Earnings Call: Q4 2020

Feb 25, 2021

Good morning, ladies and gentlemen, and welcome to Bancolombia's 4th Quarter 2020 Earnings Conference Call. My name is Ecktud, 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. 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 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. With us today is Mr. Juan Carlos Mora, Chief Executive Officer Mr. Mauricio Rosillo, Chief Corporate Officer Mr. Jose Humberto Acosta, Chief Financial Officer Mr. Rodrigo Prieto, Chief Risk Officer Mr. Carlos Rade, Investor Relations Director and Mr. Juan Pablo Espinosa, 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 our conference call for the 4th quarter of 2020. I hope all of you and your families are safe and healthy. The 4th quarter confirmed that the Colombian economy is moving forward. It has rebounded from the lows observed in April May of 2020. The 4th quarter GDP posted an annual negative variation of 3.6% and a full year contraction of 6.8%. This result shows that economic activity underwent a process of clear improvement with better than expected results. As we look at 2021, these results confirm that the worst of the impact generated by COVID-nineteen has been overcome, but also revealed that the recovery is very sensitive to the evolution of the pandemic. After a very challenging year, the net income for 2020 was COP 276,000,000,000. Before getting to the details of the results, I want to highlight some key topics. During 2020, Bancolombia became stronger. We remain closer to our clients during the pandemic, offering them better, safer and more reliable digital solutions. We improved our transactional portfolio with new digital services tailored to our clients' needs, leveraging in self managed options. We have a strong balance sheet with our diversified funding base, driven by the growth of retail deposits. Allowances for loans for the year end were COP 16.6 1,000,000,000,000, growing 52% when compared to 2019, representing 8.1% of total loans. We made an early adoption of a full Basel III capital standards, reporting a Tier 1 level of 11.24 percent that represents an increase of 167 basic points when compared with the Tier 1 reported at the end of 2019. This is aligned with the guidance we have been given in the last couple of years. Finally, despite high provision charges during the year due to COVID-nineteen, the Bank Colombia continues to have resilient results. The provisioning level takes the bank to a coverage ratio of 2 13% for the quarter. We expect cost of risk to slow down in 2021, but returning to normalized levels shouldn't only take place in the upcoming years. At this point, I want to turn the presentation to Juan Pablo Espinosa, who will further elaborate on the performance of the Colombian economy. Juan Pablo? Thank you, Juan Carlos. Now please go to Slide number 3 in the presentation. At the end of 2020, the Colombian economy continued to rebound. In fact, in year on year terms, GDP decrease moved from minus 15.8 percent in the 2nd quarter to minus 8.5% in the 3rd quarter and minus 3.6% in the 4th quarter. As a result, full year GDP variation was minus 6 0.8%. This result not only beat our expectations, but also implies that almost 8% of the decrease in economic activity that took place during the lockdown was reversed in the second half of the year. Despite this positive trend at the start of 2021, the economy took a hit as a result of the second wave of COVID contagions and the restrictions that local authorities imposed. Consistent with this, our real time data point to a 5% year on year decrease in economic activity in January. However, this negative trend has receded quickly in the 1st weeks of February. Taking this into account, we estimate that during the Q1, the year on year GDP variation will be around minus 3%. For the remainder of the year, there is still risks regarding the evolution of the pandemic and the effectiveness of the vaccination plan. We expect GDP to grow 4.7% in 2021 due to the combination of several factors. Globally, we expect higher oil prices in terms of trade as well as a stronger recovery of experts demand. Locally, low interest rates will combine with the stimulus program executed by the government in sectors such as infrastructure and housing. Regarding inflation, after an historic low print of 1.6% in December 2020, we anticipate that in the short term, 12 month CPI change will remain below 2%. These expectations relies on the fact that the economy is still running well below potential and risks arising from supply shocks are contained. The end of temporary relief measures taken at the start of the pandemic and the mild increase in the core component will take overall inflation to close 2021 around 2.5%. Against this backdrop, we continue to predict that prolonged period of low and unstable interest rates. We anticipate that reference rate in Colombia will be at its current level of 1.75 at least until the second half of twenty twenty one when the Central Bank will do some upward fine tuning in order to keep inflation expectations in check. Finally, it is important to mention that in 2021, the implementation of initiatives related to fiscal adjustment will be key to rating agencies' decisions regarding Colombia. Officials have stated recently that this semester, the government will submit to Congress a tax In addition, legal amendments to allow spending reductions could also be proposed. In our opinion, adjustments to the fiscal rule are also necessary to allow its reinstatement next year. After this economic overview, I will turn the presentation to Juan Carlos and Josembetto Acosta. Thank you, Juan Pablo. Moving to Slide 4, I want to continue this presentation by digital experiences and process digitalization. These pillars aim to increase income generation, reach new market opportunities, improve the digital experience of our clients and accomplish a greater efficiency. These goals are achieved through digital enablers such as analytics and big data, accelerated adoption of cloud technologies, artificial intelligence, strengthening cybersecurity among others. In digital business, we highlight NetE and Bancolombia Al Amano. During 2020, we reached 9,400,000 clients between both, more than doubling the number of users of 2019. Neki with 4,900,000 clients average deposits over ARS 400,000,000,000 and ARS 186,000 Visa card users had excellent results last year. On the other hand, Bancolombia We improved materially the digital experience of our clients, getting closer to them, reaching 8,400,000 digitally active clients among retail, SMEs and corporate apps. 71% of digital adoption, 44% digital sales over total sales and 63,000 new personal loans digitally disbursed in 2020. We built up strategic alliances to escalate results. 