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

Good morning, ladies and gentlemen, and welcome to Bancolombia's Presentation of its Proposed Corporate Evolution. My name is [ Shamali ] and I will be your operator for today's call. [Operator Instructions] Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] 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, addresses matters that involve risk and uncertainty. 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. In connection with the proposed corporate evolution transaction, Bancolombia will file important documents with the SEC, including a registration statement on Form F-4 and amendments thereto. Investors are urged to carefully read all such documents as they become available because they will contain important information. Investors may obtain copies of these documents when available free of charge on the SEC's website as well as from Bancolombia's Investor Relations section. With us today is Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Mauricio Botero Wolff, Chief Strategy and Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Ms. Catalina Tobon, Investor Relations and Capital Markets Director; and Ms. Laura Clavijo, Chief Economist. I will now turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer. Mr. Juan Carlos, you may begin.

Good morning, and welcome to this conference call, in which we will discuss the rationale and expected results of our recently announced corporate evolution project, which is subject to regulatory and shareholders' approvals. To begin, please go to Slide #2. As we are constantly searching for alternatives to create value, we are very satisfied to announce that we have decided to propose to our shareholders the evolution of our corporate structure by creating a new holding company, Grupo Cibest that will serve as a parent for all Bancolombia's lines of business, catalyzing tangible benefits to our clients and all other stakeholders. Our main goal is to optimize our business, strengthen capital allocation and enhance our value distribution capacity, for example, through share repurchase programs not currently allowed for banks in Colombia. The proposed transformation per se will not entail changes to our operations, sources of income, profit generation capacity, debt structure, divestment of assets nor the withdrawal from any of our current lines of business. Therefore, there will not be material changes for Bancolombia's clients, personnel or suppliers resulting from the execution of the transaction as all the entities will continue operating as usual and will maintain its financial strength and the capacity to fulfill all its obligations. Moreover, the location of current local and international publicly trade debt will remain unchanged. However, operating under this new holding company will grant us flexibility for our corporate development as it allows us to better adapt to the evolving and highly competitive banking landscape and to pursue further organic growth on our financial and non-financial businesses, eliminating the disparity with some regional banking leaders that already have theirs. Bancolombia's shareholder base as well as the underlying value of their shares will remain the same as all shareholders will receive shares of the new holding company through an exchange process at a 1:1 conversion ratio. Additionally, an application will be made to list the holding company's common and preferred shares on the Colombian Stock Exchange and its preferred shares on the New York Stock Exchange through American Depository Receipts. In addition to discussions with regulators, we have also held discussions throughout the process with key third parties, including credit rating agencies and look forward to engaging in conversation with MSCI, among others. Please go to Slide 3. Historically, Bancolombia has operated as a bank and a holding company at the same time. In other words, the entity owning the banking license in Colombia has been also the parent company of all the operating entities by virtue of which a series of financial and non-financial business coexist, combining banking operations in different regions with innovative edge technology-driven businesses as Nequi, Wenia and Wompi. However, this structural condition embeds financial inefficiencies, regulatory complexities and operational constraints due to the stringent regulatory framework applicable to banking entities, which we seek to solve with the execution of the proposed corporate evolution as the currently known Grupo Bancolombia. Meaning, the current consolidated operation will evolve into a newly created holding company and a consolidated Colombian operation. Please go to Slide 4 for a simplified explanation of the main steps of the transaction. The proposed corporate reorganization implies a series of legal transactions involving the transfers of assets and merger of certain entities to reach the final structure. As a first step, the new holding company called Grupo Cibest will be created, which by virtue of a series of legal corporate transactions, which we will explain will be the beneficiary of 100% of the equity of the current Grupo Bancolombia. That is the consolidated operation. Therefore, all assets will remain under the same perimeter, which will now be held by Grupo Cibest. As a second step, Bancolombia Panama will transfer Banco Agricola and BAM to a new company established in Colombia, which will eventually merge into Bancolombia with Bancolombia as a surviving entity. In parallel, Banca de Inversion will transfer to Bancolombia a selected portfolio of assets, including Renting Colombia, Negocios Digitales, Nequi and other assets. And finally, as the third step, Bancolombia will transfer Banistmo, Banco Agricola, BAM, Bank, Nequi, Renting Colombia, Wenia, Wompi and other selected investments to Grupo Cibest as the holding company. And Bancolombia's shareholder except Grupo Cibest will receive share of Grupo Cibest per share held in Bancolombia and their shares in Bancolombia will be canceled. Please go to Slide 5. Grupo Cibest will be incorporated in Colombia and will continue to operate under SEC and BDC guidelines, ensuring transparency to our investors. Also, banking entities will continue to be supervised by their respective regulators and the location of publicly traded debt will remain unchanged. From a corporate governance perspective, Grupo Cibest will have a Board of Directors with independent members with its respective support committees whilst all C-suite directors will maintain a corporate role. The principal operation continues to be Colombia, accounting for approximately 70% of the group's total loans, deposits and net income. effectively complemented with our regional operations in Central America, which serves as a valuable source of diversification in hard currency. Moreover, we expect all our international and local ratings to be confirmed as per the discussions