Good morning, ladies and gentlemen, and welcome to Bancolombia's third quarter 2020 earnings conference call. My name is Vanessa, and I'll 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-answer session. During the question-answer session, if you have a question, please press star then one 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 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 to new products or services by our targeted clients, changes in business strategy, and various other factors that we describe in our reports filed with SEC. With us today, Mr. Juan Carlos Mora, Chief Executive Officer, Mr. Mauricio Rosillo, Chief Corporate Officer, Mr. José Humberto Acosta, Chief Financial Officer, Mr. Rodrigo Prieto, Chief Risk Officer, Mr. Jorge Humberto Hernandez, Chief Accounting Officer, Mr. Carlos Raad, 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 of Bancolombia. Mr. Juan Carlos, you may begin.
Good morning, everybody, and welcome to our conference call for the third quarter 2020. I hope all of you and your families are safe and healthy. During the third quarter, Colombia ended the mandatory preventive isolation. The country is now facing the double challenge of containing the second peak of infections, while at the same time gradually reopening the economy. The data have shown that September was the best month since the start of the health crisis, reflecting a better performance of agriculture and mining sectors, complemented by the reactivation of retail and construction, activities that have benefited from more freedom of movement in the main urban centers. While we are still in a very uncertain environment, during the third quarter, Bancolombia performed better than the previous one. The net income for this quarter was COP 280 billion.
Before getting to the details of the results, I want to mention two key topics. First, regarding credit risk, we recorded 31% less provision charges compared to the second quarter of this year, as a reflection of a better economic activity and the increase of mobility in the main cities of the country. The cost of risk decreased during the quarter, but it still reflects weak economic outlook related with the pandemic. This provisioning level and the lag in NPLs formation results in a coverage ratio of 232% for the quarter. The second point is regarding our digital strategy for Bancolombia. Digital transformation is a continuous process and a medium to generate solutions that meet the needs of people and companies. This has a higher goal: to promote sustainable economic development to achieve well-being for everyone. We started this strategy three years ago, and now it's showing very positive results.
The actual health crisis has made possible to see the preparation of the bank in terms of digitalization. From the moment that preventing isolation measures led us to limit physical operations, we were able to redirect most of our clients' needs to digital channels. Today, we have more than 12 million digital clients. 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. During the past few months, the Colombian economy has rebounded from the low since in April and May as lockdowns came to an end. Due to a gradual resumption of activities in most sectors and higher mobility within the country, GDP variation went from -15.7% year-on-year during the second quarter to an estimate of -9.7% in the third quarter. Moreover, initial data suggests that at the start of the fourth quarter, the pace of contraction has adjusted further to around -7.6% year-on-year. This recent recovery trend is consistent with our full-year probably adjusted projection of -8.1%. Going forward, uncertainty and risks remain significant, especially due to the possibility of rising COVID-19 cases that might force authorities to re-impose new containment measures.
We think that the negative output impact on the economy of such a scenario would not be as large as we saw in the first half of this year. Other relevant risks are the second-round effects of the shocks that have taken place since March, including permanent job losses, the reduction of disposable income, and the increase in poverty. Moving into 2021, we also identified several factors that will promote economic growth. Low interest rates and stimulus programs led by the government in sectors such as infrastructure and housing will combine with a more positive global context and higher terms of trade. Next year, we project that GDP will recover at a probably adjusted rate of 5.2%. Consistent with this, we anticipate a mild improvement in the labor market.
We expect that urban unemployment rate will average 19.3% in 2020 and will adjust to 17.3% in 2021. Regarding inflation, given the ample negative output gap, as well as an abundant supply of food, we think that downward pressures will continue to determine the performance of CPI, leading its annual variation to close this year near to 1.5%. Inflation will only start to accelerate gradually in the second half of 2021, as by then, activity will start to gain traction and some relief measures taken during the pandemic are reversed. Hence, by the end of next year, annual CPI change will go back to the lower half of the target range. Against this backdrop, we predict a long period of low and stable interest rates.
We expect that reference rate will be at its current level of 1.75%, at least until the second half of 2021, when the Central Bank will do some upward fine-tuning in order to keep inflation expectations in check. Finally, a factor that will drive the performance of the Colombian economy during the next two years will be the adjustment of the central government's deficit after its large widening during the pandemic. Our scenario suggests that the pace of fiscal consolidation will probably be more gradual than initially estimated by authorities. However, implementing actions that lead to a stabilization of public debt will be key to maintain the country's investment grade and keep access to external financing. Now, I want to turn the presentation back to Juan Carlos.