1P, our payments gateway registered more than 38,000 merchants and Tributi that offers online tax preparations to our clients processed more than 27,000 tax forms. Using robotics and artificial intelligence, we automated 29 different processes to support the credit relief programs for our clients and the distribution of government subsidies to attend the pandemic. The branch network 16 processes have been automated during 2020. This allow us to sort out almost 1,000,000 requests from our clients, increasing productivity, improving service and customer experience. I want to share with you a very important news for Bancolombia. The consolidation that consolidates the bank's digital and innovation strategy. We have decided to migrate our applications to the cloud with our strategic partner Amazon Web Services. This is going to allow us to take advantage of other value added services that AWS offers and provide the business with the tools to be able to transform and innovate at the speed that the market requires. Moving to Slide 5, I'm going to elaborate in our value proposition. Ecosystems is a fundamental component of the evolution of our digital strategy. Through this, we are solving end to end needs of our clients. We have decided to be relevant in mobility and housing. Think of Bancolombia as an orchestrator of financial and non financial solutions. For example, in the housing and mobility ecosystem, we connect the supply and demand for housing and vehicles through our marketplace. And at the same time, we offer credits, leasing and rental solutions across an integrated digital experience. On the other hand, we are transforming financial inclusion using QR codes, where we connect more than 9,000,000 of our digital clients through Bancolombia Alemano, NECKI and the Bancolombia app with more than 400,000 small business, reaching 10,000,000 transactions. Ecosystem solutions are interconnected with each other and complemented by third party capabilities, allowing us to develop a value proposal beyond our industry to solve our clients' needs. On Slide 6, we present our ESG framework. First, I want to share with you something that make us very proud in Bancolombia. We're recognized with the Gold Medal of the Sustainability Yearbook 2021, developed by S&P Global, which highlights the companies with the best sustainability performance around the world as the most sustainable bank of all the organizations analyzed. Our purpose is to promote sustainable economic development to achieve well-being for everyone. We reached this purpose by developing 4 key points. Financial inclusion, more than 9,000,000 people financially empowered by Netium and Colombia Almanu and more than 1 137,000 small amount loans disbursed by these digital platforms. 2nd, sustainability finance, COP 1,300,000,000,000 issuing sustainable bonds and COP 1,000,000,000,000 disbursed on their sustainable credit line in 2020. 3rd, gender equality. In 2020, for the first time, we have a woman as a Board member, and we designed a special credit line to support women with the support of MXN 23,000,000,000 during the year. Finally, climate change, 26% of used energy in the year was auto generated with renewal energy. We invested during COP 225,000,000 in energy efficiency projects for our internal carbon travel tax. Now I want to turn the presentation to Jose Humberto. Jose? Thank you, Juan Carlos. Now turning to Slide 7, I want to walk you through the evolution of the relief program. Credit reliefs have decreased throughout 2020, reaching the peak in the Q2 with 44% of the consolidated low book under relief and closing the year with 15% level. It is important to highlight that this 15% includes structural solutions that we are giving to our clients in Colombia and El Salvador. This figure is lower than expected due to the less structural solutions in SMEs and our corporate clients. In Colombia, 12% of the loans are still under relief, out of which 11% are under PATH program. Remember that PATH program began in August and initially was meant to end in December 2020, but it was extended by the regulator until June of this year. Our operation in Panama, Banistmo, we kept 45% of the total loan book under relief. This proportion may maintain high until June because of the extension of the moratorium low in Panama. In Slide 8, we present the breakdown of provisions during the quarter. Provision charges for the Q4 were COP 2,000,000,000,000. As we did in previous quarters, we want to explain the breakdown. Provisions associated to the update of macro scenarios and COVID-nineteen explain most of the quarter charges, 82%. We want to highlight that the expectations for macro variables deteriorated from the 3rd to the Q4 of the year, especially in Central America. Just to give you an example, the GDP for Panama went from minus 3.3% in the 3rd quarter to minus 15.2% in the 4th, reflecting the still uncertain economic environment in which the bank operates. Moving to Slide 9, we give you a snapshot of the composition by stages and their coverage. During the quarter, we can see there was an important increase in Stages 23. This increase was explained by 3 aspects. 1st, clients for whom the relief ended at the final part of the Q3 and during the Q4. Some of these clients did not get a structural solution and do not have the capacity to pay yet, so they reach 30 days past due. 2nd, some of the clients that became 30 days past due since the Q3 deteriorated further and ended up 90 days past due and third, the output of the risk assessment resulted in higher risk and the number of clients in watchlist increased. At the right side of the slide, you can observe the total balance in Stage 2 and 3 and the percentage covered by the allowances. This shows that depending on how the pandemic and the economic recovery evolves, there is still a space for provision charges in 2021. In Slide 10, we present provision charges and allowances. Cost of risk for the quarter was 4.2% and for the last 12 months was 3.9%. Cost of risk without COVID-nineteen effect was 0.7% for the quarter and 2% for the last 12 months. As a result of our provisioning models, the level of allowances has increased as a proportion of the total loan portfolio, protecting the balance sheet in an environment that is still uncertain. By the end of 2020, allowances for loan losses represented 8.1% of total loans. As we mentioned before, the recovery path is going to be slow, returning to normalized level of cost of risk will take us until the end of 2022. This is going to be a transition year. Still with a lot of uncertainty, we expect to close 2021 with a cost of risk in the 3% area, moving closer to the 2% area at the end of 2022. Slide 11 shows the past due loan formation and coverage. New past due