. Transitioning to our fair value driving pillar, I would like to disclose our recent transaction in the international capital markets, which serves as a testament of our expertise in financial management. In early June, we capitalized on favourable market conditions to initiate a liability management transaction. Our goal was to enact our Tier 2 capital to support continued growth and to mitigate short-term refinancing risk. The outcome proves the strong interest in the bank from international investors, which enable us to issue the largest [inaudible] in the Colombian market to date. We effectively leveraged both internal and external resources to reduce interest expenses and provide investors with options for cash or long-term investments to satisfy a variety of needs. I will now pass the presentation to Malizia Botero, who will provide a detailed analysis of our results for the second quarter of 2024. Mauricio?

Thank you, Juan Carlos. Please go to Slide 6. The contribution of the Central American operation to the consolidated book continues increasing, providing credit risk and currency diversification to our operations. Loan growth on the regional banks was mainly driven by an increase in commercial loans and supported by an 8% peso-depreciation during the period, resulting a higher aggregate share of the offshore books relative to Colombia. However, when we're looking at each operation, we see mixed dynamics. Banistmo recorded higher provision expenses as per lower growth prospects in Panama, resulting in net income contraction quarterly, which implies an ROE of 5.5% in the period. On the other hand, Banagricola posted a 21.6% ROE on the back of growing interest revenue, coupled with a reduction on provision charges. Similarly, BAM presented a strong quarterly performance as reflected on a sharp ROE rebound to 12.3%, driven by a growing NII and lower provision charges associated to releases on corporate clients and progress made in controlling retail deterioration. All in all, the net income contribution of Central America to the consolidated figures remained flat during the quarter but decreased year-over-year, largely attributed to the lower average exchange rate in Colombia during the last 12 months. Please go to Slide 7. The loan portfolio grew 3% quarter-over-quarter and notably, we assume growth on an annual basis with a 2.7% expansion. Net of ForEx, however, growth in the quarter was low at 0.5%, yet higher on the year reaching 3%. Growth was mainly driven by commercial loans with a 3% quarter-over-quarter as we implement the special lines to stimulate demand on midsized companies and corporates, which in turn contributes to interest income generation with good asset quality. Moreover, mortgage loans registered a notable expansion of 4.8% over the quarter and 7.4% over the year, fueled by the renewal of the social housing subsidy program in Colombia. This, coupled with the recently launched of our crate program for certain mortgage loans should induce loan growth going forward. On the fleet side, consumer segment increased 1.9% quarter-over-quarter. We keep adjusted by ForEx, represents a 0.6% drop with a restrained origination standards on unsecured loans. Please go to Slide 8. Growth on deposits outpaced loans growth, posting a 5.3% growth over the quarter and almost 6% on an annual basis, largely explained by a prudent approach towards liquidity in our ALCO strategies. Time deposits grew the most with a 6.7% quarterly and 8.6% yearly, mainly explained by a pickup in time deposits with institutional clients and in digital short-time deposits with retail customers. Thus, deposits reached a 37% share of our funding mix. On the other hand, savings and checking accounts, both grew over 4% in the quarter, maintaining a 39% and a 12% share, respectively, on the total funding mix providing an anchor to the overall cost and stability to the funding structure. All in all, cost of deposits decreased 35 basis points during the quarter, driven by a 73 basis points cost reduction on time deposits outpacing the 50basis points REPO rate cut carried out during the same period. We deemed this very relevant as it provides our ability to adjust the time deposits maturity profile to secure a fast repricing and mitigate NIM contraction going forward. Please go to Slide 9. Total interest income on loans and financial leases further contracted 0.4% on the quarter and 7.2% over the year, driven by the interest rate decline that affects income generation on new and existing loans as well as per the contraction of the consumer portfolio, which has higher yields. Consequently, total interest income, including loans and investments fell 1.7% over the quarter and 1.4% over the year. However, our ability to outpace the Repo rate cut on our time deposits and reduce overall interest expense resulted in a decrease in interest expense of 4.6% quarter-over-quarter and 9.3% year-over-year. As a matter of fact, interest expense reduction compensated for the decline in yield on loans. So NII resumed its growth reaching COP5.2 trillion purchase in the quarter, equivalent to a 0.5% increase over the quarter and 5.1% over the year. As you can see, NIM remained flat during the quarter at 7.1%. Going forward, we will continue managing the sensitivity and maturity profile of our assets and liabilities to mitigate NIM contraction. For example, securing a fast repricing of total time deposits out of which 68% will mature in the next 12 months. Please go to Slide 10. Fee income grew 11.2% quarter-over-quarter and 10.2% year-over-year, mainly explained by bancassurance that resumes its growth dynamics posting a notable 37.3% increase for the period and 12.4% year-over-year. Similarity payments and collections increased close to 