Thank you, Juan Pablo. I want to continue this presentation by walking you through our digital strategy. At Bancolombia, we decided to develop a strategy focused on a holistic relationship with our clients to solve their needs with financial and non-financial solutions. We have studied the context of our clients from life cycles for individuals to production chains for companies seeking to be relevant in their daily lives. In accordance with this analysis, we have decided to evolve our value proposition towards a business model based on ecosystems, developing a value proposition in which clients and financial and non-financial solutions are in one place. We are working on orchestrating the demand and supply of certain ecosystems, such as housing and mobility, through our digital channels.
In this way, our more than 1.8 million SMEs and corporate clients have been able to offer their services and products to our more than 15 million clients in Colombia. Through this strategy, we will keep adding new clients, approving digital loans, and capturing new data sources to enhance risk models. Moving to slide five, we can see some figures of this strategy. Bancolombia's QR code as a model to connect formal and informal retailers with more than eight million digital clients through our digital channels has reached close to 450,000 merchants throughout the country in less than two years. This service allows small businesses to sell digitally and physically, receiving the money from their customer purchases directly to their savings, checking Bancolombia A la Mano or Nequi accounts.
With the transaction data of QR, we have already pre-approved credit lines of more than COP 430 billion to clients who have not had access to credit from the financial system before. We launched in alliance with Sura, Mis Aliados, a platform that will be available in our digital channels, and its purpose is to strengthen independent workers, who represent about 50% of the workforce in Colombia. We pursue to connect 600,000 independent workers in the country with the more than 15 million clients of Bancolombia to accompany them in their growth through the formalization and access to digital credit, thanks to the new data sources that the bank will have. Each independent worker will have a digital account, such as Nequi or Bancolombia A la Mano, and QR codes to receive payment for services.
In the upcoming weeks, our clients will be able to find a personal finance assistant in our app that will help them to manage their day-to-day finances and bring them closer to their housing or mobility goals through financial planning. Bancolombia, aligned with its purpose of orchestrating supply and demand to fully serve the needs of our clients, will launch the housing and mobility solutions, two marketplaces for our clients to find their next home, their next vehicle, with financing and rental solutions in one place. During the first nine months of the year, Bancolombia distributed more than 2.3 million products through digital channels, which represents 45% of total products sold. Sales through digital channels as of September 2020 have increased by 79% when compared to the same period of 2019.
Digital sales have maintained a steady evolution on a monthly basis, despite the reactivation of the physical channels during the reopening of the economy in the third quarter. This performance indicates that the customer experience evolution has accelerated during 2020 towards the permanent adoption of digital channels by many of our clients. The balance of digital time deposits reached by September COP 4.5 trillion, coming from COP 363 billion in January, showing an important growth throughout the year. Digital sales continue to gain relevance towards reducing the operational expenses. On average, the distribution of the products through digital channels represents only 36% of the cost of selling it via physical channels. The digital competitive environment in Colombia is getting tougher. New players are entering the market, but we have been preparing for this during the last three years.
We have a robust client base, products, and services coupled with the access to a very competitive funding that give us a size and cost advantage. I want to turn the presentation to José Acosta. José?
Thank you, Juan Carlos. Now, turning on slide seven, I want to walk you through the evolution of the relief program in our loan book. Trade relief have decreased from June to September by 30%, coming from 44% to 14% in a consolidated basis. Out of total loans on the relief, corporate loans represents 46%, consumer represents 22%, mortgages 19%, and SMEs 12%. This trend shows the evolution in the first wave of reliefs across the board. In Colombia, 10% of total loans are still under relief. However, this percentage should come down to 4% in October, 3% in November, and less than 1% by December. Regarding Central America, the relief program is as follows. In Banco Agromercantil, we have one% of the total loan book under relief. In Banco agrícola in El Salvador, we have 21%, which should come down to zero by December.
Finally, in Banistmo, we have 45% of the total loan book under relief. This proportion may vary until December because of the moratorium law in Panama. Even though the moratorium law is until December 2020, the regulator in Panama gave an extension of the terms of the law until June 2021. On slide eight, we present the breakdown of the first wave reliefs and the PAD program in Colombia. Regarding credit reliefs in Colombia, we want to point out that the first wave of reliefs is almost done and now represents 6.9% of total loans as of September. It is important to highlight that 88% of loans after the relief ended are performing. 8% of the loans have been canceled, and 4% are 30-day past due, which is a very positive indicator on the improvement in the payment capacity of our clients.
Regarding PAD, remember that this program began in August and will end in December 2020, and we have to offer different alternatives of payment for our clients. It is important to highlight that those alternatives are by demand. Structural solutions of medium and long-term will be granted according to the individual client condition. PAD program accounts for 3.1% of total loans as of September. Out of the total program, the 43% are structural solutions for corporates, 34% for consumers and mortgages, and 23% for SMEs. The solutions are basically three. Grace periods, deferred payments, and tenor extension. In slide nine, we present the breakdown of provisions during the quarter. As we did the previous quarter, we want to explain the provisions breakdown. First, provisions associated to the update of macro scenarios and COVID-19 represented 37% of the total provision expenses as of September.