loans during the quarter decreased because of the reliefs and the structural solutions offered to those clients whose reliefs ended. We expect charge offs to increase during the first half of the year as clients continue to deteriorate after the end of the reliefs. As reliefs continue to expire, asset quality metrics will continue to deteriorate at a faster pace. During the quarter, 90 day past due loans began showing deterioration because of clients that became 30 day past due during the Q3 and deteriorated furthermore. The coverage ratio dropped to 2 13%, but remains high because of the increased provisions based in COVID-nineteen provision strategies, clients in watch list and party loans requirement. On Slide 12, we present the capital adequacy for Bancolombia. In December 2020, Bancolombia adopted the BASF, the Capital BASF III standard for the capital adequacy. This was done in advance of the compulsory date of adoption. Remember that by regulation, all Colombian banks must comply with the new rules since January of this year, but we reported 2020 year end solvency ratios under Basel III. Total solvency ratio under Basel III stands at a level of 14.7%, while CET1 at a level of 11.24%, well above the minimum regulatory requirements. Keep in mind that even though we have a phasing period of 4 year to fulfill with the new levels and buffers of BASF III, we almost comply with the total solvency ratio with just our Tier 1 current ratio. We did this survey adoption in 2 steps. First, the reclassification of existing resource in the occasional reserves to the bank's legal reserve approved by the Extraordinary Shareholders Meeting last July. And second, during this last quarter, complying with the new regulation regarding risk weighted assets, goodwill deduction, operational risk, among others. As we have been saying in the last couple of years, the impact of the adoption of Basel III is positive for Bancolombia, showing an increase of 167 basis points year to year. On Slide 13, we present the liquidity position of the bank. In a consolidated basis, we are expecting liquidity levels to maintain at least for the first half of this year and a stable interest rates, at least until the Q3. The material increase during the year of deposits was driven by savings accounts, especially in retail and SMEs clients, whose balance increased in COP 13,000,000,000,000. As of December of 2020, savings accounts represented 40% of the total deposits, mainly from retail clients. This act makes our deposit base more stable and granular and it has also boosted the decrease in the funding cost, reducing 92 basis points in the last 12 months. On Slide 14, we present a snapshot of our standalone operations. In general terms, the trend throughout the different geographies operated by Bancolombia during 2020 was similar. Margins under pressure, fees recovering as the economies started to reactivate, slightly growth of the loan book, positive evolution of efficiency and a solid position in terms of capital and liquidity. I want to give you a quick overview of each of the Central American countries which we where we operate. Let's start with BAM in Guatemala. The provision charges for the quarter were negative because of some change in the expected loss models with respect to the macro variables as the new economic forecast for the country is better than the previous one. Bancoa Rico and El Salvador had a good performance over the year with positive operational metrics. During the quarter, provision charges increased due to the up date of macro variables and because of the model recognized that the gradual termination of the reliefs will reflect an increase in the loan book deterioration. Finally, BANISMO, on mid October, the bank regulator modified the moratorium low, so that bank could extend this program up until June 2021. This time, banks are in the position to decide how and until when we'll provide these reliefs. The objective of this extension is to find solutions to clients that are still being affected somehow by the pandemic. So in this sense, financial reliefs could go from extending loan maturities to partial payments to grace periods according to the client's current situation. These results observed in the 3rd quarter significantly deteriorated, which implied updating the expected loss model generated a higher requirement for provisions. Provision charges is due to 211% will compare with the 3rd quarter explained by 3 points. Macro barriers update, increasing coverage of personal loans and the deterioration in corporate loans. On Slide 15, we see the evolution of margins and net interest income. In line with the trends observed with the 1st 3 quarters, the net interest margin compressed for the full year figures. The reference rate cuts by the Colombian Central Bank continued to hit the lending margin in the second half of the year. The longer tenures granted on credit relief programs implied a reduction of installments and therefore a lower interest, affecting this way the revenues and the lending margin. Coupled with that, the increase of bucket 3 clients as a result of deterioration in asset quality had an impact on the consolidated margins. As a positive outcome, we highlight the sustained reduction of cost of funding attributed to the growth in deposits and efficient liability management transaction offsetting the compression of margins. For 2021, in all 4 geographies where we operate, we expect to continue reducing the funding cost in time deposits repriced at a lower rate. In 2021, the group's net interest margin is expected to remain relatively stable within the 5% area, foreseeing an environment of low interest rate in the local financial system and an increase in Stage 3. Slide 16 shows the evolution of expenses and efficiency. Facing a difficult year, the bank shows a contraction greater than 3% during 2020. Personnel expenses which represent almost 40% of the whole operational burden had an important contribution to the positive performance, mainly explained by the growth of employees' bonus plans. On the administrative side, a growth of 1% is more remarkable when analyzing a variety of challenges experienced during the pandemic. Among them, increased expenses related to insurance policies and the depreciation of the local currency, which impacts several components of the bank's cost structure. In the same way, we must highlight the decrease in expenses associated with the daily operation of the business, such as our cash transportation, payment methods and the distribution network. For 2021, we must expect a higher growth in expenses in line with a greater dynamism of the business and a faster economic activity, added with a low base effect. Investments in digital transformation will continue to be an important element of our structure, understanding the business environment and the market opportunities ahead. Slide 17 shows the evolution of fees. Net fees were one of the most resilient lines during 2020. In the first half of the year, fees were impacted by the lockdown measures. But since September, with the end of these, they quickly recovered to pre COVID levels, posting a year to year increase of 0.4% and 3.8% during the quarter. We expect fees to have a better performance for 2021 with a growth between 5% 8%, driven by a higher volume of transactions. Lines such as debit and credit cards, trust will lead the growth during the year. Finally, Slide number 18 shows the profitability metrics. 