10% quarterly and annually. Additionally, credit and debit card fee income increased 1.5% quarter-over-quarter and 5.8% year-over-year, driven by a higher volume of cards and transactions. On the fleet side, the expenses grew 22% over the quarter and 19% over the year, outpacing fee income growth, explained by the increase of both credit card processing charges and correspondent banking fees. That net income increased 2.9% in the quarter and 3.2% on an annual basis, resulting on a fee income ratio of 20.1% as compared to the 18% registered in the previous quarter. Please go to Slide 11. As shown in the upper left chart, there was a significant reduction on 5G loan formation compared to the previous quarters, mainly explained by the lower pace of consumer loans deterioration in Colombia as we will further elaborate. This, coupled with an increase in charge-offs of the quarter denotes our efforts and commitment to preserve a healthy balance sheet. On top of that, net provisions for the quarter were COP1.6 trillion, a 23% increase over the quarter, yet a 22% drop year-over-year, reflecting the better performance of new vintages on the retired origination standards and an enhanced collection process. The 3 main factors behind the provision charge performance in the quarter were: first, COP213 billion charge in SMEs. Second, a COP153 billion charge in companies from construction and health sectors. And third, a COP34 billion charge on certain clients on the large exposures segment given unexpected deterioration. On the flip side, there was a COP237 billion provision release associated to macro variables as a downward trend in interest rates positively impacts consumer loans. Regarding asset quality, the 30 days pad loans ratio decreased to 5.2% in the quarter driven by the consumer loans with a slight increase in Coveris reaching 112%, where the 90 days past due loan ratio slightly increased to 3.4%, explained by past-due loans roll over, thus reducing coverage to 169%, but still providing an ample caution. From an expected perspective, we highlight the stability accomplished in Stage 2 loans provided all measures taken to contain defaults. Moreover, the combined coverage for Stage 2 and Stage 3 loans remain steady at 40%. We remain confident that as interest rates continue its downward path, the pace of loan deterioration will tend to normalize, but we do expect higher delinquencies on SMEs associated to a weak performance of construction, manufacturing and retail sectors. Please go to Slide 12. The consumer portfolio in Colombia posted a COP210 billion reduction on new past due loans quarter-over-quarter, given the slower pace of defaults and higher recoveries, pushing down the deterioration during the quarter to 7.8%. We highlighted the improvement in personal loans that account for almost 48% of the consumer loan portfolio in Colombia as reflected in its 90-day past due balance and it is stage 2 and Stage 3 share, which have declined for 2 consecutive quarters. Thus, the overall consumer segment posted a lower 90-days past year loan ratio of 5.4% and its cost of risk dropped from 8.9% to 8.7%. Given the better performance of new vintages and the visibility provided by our trade models, we continue increasing gradually loan originations on specific client niches under a more conservative approach, which coupled with better macro conditions going forward, should contribute to restore asset quality while increasing the loan portfolio profitability. Please go to Slide #13. Operating expenses grew 3.4% quarter-over-quarter and 3.7% year-over-year, notably lower than the inflation rate in Colombia during the period. This reflects the stringent cost control and efficiency program discussed on our past conference call, coupled with a lower average exchange rate that reduced overall operating expenses denominated in U.S. dollars. Besides personnel expenses only grew 1% quarter-over-quarter and decreased 0.4% year-over-year. In both cases, below the annual wage increase in Colombia, which certainly reflects efficiency gains. On the other hand, administrative expenses grew 5.2% quarter-over-quarter and 6.8% on a yearly basis, mainly driven by local taxes and IT and licensing expenses directed to the business transformation and migration to the cloud. We remain highly committed to cost reduction and efficiency gains, while we continue evolving our business transformation underway. However, the result of expense growth outpacing operating income growth, increased the efficiency ratio to 48.8% during the quarter. Please go to Slide 14. Net income for the quarter was COP1.4 trillion, 13% below the previous quarter, mainly attributed to lower net interest income, higher provision charges and a one-off impairment charge on a joint venture. On a yearly basis, however, the bottom line remained relatively flat as the lower net interest income generation was offset by a much lower cost of risk. All things considered, the ROE for the quarter was 15.3%, which if adjusted for goodwill results in a return on tangible equity of 20.5% that shows the strong profitability of the operation isolated of goodwill related costs. Now please go to Slide 15. Shareholders' equity increased 7.5% quarter-over-quarter and 7.3% year-over-year, mainly driven by net income generation, coupled with ForEx depreciation. Core equity Tier 1 ratio ended at 10.98%, up 53 basis points quarterly, explained by organic capital generation after accounting for the annual dividend payout decreased in the first quarter. Consistently, total capital adequacy ratio stood at 12.6%, equivalent to a growth of 23 basis points over the quarter and 6 basis points over the year. With this, I will hand over the presentation back to Juan Carlos for the final remarks. Juan Carlos.