We want to highlight that the expectations for macro variables deteriorated from the second quarter to the third quarter of this year in most of the geographies, reflecting the still uncertain economic environment in which the bank operates. Second, regarding provision charges associated to the consumer loans, we must mention that those correspond to a normal pace of deterioration and represents 32% of the total provisions as of September. Moving to slide 10, we give you a snapshot of the composition by stages and their coverage. Regarding the composition by stages during the quarter, we can see that there was an an important increase in Stage 2 . This increase was explained by three aspects. First, clients in which the relief ended did not get a structural solution and not to have the capacity to pay yet, therefore, they became 30 days past due.
Second, the number of clients in watch list increased. Third, the output of the risk assessment of our expert models resulted in higher risk. On the other hand, the slight increase in Stage 3 was due to a higher number of clients in watch list and a higher deterioration in loans that were not part of the relief programs and that over past the 90-day threshold. Coverage by stages shows a strong protection of the balance sheet. Our levels of coverage are aligned with the average of the financial system. Slide 11, we present provision charges and allowances. Cost of risk for the quarter and for the last 12 months was 3.4%. Cost of risk without COVID-19 effect was 2.3% for the quarter and 2.4% 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. It is important to mention that even though the provision level was lower than the one reported in the second quarter, we expect that provision charges to increase for the fourth quarter because of the end of the first wave reliefs, worsening of macro variables in Central America, and increase of structural solutions under the PAD program. The next slide shows the past due loan formation and coverage. New past due loans during the quarter increased mainly due to higher NPL formation related with the end of the reliefs, therefore, some clients became past due mainly in credit card, personal loans, and mortgages. There was a corporate client related to biofuel production that defaulted during the quarter.
This client is highly provisioned with a coverage of 84%. The coverage ratio rose to 232%, explained by the provisions based in expert models, clients in watch list, and past due loans requirements. Also, bear in mind that our risk provisioning models are based on expected losses under IFRS 9. On slide 13, we present the capital situation of Bancolombia and subsidiaries. Total solvency ratio stands at a level of 14.8%, while CET1 at 11.4% for the third quarter, well above the minimum regulatory requirements. These levels leave the bank in the high range of our solvency target. This increase in the capital ratios is explained by the reclassification of existing resource in the occasional reserve to the bank's legal reserve, approved by the extraordinary shareholders meeting last July. This is a remarkable fact. Having a strong capital position is fundamental pillar to face the new future.
The adoption of Basel III in Colombia is scheduled to start its implementation in January of 2021. The effect of the accounting reclassification we did anticipated most of the Basel III impact. We are not expecting a material change in the ratios for January. Because of FX volatility and uncertainty regarding year-end results, ratios may vary. On slide 14, we present the liquidity position of the bank. In a consolidated basis, we are expecting high liquidity levels to maintain for this year due to low demand in the loan portfolio and low dynamics in withdrawals from savings and checking accounts. Savings and checking accounts have consolidated as the main funding vehicle with 50% share of the total funding. I want to highlight that throughout the year, we have achieved a continuous decrease in the funding cost, reducing 64 basis points in the last 12 months.
In addition to the increase in savings and checking accounts, this improvement is explained by the following reasons. First, the liability management transactions we executed last year and in January this year allowed us to exchange all bonds with high coupons for more cost and capital efficient ones. Second, the decrease in credit lines with financial institutions. On slide 15, we present a snapshot of our standalone operations. In general terms, the trend throughout the different geographies operated by Bancolombia is similar. Margins under pressure, fees recovering as economies starting to reactivate, none or a slightly growth of the loan book, and a solid position in terms of capital and liquidity. In the same way, coverage ratios have been one of the key indicators in Colombia and in the Central American subsidiaries, sustaining a level of 232% in a consolidated basis.
Amid the many challenges ahead, we would like to point out the positive evolution in terms of efficiency to bring down the cost income ratios consistently in the four operations, such a coordinated effort to contribute gradually to profitability ratios. On slide 16, we see the evolution of margins and net interest income. Lending margins continue under pressure during the third quarter explained by several reasons. First, the increase in Stage 3 clients under IFRS 9 that generates fewer interest income. Second, during this year in Colombia, the cut of rates by the Central Bank has reached already 250 basis points. We don't expect further cost cuts for this year. Third, the mix between consumer and corporate loans will continue to impact the margin. The driver for growth will be in corporate loans.