2020 was a year of low profitability. We expect the bank to gradually recover. 2021 will be a transition period. Our guidance suggests a return on equity in between 4% to 5% for the present year, below pre pandemic levels to eventually reach a target area in between 12% to 14% for 2023. Several factors will support this goal, such as a loan growth, returning to cost of risk levels at around 2% area, better cost to income ratios maintaining the cost strategy, digital business, higher means due to a different interest rate environment and the continuous recovery of the fee income. Now, I want to turn the presentation to Juan Carlos for the closing remarks. Juan Carlos? Thank you, Jose Humberto. 2020 was the most challenging years in the recent history, but it was a year where we also learned a lot. At Bancolombia, we are creating the bank of the future. We have a stronger balance, a better cost structure, and more diversified portfolio of products and services, leveraged by a robust digital strategy with a positive evolution of digital platforms. 2021 began with uncertainty. The main challenges that we will have to face during the year will be: 1st, a demanding scenario from a risk management perspective and second, relevant investments in digital and modernization projects to stay ahead in a highly competitive environment. After elaborating on these key topics, we want to open the line for questions. Thank you. We will now begin the question and answer Your first question comes from the line of Ernesto Gabilondo with Bank of America. Please proceed with your question. Hi, good morning Juan Carlos and Jose Humberto and good morning to all your team and to everyone. Thanks for the opportunity. I have a couple of questions. The first one is on asset quality. Can you share with us what is the percentage of different loans as of 4th quarter at a consolidated level? And how much is delayed with 30 days? And what was the amount of additional provisions built in 2020? And then for my second question is on operating expenses. Considering that you have been doing important efforts to control expenses in the last years, how much additional room do you see to maintain low OpEx growth? Or do you think that digital transformation should make OpEx to grow above mid single digit this year? Thank you. Thank you, Ernesto. Let me give you some color on your two questions and then I will pass to Jose Humberto to elaborate a little bit more. Your first point about asset quality. When the pandemic began, there was a lot of uncertainty. At that point, we took the decision to relieve some credits or mainly consumer credits. Then when the year move on, we started to see more clear what was the situation. And then we start to kind of normalize the situation. So we ended the year with total of 15% of the total loan portfolio under some kind of relief or restructuring process. But now it's much more different. In Colombia, almost all of the portfolio is under a program of restructuring. Still in Panama, there is important portion of the loan book under relief and that will be the situation until mid in the middle of the year. But now that we have a clearer picture of the portfolio, we can assess asset quality in a better way and have a better understanding of the current situation. Related to your second point about operating expenses, we think that 2021 is a year in which we need to invest in digital transformation, enhancing our capabilities. We will continue our program of digitalization and also improving our capabilities. Also, as I mentioned, we are moving aggressively to the cloud. That will require some investments that will that have a very good payoff. So to answer directly your questions, your question, 2021 will be a year of investments. The comparison base with 2020 is going to affect us. That means that growth expenses growth is going to be definitely above inflation. And as I mentioned, we will keep investing. So we will keep our programs of cost control. We are working on our branch network. We are also keep working on efficiency. But 2021, as in other aspects is going to be a transition year. Let me pass your questions to Jose Humberto for additional comments. Thank you, Juan. Ernesto, good morning. Regarding your first question, yes, in terms of the deterioration, we are foreseeing a combination of several factors. The first one is deteriorations of 30 90 day past due. You are going to see a pickup maybe in the first half of the year. Remember that when the reliefs ended at the end of the Q3 last year, we are seeing an increase in payday past due and now we are going to see deterioration and increase in 90 day past due. So as a result, we probably will see provisions coming made and most relevant on the first half of the year. The second element is regarding commercial loans. In terms of consumer because of their models in a certain way is covering that level of provisions, we are foreseeing maybe a deterioration in certain corporate cases that suggest that also a deterioration will pick up. Just to give you an idea, today, we have 30 days, past due, at around 5%. We are expecting to the number reach a peak at around 6% for 30 days. And 90 days, which currently is 3.8%. We are expecting maybe to reach the level of at least or at around 5%. So this is at the end of the day, we are naming as a transition year, which means that in terms of provisions, we are going to reach the normalization of cost of risk in 2022. Meanwhile, this year would be a transition period in which probably cost of risk will be at a level of 3% area. And the second question was fully answered by Juan. Thank you. Thank you very much, Juan Carlos and Caixo Humberto. I appreciate it. Thank you, Ernesto. Your next question comes from the line of Jason Mollin with Scotiabank. Please proceed with your question. Hello, everyone. Thanks for the opportunity. My question is related, I think in big picture terms to the impact of the 11% depreciation of the Colombian peso versus the U. S. Dollar in the 4th quarter itself on the results because given your business in