held with the rating agencies. Also, I want to highlight that Grupo Cibest has been designed as a light and necessary only structure and will be a cost-neutral operation as per the reallocation of resources from current budgets. On top of that, the steps required to complete the corporate evolution have been structured in such a way that is tax neutral under the Colombian tax regime. Please go to Slide #6. The proposed corporate evolution will catalyze tangible benefits in the near and long term to all stakeholders stemming from, first, a more effective capital allocation strategy that will optimize core equity Tier 1 and the value distribution capacity by virtue of the separation of the Central America and the non-financial businesses as it will isolate the regulated entity in Colombia from goodwill deductions, external risk and reduce its exposure to FX volatility as we will further elaborate. Also, under the new structure, we will be able to implement shares buyback programs not permitted by [ 2 ] banking entities in Colombia. Second, it will consider more flexibility for corporate development as in the case of acquisitions, capitalizations and divestments and facilitate the execution of each subsidiary's strategy according to its own risk and opportunities. Third, it grants flexibility and agility for digital and non-financial businesses and other transformation endeavors as it separates them from the banking license and its inherent restrictions. Fourth, it enhances Bancolombia's equity story as it reveals the inherent value of the group's different lines of business and simplifies messaging to stakeholders. Moreover, there will be a new set of performance metrics to evaluate Grupo Cibest and its investments. Fifth, the evolution will bring along a holding company perspective with its preserve its solid corporate governance and sound SOX compliant internal control system and regulatory supervision in each country. And finally, it aligns the structure with large publicly traded banking entities in Latin America. Please go to Slide 7. The most significant source of capital allocation efficiency arises from the separation of goodwill from the regulated banking entity in Colombia as it deducted from Tier 1 and total solvency ratios calculations. As per second quarter, goodwill and other intangible assets accounted for roughly 24% of gross solvency, second largest stake representing almost half of the Colombian stand-alone banking entities risk-weighted assets. Thus, by virtue of the deconsolidation, COP 9.6 trillion will no longer be deducted from solvency ratio calculations, generating a capital relief that give rise to capital allocation efficiency. Moreover, the separation of the Central American operation from the Colombian banking entity will reduce its risk-weighted asset density and its solvency ratio sensitivity to foreign exchange such that for each COP 500 increase, the FX sensitivity falls from a current 47 basis points today of core equity Tier 1 drop to a 5 basis points drop, providing a desired stability to our capital ratios. Please go to Slide #8. Despite the transfer of the subsidiaries to the new holding company, deconsolidated Colombian operations will preserve healthy solvency ratios as the removal of risk-weighted assets and the goodwill relief offsets most of the deconsolidation of capital. Arguably, these will become better quality ratios reflecting tangible assets with a minor FX impact. As a way of illustration, if the proposed transaction had been executed during the second quarter, the Tier 1 will have an almost 630 basis points drop, explained by less core equity, coupled with a 266 basis points increase due to the risk-weighted asset reduction and almost 300 basis points goodwill deduction relief. All in all, the pro forma Tier 1 will have been 10.3%, providing a 433 basis points caution to the minimum regulatory requirements. Likewise, total solvency would have been 12.5%, in line with the actual figure for second quarter. Furthermore, we maintain our year-end core equity Tier 1 target of 11% for the consolidated Colombian operation. Please turn to Slide 9. By virtue of its design under the proposed corporate evolution, the operating entities will remain unchanged and preserve its solvency ratio, whilst the corporate governance models will provide alignment between the operating entities and the holding company, thus maintaining the dividend flow to the holding. Based on our calculations using the current available information, we expect the holding on an individual basis to post a double leverage ratio close to 105%, a healthy level for the bank holding companies within the credit rating agencies' comfortability scope. Consistently, the tangible common equity ratio will be around 92%. From a leverage capacity perspective, the double leverage payback will reach 56%, whereas the dividend coverage will be around 44%. All in all, what these estimations reflect is that the new holding company will have sufficient leverage capacity, which coupled with a secure dividend flow and access to liquidity sources will provide an enhanced value distribution capacity to unlock value to all our shareholders without incurring further operational non-financial risks. Please go to Slide 10. Finally, we want to highlight that under the holding company structure, we will be able to execute share buyback programs as new way to distribute value to our shareholders as these are not enabled for banking entities under Colombian regulations. We deem this mechanism as optimal as it is EPS accretive, allows to distribute proportionate value to all our shareholders and most important, offers the market a strong signal upon our confidence on the value of our shares. As a part of the corporate evolution proposal to shareholders and subject to their approval, we will also propose an up to $300 million buyback program directed to all our shareholders to be fully executed on a medium term according to the execution of our financial plan and capital needs. Please turn to Slide 11. The execution process is currently on its first stage with the completion of a key milestones such as the incorporation of the holding company, the submission of the regulatory approval to supervisory authorities in the countries in which we operate and the rating assessments discussions with credit rating agencies. Going forward, company efforts will be focused on discussing with the SEC and the other regulators, listing of the new shares, marketing efforts, discussions with MSCI and preparation for the extraordinary shareholders' meeting, amongst others. According to our time line, we expect the process to be completed in the first half of 2025, assuming all the necessary approvals, including approval from shareholders are granted on time. With this, we conclude our remarks. Now, we open the line for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Nicolas Riva with Bank of America.