Thank you, Mauricio. Please proceed to Slide 16. As a part of our business with port strategy, we have successfully originated COP 21 trillion during 2024. contributing to a cumulative total of COP 162 billion since the year 2020. In our commitment to environmental matters, we have carried out climate-related assessments with clients in the cement, food, steel and manufacturing sector. This initiative is aimed at ensuring the talent strategies are in alignment with our own. We are also proud to announce the release of the fourth edition of our principles for responsible banking reports. This publication, which has received limited assurance from PWC highlights our dedication for sustainability. Please go to Slide 18. Last, I will share our guidance for year-end 2024 based on the current data and our updated macroeconomic forecast. We expect a loan growth of 8%, broken down in a 4.3% growth from the peso-denominated loans and 7.7% in the dollar-denominated loans. NIM to close around 6.8%, cost of risk between 2.2% and 2.4%, efficiency ratio in the 50% area, ROE between 14% and 15% and core equity Tier 1 between 11% and 11.5%. Now we will take any questions you may have. Thank you.

[Operator Instructions] Thank you. We will now begin the question-and-answer session. If you have a question, please press * then 1 on your touch tone phone. If you wish to be removed from the queue, please press *2. If you're using the speaker phone, you need to pick up the handset first before pressing the numbers. Once again, if you have a question please press * then 1 on your touch tone phone. Our first question comes from the line of Ernesto Gabilondo with Bank of America.

Thank you. My first question will be on your NIM expectations. So, you're expecting an interest rate of around 8.35% in '24 and 6% in the next year. So, should we see the means normalizing in the next coming years? And then my second question is on your effective tax rate. We noticed it came at 20% during the second quarter. So how should we think about the effective tax rate for this and next year? And the last question is on Nequi. We see you already have an important number of active clients. So just wondering if you can share a little bit of your recent strategies to monetize those clients? And how do you see Nequi at breakeven? And also, well, if you can provide some key target ratios for Nequi in the next years? Or when do you think you can start providing those indicators?