Central America, about 30% of the business on the assets liabilities, equity side is denominated in U. S. Dollars. We see these big movements. And I think it would be helpful to have you confirm my view that the depressed level of net interest income, which was down 19% quarter on quarter, And you show it very clearly that it's related to the debt investments, loss on the debt investments. But you have in the way you show in other operating income, we put it in trading, but there's a mark to market. I guess it's a net foreign exchange gain that's very large. Just to give it in some of the numbers that I see here is the loss in the net interest income was COP 152,000,000,000,000 and I see net foreign exchange gains of $670,000,000,000,000 So if you kind of net that against each other, the impact of treasury looks quite strong. And then maybe from a strategic perspective, I think this represents the fact that with that business in U. S. Dollars that you don't hedge that is my understanding. So you're going to face that volatility. So my thought is just can you share with us if there is some decision that could change that? Or will is it just the position that will remain in dollars and that's part of the strategy? Or could there be some hedging implemented in the future? Thank you. [SPEAKER JOSE RAFAEL FERNANDEZ:] Thank you, Jason. Yes, Jason, three questions in your speech. The first one is regarding the big picture. Yes, there were an appreciation of the currency in the Q4 and it is affecting in several lines. And let me elaborate. First, on the asset side, you are seeing a drop in the loan portfolio and this is, as you mentioned, 1 third of our loan portfolio is denominated in U. S. Dollars. The second effect you are seeing is on equity side, which is, for our point of view, positive thing in terms of our equity structure because again 30% of our equity is denominated in U. S. Dollars. So also you see coming down the number in $1,000,000,000 I have to highlight, Jason, that we are fully matched in terms of our structure of U. S. Dollar business, which means that, for example, in Colombia, our exposure in U. S. Dollar is very, very limited and we don't have more than 3% of our loan portfolio in U. S. Dollar. The rest of our international operation is fully matched. So no matter what happened with FX, at the end of the day, we are able to sustain our solvency ratio. We are not having imbalances. But there are a third element regarding this particular quarter, which is what you are seeing on debt investments, which is true that investment shows a negative number. And this line is a result of debt investment correspond to the short term portfolio invested in U. S. Dollars in U. S. Treasuries that as a result of the FX appreciation shows a negative numbers. However, Jason, this is a hedging of other balances position that we are having and those are reflected in other operation income. And the net effect is positive. So at the end of the day, when you see a change of the FX rate in our balance sheet, we don't have a big change, we don't have a big impact. We are seeing that impact as a result of the hedging. So this is the particular situation that happens in the 4th quarter. Regarding the NIM, the reason why the NIM is compressed in the 4th quarter is not because of FX. It is because of combination of 3 factors. The first one, you see you know that the interest rates in Colombia have been dropping. We are asset sensitive. So the repricing of those loans is affecting and compressing the NIM. The second one, as you see, Stage 3 is growing up. And as a consequence of the big portion of our loan, 8.9% of our loan is Stage 3 also we are affected. And the 3rd element is the relief program because you are changing the interest rate, so you have to register the net present value, the new net present value and it is affecting the need. Regarding NII, NII in terms of the FX moved both sides of the equation. NII obviously impact the interest rate coming from the loan portfolio in U. S. Dollar, but also it is impacted the interest rates coming from the debt that we are having in time deposits, saving accounts and checking accounts. So at the end of the day, NII, it is compensated because of the two parts of the equation. What we expect NII in 2021 that will be lower than the loan growth and there is one specific reason why. We are expecting that the loan growth for this year will appear so will consolidate in the second half of the year. So again, the big picture is we are pretty much we are not having any particular exposure in U. S. Dollar, So the consequence is the managing of the hedge. Thank you very much. My pleasure. Your next question comes from the line of Sebastian Gallego with Trade Corp Capital. Please proceed with your question. Hello, good morning. Thank you for the presentation and the opportunity. I have three questions today. The first one, maybe a follow-up on asset quality. I would like to understand a little bit better how should we expect on a sequential basis during the upcoming quarters the evolution of provision expenses? You mentioned that we could see the peak on NPLs and PDLs in the first half, but I just want to get a sense on how much we could see an improvement or how much can improve provisions on a sequential or on a quarterly basis. Second question is regarding actually dividends. You released yesterday your proposal as well. I just want to understand first the material differences between the net income between full IFRS and the local individual net income? And also, what was your rationale behind the payout ratio in this proposal? And finally, my third question will be on Panama. How should we think about what could happen on provisions once the moratorium law is over? Thank you. Thank you, Sebastian. Regarding your first question about asset quality, Definitely, as we mentioned, we think that the 2nd semester is going to be better than the first one. And regarding quarters, we think that this Q1, we still will need to assess what is going to be the economic situation. Our expectations are on the positive side, meaning that we are optimistic that economic conditions, particularly in Colombia, are going to be are going to improve. We have a first month of the year, January, with some issues related second peak of the pandemic, but we see some vigorous economic activity that allow us to be optimistic on the economic performance. But what we have in our models is that we introduce that macro parameters and we run the provision models. So if we see that economic activity is improving, we will be incorporating those results in our models. So we think that the Q1, we still will see some provision levels in line with our forecast or our guidance. But we will see further improvements in the