Finally, the loans under reliefs and PAD program will return a lower interest rate because of the structural solutions of grace periods, deferred payments, and tenor extensions. On the other hand, it is important to note that the decrease in cost of funds has added resilience and partially offset the compression to our lending margins, which ended the quarter at a level of 5.5%. We are expecting NIM at around 5% area for the year-end. Slide 17 shows the evolution of expenses and efficiency. The trends in cost efficiency for the bank continue to show an encouraging outlook. During the first nine months of 2020, total operating expenses have contracted already more than 1% when compared to the same period of 2019. General expenses have remained relatively stable, growing less than 1%, below inflation rates, reflecting the management actions to maintain a strong cost control.
Moreover, personal expenses have significantly contributed to the improvement of operational burden, dropping more than 7%, mainly attributed to bonus plans related to employee benefits. Our cost-to-income ratio stands at a level of 49.7% for the third quarter of this year. The depreciation of the local currency had an impact on efficiency when excluding the FX impact and cumulative figures, the reduction in operational expenses for the first three quarters of the year will have reached more than 4%. For 2020, we are expecting to report a variation between 0% and 2% of our operating expenses. Regarding income tax, the figures shows a recovery of COP 11 billion, mainly explained by the Colombian operation. Such amount refers to the tax impact related to fiscal concepts such as tax discounts, liability management operations, and tax shields resulting from the second quarter net losses. Slide number 18 shows the evolution of fees.
Fees have been resilient during 2020. During this quarter, they grew 12% when compared to the second quarter of 2020 and decreased 2% when compared to the third quarter of last year. Lines such as debit and credit cards, bancassurance, trust, brokerage, and investment banking have contributed to the performance of fees during the year. In bancassurance, we have grown 20% for the year. We expect these products will continue leading the growth next year. Now, I want to turn the presentation to Juan Carlos for the closing remarks. Juan Carlos.
Thank you, José. As a summary, I would like to highlight several elements of the third quarter results. The balance sheet structure remains solid. We are expecting the loan portfolio to remain stable or could even have a single low-digit growth for the end of the year. The funding composition shows high liquidity levels, diversification, and cost reduction. Solvency levels are more than enough to face this economic cycle. This year has high levels of uncertainty. We think that the fourth quarter of the year will reflect more accurately the performance of our clients in terms of their payment capacity. Therefore, we could know what will happen in terms of risk. Bancolombia is well prepared to face the new normal.
We have a stronger capital and liquidity position, 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 that have allowed us to gain over four million new clients during the year. After elaborating on these key topics, I want to open the line for questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star, then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the headset first before pressing the numbers. Again, because of constricted time, we allow one question per participant. Once again, if you have a question, please press star then one on your touch-tone phone. Our first question comes from Thiago Batista. Your line's open.
Yes. Hi, guys. Good morning. I have one question about asset quality. If you can comment, how fast do you believe that the cost of risk of Colombia will normalize it? To be more specific, in 2021, next year, do you have any sense on the level of cost of risk and, if it's possible to see, let's say, kind of still high level of provisions in the first half and then some normalization in the second half? If you can talk a little bit, I know that it's tough question, but on how you can see the dynamics of cost of risk going forward. Another one, very briefly one, and linked with this cost of risk, is how fast will be the normalization of the bank's ROE?
If you can comment, what we can expect for next year, if it's high single digit, close to 10, above that. Only big numbers or big indication on how fast would be the recovery of the bank's results.
We are expecting maybe, as we mentioned on the script, a certain level, the same level of provisions or even a little bit more this next quarter, the quarter of this year. What we expect next year. Next year, we are expecting the first half maybe to maintain a certain level of provisioning's because of two factors. First, because of the PAD program, which means there will be more clients on restructuring that will require provisions. The second factor, that would be because of the Banistmo operation in Panama. They will finish partially the relief program. We are going to see the same effect that we are seeing here in Colombia during the second half of the year. Those are the two reasons why we believe that this, the first half of the year, the provisions will maintain certain level.
When we are going to reach the new normal in terms of cost of risk, a new normal meaning in between 2% area, maybe in two years. This is basically because of the effects of COVID-19. Regarding your second question regarding return on equity, obviously, because this is a high correlated with the cost of risk, we believe that the next two years, the return on equity will be single digit, and we will go back to the double-digit return on equity in two years, I mean, beginning in 2023.
Our next question comes from Ernesto Gabilondo from BofA.
Hi, good morning, Juan Carlos, Juan Pablo, José Humberto, and good morning, everyone. Thanks for the opportunity. My first question is on the deferred portfolio. Can you walk us through the first and second round of the deferred loans? I believe that initially 50% of the portfolio was integrated by deferred loans, and as of today, it's only 14%. Can you repeat how much of the first round is current, restructured and delayed? For the second round, how much do you expect to be restructured and delayed? When do you expect to communicate the payment behavior of the second round? Very quickly, a second question in terms of taxes. I believe you have a couple of quarters with no taxes. How should we think about effective tax rate during the last quarter and for the year? Thank you.