I have 2 questions. The first one is if you're going to need consent from bondholders for these changes in corporate structure because the way I see it is you have said the issuer of the bonds outstanding is going to remain Bancolombia. But given that Bancolombia is no longer going to consolidate the Central American subsidiaries, bondholders would lose access to about 30% of the total assets. So, first question is, are you going to need consent from bondholders of Bancolombia for the changes in corporate structure? And then second question, something you kind of alluded to assuming this is all done, you're going to be able to raise funding through different vehicles, not just Bancolombia, but also, for example, the new holding company. Is there going to be a preference to raise senior debt and separately subordinated debt through either the existing Bancolombia or the new holding company? That's my second question.

Thank you, Nicolas. Let me give a couple of general commentaries on your questions and then I'm going to pass them the first one to Claudia Echavarria, who is our General Counsel and Secretary of the bank. And the second one to Mauricio to more color on the answers. We are clear that we don't need a consent from the bondholders since the debt, the debt that is publicly traded, it's going to remain in the entities that the debt is today. So, we don't think that we don't need a consent or we are pretty sure that we don't need it. Regarding the second question, we are going to have much more flexibility and we will have access to different vehicles in order to touch the market. So that's -- we will have more flexibility. So, now with that, let me pass the first question to Claudia.

Thank you, Juan. Thank you, Nicolas. As Juan Carlos mentioned, we are confident we do not need a consent from bondholders since we are not transferring, leasing or selling substantially all of our properties or assets to another entity. As you mentioned, the assets that are being transferred account for approximately 30% of the bank's current assets. So, this would not qualify for an event that would require consent under the indenture.

About the second question, the new structure gives us a lot of flexibility. So, we will be able to issue subordinated bonds, AT1s and either in senior bonds, either in Grupo Cibest, in Bancolombia and [indiscernible] or any other Central American operation. We do not intend to issue any bonds in the short term. That's not our plan because as you can see, according to our double leverage ratio, we are fine in terms of leverage. But the flexibility of the new structure allows us to tap the market with any instrument at any point.

If I can do just a quick follow-up, given that you just said you don't plan to issue debt in the short term. You last week, you announced you're going to be calling the 2029 Tier 2s in December. So, then I assume that capital, which I think is about 80 basis points is not going to be replaced at this time. You're not planning to issue Tier 2 or any kind of debt in the short term?

Nicolas, in the short term, we feel comfortable with the levels of capital that we have. So, no. And Mauricio, if you want to elaborate a little bit more, please go ahead.

Yes. What we have been talking about, Nicolas, is a guidance of 1.5% of Tier 2. That's the level that we feel comfortable with. And as you can see, if you add up the 34s and the 29s, we would be well above that level. So, calling the bonds and without replacing those bonds, we're still going to be fine in Tier 2 capital levels.

Thank you. Our next question comes from the line of Carlos Gomez with HSBC.

My question refers to beyond Bancolombia to the greater [ company's group ]. I understand that this is a transaction which is optimizing the capital for the bank and for the financial company. But is Bancolombia playing any role in the possible reconfiguration of the rest of the company groups? I'm talking about Argos, Sura. Would you participate in that in any way? Or do you see yourselves completely separate and they remain as shareholders of yours and that is separate?

Thank you, Carlos. Yes, as you said, it's -- this is completely separated from what is happening around Grupo Sura or Grupo Argos. This corporate structure evolution of Bancolombia intends to capture value inside Grupo Cibest with what we describe as using capital better to have more flexibility on our corporate structure to have to be -- that the structure also allow us that the market understands better where we have the investments, the business. So, those are the main goals. Also, the possibility to have shares buybacks is also that is important for us. So, it's related on how we make our corporate structure more efficient and allow us to move forward in our strategic plan not related with other companies.