Q2 and further on. Regarding dividends, basically, we have international norms of accounting, and it's the ones that we used to report and run the bank. And we have local Colombian gap in which we report to the superintendents in Colombia. The differences are mainly related to provisions and how provisions are incorporated in the local way of accounting. So we reported on an individual basis, meaning our Colombian operation, a net income of ARS 900,000,000,000 in net income. Compared to what we reported on a consolidated basis. But the way we are or the way this works is we are proposing dividends based on the local accounting rules and that is 28% paid out ratio. What it's key for us is how the solvency ratio is going to behave and we are sure or we are comfortable, very comfortable that the levels, the capital levels that we have after this dividend proposal, it's fine. So that's mainly the reason about dividends. And regarding your third question, Panama. Panama, as I mentioned, it's under a moratorium until the middle of the year. But we are not waiting for that moratorium to end. We are doing the provisions. We have a healthy coverage ratio. After the moratorium ends, in the second half of the year, we will start working with our clients on restructuring them and working doing the things that we need to do to manage the situation. I don't know if Jose Humberto would like to add something to my comments. Jose? [SPEAKER JOSE RAFAEL FERNANDEZ:] Thank you, Juan Carlos. Just to complement the rationale why we are paying dividends and remember that 47% of our shares are preferred and we have a dividend that we have to pay. That was the rationale, but the dividend payout as you can see in terms of yield is very low compared with what we paid last year. That's all, Juan Carlos. Just to complement that last comment is we have preferred shares that one of the preference is to have a dividend equal to 1% of the issue price. So what we are doing is we are complying with that dividend. Very clear. Thank you very much. Your next question comes from the line of Tito Labarta with Goldman Sachs. Please proceed with your question. Hi, good morning, everyone. Thank you for the call. A couple of questions also. I guess, first, in terms to get to the 12% to 13% longer term ROE target, just to understand the drivers to be able to get there. You showed this slide on your margins at 4.9% in 2020, down from 5 point 7%, 5.8% in prior years. Do you need to get back to that 5.7%, 5.8% level of margin? Is that dependent on higher interest rates? What could be the drivers of improving your margins going forward back to the historical levels? And sort of related to that in terms of efficiency, I understand you're investing just the digitalization of the platform and moving to the cloud. But also like in Slide 16, where you show expenses to interest earning assets fell to like 3.6 from a historical level like 4.2. Is this 3.6% sustainable Given the investments you're making, is the 4.2% more reasonable to get to that 12 to 13% ROE? Where should that level of expenses to assets be? If you can help with those 2, it would be very helpful. Thank you. Thank you, Tito. Let me elaborate on your two questions. 12% to 13% ROEs and your question is dependent on margins. Clearly, we are at a low point of interest rates globally. And that's the case in the geographies that we operate, particularly in Colombia. We are on a very low rates interest rate environment. So what we expect, and I think his general expectations is that interest rates are going to raise in the probably not 2,001, but 2,002. And since we are asset sensitive, that is going to give us some push on the NIM. But the ROE the 13% ROE, it's going to depend basically on cost of credit. That's the main driver of our results. We keep working on interest rates, how the mix of our loan book is going to be, that is going to help. We will continue working on fees. And we have a big strategy on fees, as we mentioned. We are moving aggressively to offer different alternatives to our customers. That's going to help also. We will recover some margin. I don't expect to return to the levels we have before, but we will keep working on that and that will come. And then expenses that is your second question is another driver that we need to work on for achieving the ROE target. As I mentioned, 2021 will be a year of transition. You mentioned this EUR 2.4 billion, EUR 3.6 billion. I think we will target mid term EUR 3.6 billion, percent, but it will be it will take us some time. This year definitely is going to be a year and we will have, as I mentioned before, our efficiency programs in place, and we will keep working, but expenses are going to be higher. I don't know, Joseonberto, if you want to elaborate on the Tito's second question. No, that's very clear, Juan Carlos. Thank you. Okay. Thank you, Juan Carlos. Just one quick follow-up, I guess. Sure. I understand, yes, it definitely depends on the cost of credit, and you probably don't get there until 2022. But even if you get to that cost of credit of like 2%, it still seems you would need some margin expansion. And I guess just to try to take out whether interest rates increase or not, which is probably out of your control. What can you do to improve the margin? Is it grow the consumer loan portfolio, improve your funding costs? I mean, we have seen some improvements on your funding costs. But what kind of like self help can you do to get that margin up to help also boost profitability? Yes, Tito. All of the above. As I mentioned, some recovery of the margin will come from interest rates that are not raising. The mix is going to help. We are going to grow a little bit more on consumer loans that will give us a better margin. And funding cost also is going to help. And let me add some color. We are growing our savings accounts on a very healthy base and granularity is there. So and we and our digital platforms that now have close to 10,000,000 customers are giving us that granularity and are helping with the funding cost. So that also will help. So we will have some better margins because of increased interest rates, the mix that we are going to work and adding more consumer loans starting in 2020. We were very careful about the risk. And then funding costs, I think during this pandemic, we showed how strong is our franchise, how our capillarity to get deposits and our digital platforms are going to help a lot with the funding cost. So all of the above, Tito. Okay. Thank you, Juan Carlos. Your next question comes from the line of Carlos Rodriguez with Porvenir. Please proceed with your question. Good morning, everyone. Thank you for the conference call and taking my question. I have two questions. My first one is, what will be the strategy