Thank you, Ernesto. Let me elaborate on your question. Related the relief part of the portfolio, currently in Colombia, we have around 10% of the total portfolio with some kind of relief. 14 in total, in the total portfolio on a consolidated basis. That part of the portfolio is performing close to 90% are current. The other part was canceled, just 4% is 30-day past due loans. That behavior, we think it's a good behavior, shows that the payment capacity of the clients was affected, but still they have cash flow to serve their portfolios. Related taxes, you are right. We had lower taxes because of some tax shields and some particularities of the quarters. We expect the tax rate on a consolidated basis to be between 10% and 15%.
There are going to be some tax charges at the end of the year related to how are we going to behave. I want to refer to Thiago's question, since I was not able to answer. Definitely 2021 will be a transition year. It's going to be a better year than 2020, but it's not going to be a normal one, definitely. Cost of risk is going to move towards a mid-term normalized figure, but still is going to be above that level. We defined that our cost of risk, mid-term cost of risk, should be around 1.7, 1.9. Definitely next year will be, as I said, better, but not on that range. Related, ROEs, again, transition year. We think that ROEs should be around on the top of a single-digit figure. We will see how it's going to perform.
The performance of the portfolio is encouraging. We think that it's performing better than we expected. We need to wait and see how 2021 will develop. I want to pass to José Humberto Acosta, if he wants to add something to these topics.
No, Juan, I think the answer is complete. I have no comments.
Our next question comes from Sebastian Gallego.
Hi. Good morning, everyone. Thanks for the presentation. My question today will be devoted to Central America. We saw a mixed performance across different regions. I just want to understand in more detail some of the trends, particularly as we saw net losses in Guatemala, but a strong result in El Salvador. Also considering as well the situation of Panama, if you can provide a bit more color on the expectation on what could happen, given that the reliefs are still high, as you mentioned on the script. Maybe the second question is related to capital. You mentioned on the script that Basel III should not materially affect the capital ratios. The question here is, at the very beginning, banks in Colombia were expecting kind of a positive effect due to the implementation of Basel III. Are you no longer expecting that positive effect? Thank you.
Thank you, Sebastian. Related Central American operations, we need to divide it in the three countries in which we operate. Let me start with El Salvador. Banco agrícola is performing very well. The situation there shows that the bank, the non-performing loans are performing well, as I mentioned. Profitability of the bank, it's good. Operational ratios are fine. Remittances, which are a very important part of the Salvadorian economy, are performing well. Very well, I could say. Same thing in Guatemala, by the way. It's not something that is just related to Salvadorians, but it is more related to Central Americans in the U.S. mainly. Remittances are performing well. The operations in El Salvador are normal. Guatemala, also the economy is performing, I could say, well. We have losses because we had some provisions that I could say are extraordinary.
We are on the way of normalizing our operation in Guatemala. What I mean with normalizing, we have standards about coverage ratios, how to provision. We are on that way. We are doing our job on Guatemala. I am positive around the performance of the economy and positive on the performance of Banco Agromercantil. It will still need some additional adjustments that will affect the performance of Banco Agromercantil in the near future. I could qualify the performance of both banks good. The case of Panama, it's a little bit different. We are, as Sebastian mentioned and we mentioned, still under some moratorium that don't allow us to see what is the real asset quality. We will remain on that situation for a little while. We need to wait and see how the economy is going to perform.
Still, we don't have much information. We are working with our clients. We are providing them solutions related to their particular cases. In the case of Panama, I could say that we should wait for the moratorium to end to see what is the real asset quality in Panama. Related to capital, we had an extraordinary shareholders meeting at the end of July. We moved reserves to be a permanent reserve. What that movement did was to improve our capital ratios. Still, there are some You mentioned Basel III implementation. Basel III implementation will start in Colombia beginning next year. We will see some positive effects on the capital ratios. The density of the assets is going to change for the better, lower, so that will improve our ratios. We need to start accounting some additional buffers, like the operational risk and systemic.
All in all, we will still have some benefits on capital ratios from the implementation of Basel III.
As a reminder, please limit your question to one question per participant due to restricted time. Our next question comes from Jason Mollin.
Yes. Hi. Thanks for the opportunity. My question is a follow-up on the payments being made by the first wave of rescheduled loans. I think you showed almost 88% in the presentation, and you were saying almost 90%. Can you give us that evolution? What was that in the second quarter? I think it was not nearly as good. I wanted to understand better that evolution. As a follow-up on capital, but more so on the movement in shareholders' equity. In the quarter, we saw a boost above the net income generated, and I believe a portion also came from translating the dollar capital or equity you have in Central America.