Thank you, Ernesto. Let me address your questions, your first, I will have a comment on the tax, effective tax rate. And on that, I will ask Mauricio to give you more color. And I'm going also to answer your question or your comments about Nequi. So, let's start with the NIM. We know that in Colombia, we have had monetary policy that is at this moment like inflation and inflation has been kind of persistent to go down. So, at the end, our NIM will depend on how the monetary policy will behave. And we are expecting, or there are expectations around 2 additional reviews of the interest rate from the Colombian Central Bank and due to the inflation news that were released yesterday, probably we will see probably the rate will go down around 100 net 25 or 50 basis points. So, with that, we expect our NIM to be around 6.8% by the end of this year, and that will depend mainly on the speed of the transmission of the monetary policy and if the Central Bank is going to decrease the rate 25 or 50 basis points in each of its millions this year. So, for next year, we expect the inflation to keep going down. And still, we don't see that the rate, the inflation, sorry, will be in the banagricola target. So, the monetary policy will continue trying to control inflation. So, with that, we expect that our NIM for 2025 will be around 6.5%. So that will decrease our net interest income, but also that will be related to the cost of risk to see the results. Regarding your second question, the effective tax rate, I'm going to make a comment. And then we will go back after I answer your question about Nequi to effect tax rate. So, our expectation is that effective tax rate for the year will be between 26 and 28 and that's in line with our past guidance. The quarter was around 25%, and Mauricio will explain that a little later. Regarding Nequi, Nequi now has more than 20 million clients, around 14% of them are active customers. And our path to monetization is going well. We are improving or we are in the path of mutation is definitely through credit. And we are monthly by monthly improving our credit performance. So that will take a little bit a while we think that our profitability will be by the end of '25, beginning of 26, but it will depend on how fast we can go on the credit on the credit side. We need to be careful, and we will be measuring how the clients are performing. So far, as I mentioned, we are doing well. So those are our expectations. The transactions are there. We have now a lot of information about our clients. They are transacting through Ekso that's going to help us a lot know the clients and with that, we'll be able to offer the credit lines. Mauricio, let's go back to the second question about the effective tax rate, please.

Yes. Ernesto, to understand the tax rate we used for the second quarter, it's important to understand that the aggregated tax rate among all the different segments, businesses and geographies in which we participate was 25%, as Juan Carlos mentioned, but there was a one-off reversal of provision for taxes from the previous year. If you normalize that, you get to 25%. And that's why it was 20%, and the guidance should continue to be between 26% and 28% for this year and the coming year.

Excellent. Just a follow-up in terms of your NIM expectation. So, in this first half, I think, means we're at around 7.1%. And you're expecting that for the full year or in the second half, the NIM should be going to 6.8% as that will be in pressure of 30 basis points for this year. And then for next year, you are saying it could be around 6.6%, so that will be only in pressure of 20 basis points. So, I just wanted to double check these numbers with you.

You need to understand the sensitivity that we have in the net interest margin to the movement in the REPO rate. So, for every 100 basis points decrease in the Repo rate, we would have an impact of 10 basis points in the net interest margin. So, it will all depend on the velocity of the decrease in interest rates from the Central Bank, it would make sense to look at the second half at 6.8%. And according to the velocity, you may see that interest margin moving from 6.8% to the 6.5% area during 2025. But it won't be from the beginning of the year, it would depend on the velocity of the Central Bank to decrease interest rates.

Our next question comes from the line of Tito Labarta with Goldman Sachs.

My question is on your provisioning. We saw provisions increased in the quarter, although asset quality looked better. The tone on the call in general, sounds a bit more optimistic and you did lower the guidance a little bit on the cost of risk. So just to think about, I want to understand the increase in the quarter a little bit more specifically, given the somewhat better trends overall that you're seeing and thinking maybe a little bit more longer term, you're still well above your historical cost of risk. Do you think you can get back to those levels where you expect a better GDP growth next year? How do you think that cost of risk continues to evolve into 2025?

If you compare second quarter with the first quarter, you see some additional cost of risk. But the overall, and that's because the first quarter of the year was abnormal low. What we see is a trend of better asset quality and the behavior in the second quarter was better than in the first quarter. Now that's why we , our guidance is for cost of risk for the end of the year, it's between 2.2% and 2.4% previous guidance was COP2.5 billion. So, what we have seen is a better behavior on the consumer loans, some deterioration on SMEs, but all in all, we expect an improvement on cost of risk for the next of the year. And regarding your question about 2025, do you expect a better performance in terms of GDP overall? And on top of that, we always expect a better cost of risk and a more normalized, as you mentioned. In the past, our normalized cost of risk was around 1.8% we expect 2025 to be between 2% and 2.2%, which is towards a normalized cost of risk T2.

Our next question comes from the line of Yuri Fernandes with JPMorgan.

I have a question regarding your guidance and your ROE. You are increasing this a little bit, but when you look to the metrics and when we look to the first half, like you had almost 18 ROE in the first quarter, there was higher and there were maybe some onetime events on impairments. My question is, can we see higher ROE? Or is this, I don't know, tax rate normalization a headwind or margin pressure? I'm just trying to understand if we're not being too conservative on the ROE here and what can maybe make the ROE to be, we see your guidance. If it's taxes, it's high expenses, if it's the margin normalization? Just trying to get some color on this.