for the 2021 and onwards to tackle the new and coming banks, both digital and traditional banks and to defend your market share in Colombia? And my second question is regarding your guidance in efficiency and ROE for the coming quarters and full year in 2021 and going forward. Thank you. Carlos, good morning. Let me begin with your second question. Let me I'm sorry. Okay. I am here. I'm sorry. Let me take your first question and competence and the competition. Competition is increasing both from traditional players, banks and other entrants to the market, fintechs and nontraditional financial service companies. What are we doing? And we mentioned, we are investing, we are investing on digital. By the way, we are getting market share. We are the pace in which we are acquiring clients is very healthy. We now have in all our platforms close to 17,000,000 customers in Colombia. That's half of any person that has a relationship with the bank has a relationship with Bancolombia. That is not market share in terms of loans or deposits, but we are acquiring clients. Our digital platforms are acquiring clients at a pace of 300 to 400 each a month, new customers. So the activity is there. We have the platforms. We are adding new features. Now we have digital debit cards. We are giving or our ability to analyze the credit risk and provide line of credits through our digital platforms is already there. So I think we are very well prepared for the competition that is coming. And by the way, we are growing. The competition is there. We have a big opportunity to prove what we were doing in the past during the last year. That accelerated a lot of our programs. And we are growing very on a very healthy pace. Jose, could you take the second question, please? Yes, sir. Carlos, regarding your first part, return on equity, as Juan Carlos mentioned, our goal for midterm is to be between 12% to 14% and that will be a function mostly of cost of risk. But going to the 2021 to your specific question, we are forecasting at the end of this year mid single digit return on equity. And this is again, because probably we are assuming that we will come from 3.9% cost of risk to 3% at the end of the year. That will be the most relevant point that affects the return on equity. Regarding efficiency, as Juan Carlos mentioned in the previous question, digital will be the key investments during this year and that will be focused on maintaining the competitiveness to maintain the level of transaction that we are having today. So our goal for midterm is to reach the level of 45%, 46% efficiency level, And that will be achievable once those investments that we are planning to do this year begins to show on the net income side. Thank you, Juan Carlos and Jose Andres. My pleasure. Your next question comes from the line of Alonso Garcia with Credit Suisse. Please proceed with your question. Good morning, everyone. Thank you for taking my question. My first question relates to taxes. I know it's there's a lot of uncertainty given the tax discussions in Colombia this year, but what's your effective tax rate assumption for this year and for the years ahead? And my second question is a follow-up on provisions. I mean, you mentioned that if you see improvements in economic expectations, later this year, you would update your models and that would probably result in a release of provisions, basically the opposite of what happened this quarter. So I wanted to ask if that's something embedded in your 3% cost of risk guidance or if that would be upside to that number? Thank you. Thank you, Alonso. Let me start for your second question, provisions. Yes, I mentioned that we will incorporate further information into our models once we know how is going to be the economic performance. But that is not incorporated right now on the guidance that we are giving around provisions. It's with the expectations that we have at the end of the year and the beginning of the year, and it doesn't incorporate further improvements. That if that improvement occurs, is going to mean that we are going to release provisions? I don't think so. I don't think that is not going to be the case during this year. That could affect the cost of risk. It's going to it could be lower. If those that economic activity is healthy and we see that the GDP forecast are improving. But I don't see provision releases during this year. That could occur more towards the next years. Related taxes. We expect a tax rate around 28% for this year. That is because of the mix of statutory rates and particularities around tax regulations in the different geographies in which we operate. I don't know, Jose, if you want to elaborate more on taxes or on provisions. In taxes specifically, Juan, yes, there will be, as Alonso mentioned, very difficult to forecast taxation this year. But let me put it in perspective. There will be 3 factors that will affect the taxation this year. The first one is you know that in our international operation, the statutory tax is lower than the statutory tax that we have in Colombia. That will give you the maybe the opportunity to reduce the taxation. The second element is we have other operations with 0 taxation as for example, Bancolombia Panama also will help to maintain taxes at a level than Juan mentioned. And the 3rd element that is also relevant regarding the operation in Colombia is every time we have a mortgage social housing or investment in productive fixed assets, we have exemptions. So if you combine those, that would be the number would be below 28% as Juan Carlos mentioned. Your next question comes from the line of Andres So to with Santander. Please proceed with your question. Good morning, Juan Carlos Humberto. Thank you for the presentation. I have a couple of questions. The first one is a follow-up on your guidance on cost of risk. When I look at your total allowances to total loans, the ratio is 8%, which is pretty high for me. But still, you are expecting cost of risk to be significantly above your normalized level in 2021. I would like to understand, if you think about geographies, to what extent this is driven by Colombia or rather by your Central American operation? That will be my first question. My second question is related to expenses. You mentioned digital investment as a reason to expect high expense growth in addition to hard comps from 2021 for 2020 1 sorry, 2024 2021. So I would like to understand in terms of your digital investment cycle, what is the point we are now? How much you are expecting invest in 2021? How much additional investment you will need for 2022? Thank you. Thank you, Andres. Cost of risk and we are currently, we are at 8.1% is the percentage of provisions that we have in our balance compared to our loan portfolio. That number seems