If you can give us some specifics on what is the dollar equity that you have and how did that impact it, and if there was any other impact, because it seems like it was a larger impact than just that FX movement? Thank you.
Thank you, Jason. Let me take your first question, and I will pass the second one to José Humberto. During the second quarter, around 44% of our portfolio was under some kind of relief. During that period, indicators actually improved. The NPLs were down, but that was because of that particular situation, that a lot of our portfolio was under some kind of relief. The second quarter is not a quarter from which we can have good information about the performance. Even though we keep doing provisions, coverage ratios improved. Third quarter, now that the first wave of reliefs ended, as we mentioned, and now we enter in a different phase, which is more structural phase of restructuring the client's loans. It's much clearer how the loan portfolio is performing. As I mentioned before, it's performing well, let me say that.
In general, the economy is affected, and of course, some payment capacity of some clients is affected, but it's performing well. The second quarter was, for me, a quarter in which we didn't get much information of the actual quality. Third quarter give us more information, and we are confident that what we are seeing is good. Let me say that economic activity in Colombia, September, October, has been good. We see much more activity around sectors that were very affected, and that is encouraging. Still, as we mentioned in our presentation, still there are a lot of uncertainty around if these trends are going to consolidate or not. What we are seeing at this moment, with the information that we have, is that the loan portfolios are performing according what we were expecting or even a little bit better.
Let me pass your question around capital to José Humberto.
Thank you, Juan Carlos. Yes, the equity is improving, and it's increasing because of combination of three factors. The first one, as you mentioned, Mollin, today we have more than 30% of our equity is in U.S. dollar. You have to take in consideration that the valuation of the currency of 30%, so that this is the first reason why the equity is increasing. The second one is the net income cumulative. We are having 500 billion pesos in net income till September, so it is reflected also on the equity side. The third reason is, we announced the complete acquisition of Banco Agromercantil that was 40% of the operation. That also is reflecting on the equity.
Going back to the point of solvency ratio, the impact of the moving some reserves from occasional to legal reserves, the real impact was, in terms of solvency ratio, at around 200 basis points.
Our next question comes from Carlos Gomez.
Yes. Hi, good morning. It's also clarification of what you said before. You were very clear guidance in terms of taxes for this year, but I don't think you gave guidance for 2021. Also, you referred to more provisions in the fourth quarter. The profitability of the group was already reduced to 4% ROE this quarter. Should we expect a loss in the last quarter of the year? Again, related to this and given your capital position, do you have any expectations for dividends for next year? Thank you.
Thank you, Carlos. Let me take your second and third comments. I will pass the first one to José Humberto. Fourth quarter, what we expect during the fourth quarter. What we are seeing is that we're moving to a more normalized situation. What means normalized? Normalized meaning that the loan portfolio performance is going to reflect the current situation of the economy. We were, as I mentioned before, on the release during the second quarter. Third quarter, it's more accurate in terms of reflecting the situation of the economy. Fourth quarter is going to show us how is that situation. We are saying that we could have more provisions during the fourth quarter because we don't know yet how the clients are going to perform in terms of payments, those that are still under some kind of relief.
On the other hand, what I mentioned that the performance of the economy, how the economic activity is behaving, some sectors are showing better result than expected. On the other hand, unemployment rate, it's recovering a bit, we need to see if that trend continues. To be more direct and to conclude, we could have higher provisions during the fourth quarter, still we don't know. We think that the economy is performing a little bit better than we were expecting. In terms of losses, we think that on the performance of the bank in terms of fee income, what we are doing on expenses could or should work on a positive way, our expectations are that actions or that things that we are doing could make us to have a quarter in which we don't have losses. Still, we don't know.
I want to be clear that, still, there is some uncertainty, and we are not now very clear on how the last quarter is going to perform. Related dividends, it will depend. It will depend on how the year ends in terms of net income. We are now on the third quarter, on the positive side. It is related to your question about the performance of the fourth quarter. If you ask me, I am positive about the performance of the fourth quarter, but still, we have a lot of uncertainty. Let me pass your other question to José Humberto.
Thank you, Juan. Carlos, yes, what happened till September, as we mentioned on these credits, because of the net losses that we registered in the second quarter, we have this tax recovery. Remember that we had the liability management exercise exchanging sub-debt, and also they gave us a tax shield. That's the reason why we have right now a tax recovery. What is going to happen at the end of the year is maybe some operations will have net income, and in those operations, the statutory tax will be in between 35%-36%. That's the reason why our guidance could be the tax at the end of the year will be on the range of 10%-15%, as Juan mentioned. Next year, we are going to see the performance of the different operations that we are having.