Thank you, Juri. The first semester was a good semester and actually was better as we were expecting. Regarding the second semester and what we expect by year-end and if we will be able to deliver a higher ROE that basically will depend on, and this is quite obvious on 2 main variables. The speed of interest rate changes or if, as I mentioned, if the Central Bank will produce 25 or 50 basis points and the effect on our NIM, so that 6.8% NIM suppose a more aggressive reduction on interest rates. So, there could be an upside possibility. And the other main variable is cost of risk, and we are seeing the cost of risk improving. So, to your question, our past guidance of ROE was around 14%. Now we are saying 14%, 15%. It's an upside possibility regarding NIM. It will depend on how, at the end, the interest rates will behave and the Colombian economy will perform. We had in the couple of past months, a good surprise positive surprise regarding economic activity in Colombia. If that continues, I think we could deliver a little bit higher ROE Juri.

Super clear. If I may, a second one more strategically structural, like one of the good things about Bancolombia is the funding, right, like the funding cost and the franchise. And now in Colombia, we have the newcomers and like we discussed a lot in new banking here, and they are offering 13% yields on the [Inaudible] is there a problem for funding cost in Colombia at some point probably your end will be, they are too small, but like thinking 2, 3, 5 years from now, how do you see players offering above niche market rates and liabilities impacting the dynamics like on competition for the industry because maybe it's not a direct impact for Bancolombia, but some peers of you will start offering higher yields to attract deposits. And like in the end, the entire industry funding cost moves up. So not a question for the quarter, but more how you see players offering yields above benchmark rates and how this can be attracted for your funding cost?

Yes, definitely, competition is tougher now. There are new players that are more active now, as you mentioned. They are offering rates in savings accounts that are high. One of our advantages is that we have a lower funding cost and a presence in all parts of the country. So, regarding if that is going to affect our position in the future. Definitely, we need to adjust our strategy and our strengths, but probably still as it or the cash in and cash out and our presence in it through physical channels, it's also important. So overall, we will need to adjust our strategy. We don't think that is going to affect materially our cost of funds. But we need to keep an eye on the development of those competitors and how they behave. So far, the players that are offering higher or high interest rates for savings accounts are the new-comers comments and the fintechs mainly, not the traditional players. We will see, we need to adjust a little bit our strategy. And at the end, if the cost of funds increases that will also, we will need to see if we are able to transfer that to the economy through the interest rate we charge to our customers. So that is something that we need to take an eye on and see how it develops. And as you said, I will probably come in ‘25 by the end of '25 or '26, we will see the effect of that strategy from some competitors. No. Super clear.

Our next question comes from the line of Brian Flores with Citi.

I wanted to ask on 2 things. One is maybe seizing the opportunity. I follow up on Yury's question. You have a very strong franchise in terms of credit card. You have a 30% market share in terms of value of transactions. And as Yury was mentioning, you have a new entrant that is accelerating in this segment that, as you mentioned in the call, appears to be in a very risky segment in this point in time, right? So how is your spending in terms of preparing to send this market share? Or would you be willing to open space in terms of market share given the current market conditions? I think maybe just, this question is more focused on the asset side more than on the funding side that you covered with Yury's answer. And then my second question is in your presentation in the first quarter, you opened the duration of your assets and liabilities. And we saw that you have around 590 days duration in liability, which was already reducing around 530 days in assets. Can you elaborate a bit on where is it now? And where is this gap, the mismatch between those as of the second quarter, it would be very, very helpful. Thank you.

Thank you, Brian. I will tell you your first question, and I will ask Mauricio to address your second question. It's definitely the very relevant scale is changing in Colombia. As I mentioned, there are new players trying to enter and buy some market, which is understandable. What I see is that if you do the math, 13% interest rates on savings accounts with maximum rate, around 29%. We don't have much room there to take risk. So, what could happen is that players are going to trying to buy market, but it's not a sustainable strategy in terms of how that last. So, we have, as you mentioned, a strong franchise, we have a diversified client base. We have a very strong and very wide distribution network in terms of branches and in terms of banking agents. So we are going to leverage that. And the other point that is important and different to other markets besides the maximum interest rate that we could charge it's that there is a transaction fee in Colombia, which promotes the use of cash. So that also is something that we need to take into account. As I mentioned, we need to prepare for different conditions. And we think that we have all the tools to defend our market share, and we'll need to adjust our strategies regarding those new competitors and new players that are entering into the market. Mauricio, could you address Brian's second question, please?