adequate. Again, we are giving that guidance that 2021 still we would have high cost of risk depending on the economic performance of the economies, mainly Colombia. And you mentioned Panama. Yes, Panama, it's probably the geography in which we have more questions about how it's going to perform. Last year was the economy hit harder by the pandemic in terms of economic activity. Also, we expect a rebound as in the other in the other geographies. But put it in perspective, what is going to drive the cost of credit during 2,001 is going to be Colombia. Since it's our main operation and represents 3 quarters of our assets. So Panama is going to have an effect. We have a lot of questions still to be answered around Panama's economic performance. We are more optimistic about Colombia. We think that the economy could perform better than what we have in our models, but we will need to wait and see. And I think it's responsible for us to give you the guidance of 3% cost of credit that we have now with the variables that we are incorporating in our models and wait for the evolution. I remind you that we have normalized cost of credit between 1.8% to 2%. Still 3 is pretty high. And as I answered Tito's question, that's the main driver of our results. I don't have to say this, you know it, but that's the key driver. Expenses, where are we on the digital cycle of expenses? I mean, it's difficult to know. We made a big effort or we have been making a big effort since 2017 investing in digital or 2016. We already have the platforms, but we will keep investing. And I cannot say that this is going to end. I mean, we will keep investing, but what is going to happen is that those investments are going to start returning or they start returning last year and will or will return this year year after. So probably we will need to keep investing to have the competitiveness of the bank in place, but returns are going to be there. Jose, I don't know if you want to elaborate on these two questions. No, Juan. It is very clear. Thank you. If I may, just a follow-up. When you mentioned these migration to the cloud that is going to start this year. What time frame are you looking for this? And what is the big investment for this in total and for 2021? Andres, could you repeat, please? We couldn't get you. Sure, Jose Alberto. I'm asking about the cloud migration. You mentioned in your initial remarks, Juan Carlos mentioned this investment, this plan. I'm curious about the time frame and total investment related to that. [SPEAKER JOSE MARIA ALVAREZ PALLETE:] Okay. [SPEAKER SEBASTIEN DE MONTESSUS:] Yes. We are investing for 3 years. The time line is the implementation will take us 3 years moving to Icloud. And the investment is it is at around $15,000,000 $15,000,000 the cost of migrating to Icloud. That's perfect. Thank you, Jose, Humberto, Juan Carlos. My pleasure, Andreas. Your next question comes from the line of Carlos Gomez with HSBC. Please proceed with your question. Thank you very much. My first question is regarding how confident are you about your guidance for 4%, 5% ROE for this year? And in particular, how confident are you about the provisions in Panama, which seems to be quite a fluid situation? The second question refers to the difference between local accounting and IFRS, and that is the basis for your dividend. Since your earnings were higher in 2021, does that mean that as provisions catch up in local accounting that you might have lower returns in 2022 in accounting terms? And therefore, you might have less than 4%, 5% ROE in local terms in 2022? Thank you, Carlos. How confident are we with the guidance of 4% to 5% ROE? We are confident. It's challenging in relation with loan growth, but it's achievable. We are convinced that we can achieve those returns during this year around 4% to 5%. And that guidance is taking into account how we believe Vanitsmo operation is going to behave. So we are pretty confident that we can achieve that returns during the 2,001 year. Regarding your second question, I will pass on to Jose Humberto. Thank you, Juan Carlos. Yes, Carlos, as we mentioned before, the key difference is the level of provisioning that we are having in comparing our models with the local accounting system. This is a particular year, the 2020, which it was the other way around. I mean, the IFRS provisioning level was higher than the Colombia regulation provisioning. We are expecting, Carlos, next year that will be aligned in order to reduce and to mitigate that difference in between the two level of net income. Sorry, when you say next year, you mean 2022 or you mean 2021? And again, should we expect a reversal of the impact that we saw in 2020? [SPEAKER JOSE RAFAEL FERNANDEZ:] No. We are expecting for this year 2021 that the gap will reduce if you compare both. Again, we are not talking about reversing. We are talking about that because of the mortgage, some provisions will reverse, will coming down. But because of deterioration, you are going to see some provisions going up. Caro, let me elaborate a little bit more. The main difference, as I mentioned, is regarding provisions. And during let me say normal times, those two accounting methods converge in general. But when we have these events, the IFRS model incorporates further looking and incorporates macroeconomic variables into the models. That's where the difference comes. So we will expect those numbers to converge in the future. But during this year that are not normal years, those numbers are apart. But we should converge on these two accounting methods. No, I mean, that is clear that they will converge in the end, but you have essentially anticipated some provisions because of what you said, they are forward looking in IFRS and you incorporate the macroeconomic variables. So it stands to reason that that comes to pass in 2021, you will have to provision more locally than you will have to return in IFRS since we already have your provision, which means that your results locally could be lower than IFRS. I want to understand if there is any demand of considering there. That could be the case, but it depends on how again, how the economic outlook or the economic behavior is going to be. Because if the deterioration appears and we don't have that deterioration reflected on local accounting rules, You are right. We need to incorporate additional provisions on local rules. But it depends on how the variables behave. But your analysis is completely correct. But we cannot conclude exactly how it's going to be that behavior on local accounting. Thank you for the clarification. Thank you. Thank you, Carlos. Ladies and gentlemen, we have ended the question and answer session. And this concludes today's conference. Thank you for your participation. You may now disconnect.