Remember that our statutory tax in Colombia will be 36%, Salvador, 35%, the other two operations in Guatemala and Panama, 25%. If you blend or combine, maybe our taxation, our tax rate, effective tax rate, next year, will be on the range of 25% area. Again, it depends of the performance of the cost of risk, depends of the recovery of the economies in which we operate, depends of the loan growth that we are going to see maybe in the second half of the year.
Our next question comes from Alonso Garcia.
Good morning, everyone. Thank you for taking my question. I just wanted to touch base on the OpEx side. This year, the past two quarters, OpEx has been a positive surprise. I just want to understand how much of this positive surprise is explained by the much lower activity this year, the pandemic, and how much of these cost savings are here to stay. I just want to understand, after 0% to 2% OpEx growth this year, how much should we expect next year and the coming years, if we should expect OpEx growth aligned with inflation going forward? Also, how do you think of your efficiency ratio in a midterm perspective? Thank you.
Thank you, Alonso. Let me give you some color, then I pass your question to José Humberto for comments. Related how structural are the measures that we are taking related OpEx. There are some measures that are more related to what is happening during this year and related to the peculiar situation that we are living. Let me elaborate a little bit. Bonuses, for example, is one topic that it's peculiar of this year. That is going to go on a more normalized way in the future. Other than that, we are working on structural measures that are going to stay. Our target on efficiency, definitely, it's keep improving efficiency. That has two main drivers, of course. How are we going to control OpEx? For next year, we expect some growth, real growth.
Still, we think that the program that we are undertaking to cost control are going to have positive effects into 2020. We will have some growth, in 2021, since we need to maintain investments and keep providing the bank with tools to compete in the market. We will expect income to recover. Efficiency ratio should improve next year, and we should be going back to continuous improving of efficiency ratio in the future. With this, I want to pass your question to José Humberto for additional comments.
Thank you, Carlos. Alonso, if you double-check the numbers of each operation individually, all of them are growing negative in terms of expenses. We have been doing our job, as Juan mentioned. Just to give you a couple of examples. In terms of headcount, we always almost maintain the same number of headcount that a year ago. We have been doing some efforts in different geographies. In terms of branches, this year, we have been reducing 17 branches in some operations in Panama, in Colombia, and also in El Salvador. At the end of the day, we are creating the foundation of the new way to do business, new way to distribute our products. Again, you have to take into consideration that there were an inflation in Colombia of effects, I'm sorry, effect depreciation of the currency of 11%. If you discount that-.
The negative growth could be at around minus 4% in expenses. We are doing our job, and as Juan mentioned, we are expecting to maintain this OpEx under control in the next coming two years.
Our next question comes from Yuri Fernandes.
Hi, Juan Carlos, José Humberto. Thank you for the opportunity of asking questions. I have a very quick one on margins. I heard on your presentation you saying outlook is challenging because of the mix, the rate pressure, the PAD program, you mentioned NIMs around 5% by year-end. I just want to check what this 5% means. If we look to the total margins now, this quarter, I think was 4.9%, so is this an improvement like of 10 basis points? When you say around 5%, you are talking about the margins on loans that was 5.5%, so an additional 50 basis points pressure for the first two. I just want to understand a little bit more the dynamic of the margins for the 4 Q, and as a result, for 2021. If I may, a second one on provisions.
We see Bancolombia doing more provisions than peers overall. We know that all the banks in Colombia, at least the way we look here, they are under IFRS 9, and they should provision as expected losses. Still, we see a very big difference between you and some of your peers. I know it's hard to talk about peers, but what is happening here? You think Bancolombia had a worse underwriting, it's a different mix, or maybe peers are having different assumptions on the expected losses model. How do you address this big discrepancy of you building a lot of allowances on the loans and some peers not doing as much as you are? Thank you.
Thank you, Yuri, for your question. Let me take your second one, and I will pass your first one related NIMs to José Humberto. As you said, it's difficult to talk about peers, but we can talk about ourselves. What we are doing is we are assessing the credit risk on a position that we want to be on the conservative side. As you mentioned, we are working on expecting losses situation, but there are some parts of that provisioning that is how you tackle the situation. Let me give you some more details. When you incorporate in your models what is the expected performance of the economy, it's very different when you expect at some official forecast mention, a GDP decline of 6% during 2020, or you expect a 8% decline, and that's going to affect your provisions.
It depends on what inputs the banks are using, even though we operate in similar conditions. Related, your question, is our underwriting process worse than the others? I don't think so. Numbers show that, because you see how the other indicators behave, and there is no big difference how the NPLs, how the credits moving from a 30-day past due to 90-day past due behave. There are not big difference among the different banks. At the end, it's how you incorporate your view of the future, and if you incorporate it faster or you are waiting and see, and you will do it later. That's my view on that question, Yuri. Let me pass your question related provisions to José Humberto .
Thank you. Yuri, yes, you are right. There are a combination of factors that had a big pressure of the NIM.