Yes. Brian, our strategy has been very focused on the deposit mix, how to keep a low cost of funding based on the deposit mix. So, as you can see, both the interest income from loans and interest expenses from deposits, both of them decreased, but the interest expense from deposits decreased a little faster, defending the NII. So, in terms of duration, what we're having is a repricing strategy for time deposits as 2/3 of the time deposits have a maturity of 1 year or less. So that allows us to reprice our time deposits and keeping savings and checking accounts with healthy growth figures. So, all in all, we keep on having a low cost of funding, which allows us to have a resilient net interest margin.

Perfect. And just a quick follow-up. So, in terms of the magnitude of the sensitivity, I know maybe the days are now not being disclosed, but should we think it's a bit more again on the passive side of the balance sheet? Or is it more much now more neutral? Just to get a big picture idea.

Brian, I'm sorry, could you repeat your question, please?

Sure, Maurice, no worries. So basically, in the second and in the fourth quarter, we saw the gap, right, in already contracting. I think in the first quarter, it was around 56 days negative basically on the duration of liabilities right this asset duration gap between assets and liabilities was minus 66 days. Should we think that as of the second quarter, is this at similar levels? Is it closer to 0? Just a big picture area would be helpful.

Okay. Thank you. You can have a projection of a similar duration in terms of assets and liabilities. We are working very actively with the ALCO committee trying to hedge the different rates. But overall, the structure between assets and liability should continue to be very similar to the one we had in the previous quarters.

Our next question comes from the line of Andres Soto with Santander.

I have a question regarding the numbers that you are commenting on the 2025 outlook. You have mentioned margins at around 6.5%. So that will imply a 30 basis points compression versus the one that you are expecting for 2024. And you are guiding for a cost of risk that is 20 basis points below the range that you are providing for 2024. With that, we will assume some ROE compression next year. I would like to confirm if that's your view? Or you are expecting some efficiency improvement to offset that ROE compression? And if you can give us what is your preliminary outlook for ROE next year.

Thank you, Andreas. As you mentioned, our guidance for 2025 regarding mini 6.5%. And that's because interest rates will go down. Also, as I mentioned in the previous answer, that viable, mentees margin and the cost of risk will be key. So, what we expect is a lower cost of risk between 2 and 2.2%, I'm sorry. With that, we, our expectations regarding NIM are in the 14% area. We will expect some efficiencies in terms of expenses, operating expenses. We expect to have less pressure from inflation during 2025. So, with all of that, our expectations of NIM is around 14% between 13.5% and 14% for 2025, Andres.

That's very clear. And assuming your cost of risk expectations specifically for this year, your guidance implies that for the second half of the year, you are going to be at around 2.2%, 2.6%. When I look at your number in the second quarter, excluding the provision releases that you guys conducted cost of risk is significantly higher than that level at almost 2.9%. So how confident are you on this ROE, sorry, cost of risk improvement in the second half of the year? And if you can comment, we have discussed a bit about the performance in Colombia, but we see that continued deterioration in Panama, do you expect this performance to continue? And what have been the drivers for the Benomar deterioration?

Yes, Andres. If you see the behavior of the second quarter in terms of provisions in terms of how the loan book performed in general, we see an improvement. It's more regarding a specific situation for the quarter. If you not analyze the cost of risk for the quarter is 2.5%. With that and the having behavior that we are seeing in the different books, we could expect a lower cost of risk. So as of your question, yes, we are expecting an improvement for the, in the second semester. That's because we have seen a better performance on the Colombian economy, but we were expecting at the beginning of the year, even after the first quarter. Regarding your second part or the second part of your question, Panama, yes, we see a higher cost of risk in Panama. But and that's mainly on the consumer side. We don't expect an additional deterioration, but it's going to impact the results of the year overall. So, we don't expect an additional level of deterioration, but is going to continue at similar levels. And because of that ROE for Manito will be below 10% for the year. But we expect that situation for Panama improves during 2025. Remember that Panama was especially affected by the pandemic and some measures coming from the supervisors regarding payments. And still, we are seeing some effects on that, particularly on the consumer side and some mortgages, but we expect that to improve in 2025.

And maybe as a follow-up to that, you have presented in this release, the time will ROE, which is significantly higher than you reported ROE and a lot of that is affected by the goodwill from the Panama acquisition. Have you guys considered a write-off of that goodwill that you still have on your balance sheet?

We always are exploring different alternatives and options. So far, we are not, we don't have a decision, but we always have in mind and look for opportunity. But as of today, we don't have any decision regarding that goodwill Andress.

Our next question comes from the line of Nicolas Riva with Bank of America.

As I have said before, I think it's very useful that both credit analysts and equity analysts can ask in this call. So, with that, I have 2 questions on your Tier 2 capital. The first one, looking at the change quarter-on-quarter, so it declined by $226 million. You did the buyback on the 27s, you bought back $283 million. I believe they compute 80% as Tier to capital. So that would explain the buyback of the 27s would explain the $226 million decline in your Tier 2. However, it looks like you even include the $800 million rate that you did by issuing the 2034. So, I want to confirm that the $800 million new Tier 2 capital has not been included in your capital ratios at the end of June. And in that case, that will increase, I believe your capital ratios by 110 basis points, which means that pro forma, your total capital would be 13.7 rather than 12.6. If you can confirm that? That's my first question. And then my second question, you have the call option on the 29s in December. I know that the decision has not been made yet. But if you can maybe just talk about your thoughts regarding that call option. I would assume that calling the 29s without any capital replacement is not a [Inaudible] possibility because, in that case, you would lose, I believe, 80 basis points of capital, which is all the capital you raised by issuing the 2034s net of buying back some of the 27s. But again, if you can discuss your thoughts regarding capital ratios now including the issuance of the 2034s. And any early thoughts regarding the collection of the 29s in December.

Thank you, Nicolas, for your questions. I'm going to ask Mauricio to take them.

Nicolas, let me take the first question. You are right. We didn't account in the solvency ratio for the second quarter. We didn't account for the COP800 million bond issuance. And that's because by the close of the second quarter, we haven't received the approval of the Superintendency of Colombia to get capital credit for that issuance. But we already did -- we did receive it on July and the pro forma figure is exactly what you just mentioned. It would have added 117 basis points. So, if you normalize that, our solvency ratio would have been 13.7% and not the 12.6% that you see. And we're going to be able to see the updated figures for the third quarter. So, for the second question, you need to take into account that the 27s are decreasing their capital credit. So, by the end of this year, the capital credit would amount to 56%. So according to that, we're going to have an open window to make our mind in terms of the call option. But one different thing from the previous situation in which we didn't call the bond is that markets are open. We just did issuance, markets are open, we're able to replace capital if we want to. But the other thing to take into account is that our long-term guidance for Tier 2 is between 1.5% and 2% in Tier 2. And as of today, as we just mentioned, here too, after accounting for the recent issuance moved from COP1.6 million to 2.7%. So that can give you a big picture of where we are spending in terms of the call option coming in the next few months.

Maybe just one follow-up. So, your total capital, we said 12.6% at the end of June. It's going to increase to 13.7% by including the $800 million on the 2034, but then you're going to have the 20% phase out of the 27 by the end of the year. Do you have a target because, so the minimum capital requirement in total is 11.5%, right? So that means that pro forma with the 2034, you would be around 200 basis points about the minimum requirement. Do you have a target for the total capital or for the buffer over the minimum requirements?

Our target has always been around 11.5 in Tier 1, but you need to take into account that, that's our target for year-end as we have a seasonality in terms of Tier 1, after declaring the dividend payment that we always do during the first quarter, capital decreases as we did in the first quarter of this year. And after that, we organically accumulate capital with the retained earnings, as you can see in a very positive manner for the second quarter. So, you're going to see Tier 1 increasing above 11.5% by year-end. And if that's the case, we're going to be okay. It's especially according with the loan growth we're seeing. So, we believe we're very confident in terms of capital, both Tier 1 and Tier 2.