Just to give you an idea what's going to happen in the 4 Q. What is happening right now in this Q, the 3 Q, is there is an increase in Stage 2 credits because now people are increasing the level of past due from 30 days to 90 days. In the next quarter, we are going to see an increase of the 90-day past due. When you get the 90-day past due, you have to increase the provisioning, but also you don't have to accrue interest. That will impact the NII for the fourth quarter, basically because of the Stage 3 incremental. The other reason is we did our job reducing our funding cost. You see that the numbers is dropping 69 basis points the whole year.
We did our job, marginally, we are not seeing more space to reduce the funding cost on the same trend. That's the reason why we are expecting a 5.1%-5.2% area NIM at the end of the year, and we are expecting to maintain the 5% for the whole year 2021. José, Yuri was asking about NIMs. Could you give some information about what we are expecting? We mentioned during the remarks that we are expecting by year-end a NIM around 5%. We reported 4.9%. We still need to see how interest rates will evolve. Please, José.
Okay.
Give Yuri some more information about the NIM.
Yeah, I'm sorry about that. Yes. We were talking about the lending NIM of the loan portfolio. If you combine the 5.5 of the lending portfolio NIM with the securities portfolio NIM, that it is 1.7, that's the reason why it is right now at a level of 4.9%. For us, it's very complex to realize how will be, or which number will be at the end of the year, the combined NIM. We are just referring to the NIM of the lending portfolio that currently is 5.5, and at the end of the year, that will be 5.2. The whole NIM will depend on the performance of the security portfolio.
Our last question comes from Andres Soto.
Good morning. Thank you for the presentation. My question is related to digital strategy. When we look at your numbers, it's really impressive what you have achieved in terms of digital adoption and increase in clients via digital. My question is related to what is your target in terms of digital strategy, meaning, are you looking at this either as a way to increase your market share in consumer loans? Are you looking at this as a way to improve your efficiency, therefore you should have a reduction in expenses, shutting down branches? Is just this a defensive strategy? This connected to your medium-term guidance, where you say that you don't expect returning to double-digit ROE till 2023, which implies that based on the cost of risk assumption, that basically implies that your margin is not going to expand that much.
I don't see that much of a mixed benefit in that. You are expecting. Expenses will need to continue increasing in nominal terms year after year. I don't see that being reflected as efficiency. I'm kind of puzzled how we can incorporate the results of digital in terms of profitability.
Thank you, Andres, for your question. The digital strategy is going to serve as a defense strategy, but that's not the main goal of the digital strategy. As we mentioned, we have been developing all the actions and all we need to really become a digital player in the markets in which we operate. We have been doing this now for more than three years. During this health crisis, that strategy is getting a boost. Adoption, it has been very high from our clients. We were, I could say, prepared for that approach. Numbers, we feel very comfortable and happy with the numbers that we are seeing, how our clients are adopting new possibilities to deal with the bank and to access our products.
As we mentioned, not just the financial products, but how we move in being more involved in the everyday life of our customers. In terms of numbers, we mentioned we are getting in a pace of 300,000 new customers a month. Digital sales are improving. Even though people could go to branches, still the digital sales keep growing. Market share, definitely, we are getting market share. I can say that. We will keep getting market share because we have the capabilities to capture this new way in which clients want to relate with the banks. We have the tools, and we have now the possibility. It's more how the clients adopt what we are offering them, more than if we are prepared to offer them the different alternatives on the digital side.
We definitely are getting market share, and we see it during this period. There is a lot of comments about fintechs and how fintechs are playing a good role. They are very good players. Since we have been working on this for a while now-Able to present an offer to the consumers that equals the alternatives that something could offer to the market. It's strategy to grow, and we are seeing that is paying results. Definitely, it's going to have another effect, which is an effect on expenses. As you know, an expense that is important for banks is related to the branch network. In a way that we are moving towards a digital offer and digital relationship with our customers, branches are going to evolve, and that cost could change.
As a consequence of the strategy, we will see a better performance of our costs. At the end, it's a midterm strategy that is designed to gain market share, to be a very active player, and to compete in the market that is going to have an effect on OpEx and will work as a defense for new participants in the market that we will find a player that is very well-positioned to compete with the new alternatives that are going to be in the market.
Thank you. There are no further questions. I'll turn the call over back to Juan Carlos Mora, CEO, for closing remarks.
I want to thank all of you for your participation in this call and your interest in the Bancolombia results. I think that the fourth quarter is going to show us how is the real situation of the economy and related to that, to our clients. I am positive that what we are seeing is good. We will see that next year when we are together to present the full year results conference call, in which we will expect you to be with us. Thank you very much again for your interest, and have a good day.
This concludes today's conference. Thank you for participating. You may now disconnect.