Okay. So roughly, 11.5% roughly target for Tier 1, plus 150 to 200 basis points Tier 1. So, your target for total capital would be 13% to 13.5% kind of over the cycle roughly, which is roughly like 150 basis points over minimum requirements. Thank you.

Our next question comes from the line of Jitendra Singh with HSBC.

So my call as trots apologies if you have already answered my question. So, the first one was on impairment costs with JV in 2Q. So, can you elaborate why the bank decided to report it payment losses on CV? And what is your outlook on the remaining equity investments in your portfolio? And second, I just wanted to give you a sense on liquidity. How has been the banks on the financial system liquidity position to evolve since the issues faced last year. Can you just give me the numbers like what is your NSFR ratio currently versus last year? Thank you.

If I understand your question right, it's, and you correct me, it's about the joint venture impairment. Is that correct? And then just second one about liquidity. I am correct?

Yes, that's it.

Okay. Regarding your first question, we have an impairment of around $75 million regarding our investment in Puja. As you may know, Tuya is a company that we have with exit to a retailer is a joint venture. And that business, particularly in Colombia has been affected because of the behavior of interest rates. So, we have an impairment, as I mentioned, close to $75 million during the quarter regarding that investment to that joint venture. That's just for one-off for this quarter. And we don't expect in terms of valuation, additional effects of that of that business. So that's regarding the impairment. I will pass your second question to Mauricio.

In terms of liquidity, I would say that we are very comfortable. Our ratio is around, continues to be around 115 in both U.S. dollars and Colombian pesos. We're very comfortable in terms of liquidity and our funding strategies are a reflect of that.

Our next question comes from the line of Julian Ausique with Devina.

My question is regarding as well as cost of risk, I would like to understand why you have the expectation. I know you already mentioned some explanations of the reduction of cost of risk. But I would like to understand why this reduction is we have seen an upward trend of the SMEs deterioration during the quarter. So, I would like to understand why you reduced the cost of risk estimation? And what is the expectation of deterioration of SMEs for the second part of the year.

Thank you, Julian, for your questions. Cost of risk, what we have seen is a better performance on the retail part of the business. Consumer loans are behaving better since we're starting to change our policies last year at the end of the third quarter. So, we see the effects now that, that vintages are behaving better. Regarding ..., and we mentioned that we are seeing some deterioration on SMEs, but let me remind you that are around 11% of our total loan book. So that part of the business is limited and the effect on the total cost of risk is not that important. So overall, we see a better performance on the retail business. We have seen some deterioration in SMEs, but it's a relatively small part of our portfolio. And we are also seeing a good performance in terms of some corporates. And if the economy is performing better in the last quarter, and there are some expectations that that continues. So, with all of that, that's why we expect that our cost of risk should be around 2.4%, 2.3%, 2.4% with that.

Okay. And just a follow-up. In the report that you released yesterday, you mentioned that the Construction and [Inaudible] segment had a deterioration in the corporate segment, like you are seeing something especially in those sectors? Or it's just like the common behavior of those sectors during this part of the year.

Yes. We mentioned that we are seeing some deterioration on construction and health sectors as also additional deterioration in the retail business and manufacturing. But that's..., they are behaving aligned with our expectations. So particularly on the construction segment, we have been working with that clients now for almost 9 months helping them. So, we think that we can manage that deterioration. And we also have included some provisions already for those segments. In terms of the health sector, our exposition, it's limited there. So, we don't see a big impact of the health sector. And on the retail businesses, we see some deterioration, but as the second semester, it performs better for that sector. We will see some deterioration, but nothing that affects materially our projections in terms of cost of risk.

We have no further questions at this time. I would now like to turn the floor back over to Mr. Juan Carlos more for closing comments.

Thank you, everybody, for participating in our second quarter results conference call. As we mentioned, we had a good first semester. We will have some challenges ahead for the second quarter, but we expect that our behavior or the behavior of the economy and Bancolombia's behavior will be in line with our expectations, and we could deliver what we were discussing during this call. So again, thank you. Thank you very much for participating in this conference call, and we hope to see you in our third quarter conference call results. Have a good day, everybody.

This concludes today's conference. Thank you for participating. You may now disconnect.