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 and services by our targeted clients, changes in business strategy, and various other factors that we describe in our files filed with SEC. With us today, Mr. Juan Carlos Mora, Chief Executive Officer, Mr. Jaime Velásquez, Chief Strategy and Finance Officer, Mr. José Humberto Acosta, Chief Financial Officer, Mr. Rodrigo Prieto, Chief Risk Officer, Mr. Jorge Humberto Hernández, Chief Accounting Officer, Mr. Alejandro Mejía, Investor Relations Manager, 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 the conference call for Bancolombia's fourth quarter results. I would like to start this call presenting the net income for 2018. During the year, we posted a COP 2.6 trillion net profit, a 1.7% increase versus the result of 2017. We consider this a very positive result given the challenging economic environment in Colombia. During the fourth quarter, we generated COP 1 trillion in net income, a result that we consider very positive since we could maintain the NIM, keep expenses under control, and most importantly, to reach a turning point in the credit cycle. I would like to elaborate about the performance of the bank. In the last months of the year, we saw a change in the trends of some metrics of the business.
We experienced a faster growth of the loan portfolio, which suggests that in 2019, the trend will continue and will reach high single digits. This evolution is particular to Colombia, where we see an improving demand from corporates. Another element that I want to highlight is the change in the credit cycle and the reduction in provision charges. The quarterly new past due loans formation was close to zero and shows clear signals of a better situation among customers and better origination over the last six months. For 2019, we believe that the trend will continue and the stock of past due loans will decline. Regarding provisions, we saw the peak in the third quarter 2018, and the trend suggests that the cost of credit for 2019 will be around 2%. Higher provisions during the quarter and the year lead to an increase in coverage.
It went from 164% in 2017 to 180% in 2018. Also, we continue our cost control program, and as a result, the expenses grew only 3.6%. We aim to continue improving the efficiency levels and the cost-to-income ratio will go down to around 48% in 2019 as the top line will grow faster. Finally, I would like to highlight also some relevant achievements during 2018. A 10% growth in our base personal customers and SME, which represent 1 million new clients. 25% growth in the number of transactions performed by the bank in Colombia. The fastest growth occurred in internet and mobile channels. We reached 9.5 million debit cards in Colombia, 11% growth. These cards performed 43% of the debit card purchases in the country and have become the first line of fee revenue.
The consolidation of these trends observed in the fourth quarter 2018, such as credit growth, quality improvement, and efficiency gains, lead us to believe that Bancolombia will have positive numbers in 2019. That will lead to a double-digit growth in net income. Having said this, I want to ask José Humberto Acosta to elaborate on the main topics that are driving our business. José.
Thank you, Juan Carlos. For all of you following the presentation, let me remind you that at the end you will find additional information that complements the bank's numbers and that might be useful. I want to start this presentation making a reference to the very good performance of the core business during the last quarter. In particular, two facts explain this. One is the net interest income after provision charges, which increases 17% due to a positive change in the performance of the loan portfolio. The other factor is the 10% growth of net fees due to a greater number of transactions. Three one-offs impacted net income of the quarter. First, we conducted the annual appraisal of the investment that we do not consolidate. One of them is TUYA, which presented a significant increase of value of COP 174 billion due to the recovery of impairments done in 2017.
Second, the agreement to sell SUAM, a stake of SUAM, announced in December, generate a pre-tax profit of COP 63 billion, or a net profit of at around $15 million, [one-off]. The third one is the recovery of income taxes from previous periods, which was the result of clarification about certain Bancolombia tax positions. The impact for the year was COP 149 billion, and for the quarter was COP 98 billion. Now, I want to elaborate about the results of the bank. On the slide number three, regarding loan growth, the portfolio started to show signals of recovery as commercial loans grew at a faster pace than in the previous quarters in the Colombia operation.
The Central America operations grew at around 2% when expressed in dollars. As a result, the annual growth reached 8%. The fastest pace was observed in Colombia, with 7% growth, and in El Salvador with 6%.
Two factors impacted the loan portfolio growth in the fourth quarter. First, the seasonal effect during the last months of the year that present a more dynamic economic environment. As a result, corporate credit demand, which had been slow until December, picked up and the portfolio expanded. In the consumer front, we maintained the pace of expansion of the portfolio, which reached 18.5% of the loan book, in line with our strategy to change the mix and improve margins. Second, the 9% depreciation of the pesos versus the dollar contributing also to the faster growth of the portfolio when expressed in pesos. After considering these signals of recovery, we are estimating a loan growth at around 6% in 2019, with Colombia growing at around 9%. On the slide four, we see the evolution of margins. Core margins remained stable during the quarter.
Nevertheless, we had a positive impact in NII of around COP 120 billion due to the reduction of the stock of loans classified in Stage Three. This contributed to a 20 basis points pick up the lending NIM. This fact had the opposite effect in provision charges, which are COP 120 billion higher in the quarter, and as a result, it is neutral to the bottom line of the bank. Isolated the impact, two factors explain the stability in NIM, despite interest rates cuts in the first half of the last year. One is the change in mix over the last year, with consumer loan contributing to a higher asset yield. As you can see, consumer loans represent, again, 18% of the portfolio today, versus 16% two years ago. The second factor is the reduction in funding costs through retail deposits and the reduction of cost of time deposits.
We don't forecast big variations in margins during the year, and we are expecting a NIM at around 5.8% for 2019. The funding strategy for some geographies will be to replace long-term debt with clients deposits and promote checking and savings accounts. In the slide five, we present the provision charges. The three large corporate cases, the red bar in the chart, represented COP 130 billion in charges during the quarter, or 30 basis points of the reported cost of risk. As of December, they presented the following status. Electricaribe, we went from 84% coverage in September to 91% in December. In Ruta del Sol, we came from 26% in September to 34% in December. In Consorcio Express, the massive transportation company in Bogotá, we came from 54% coverage in September to 57% in December.
The blue bar, as we just mentioned, also includes COP 120 billion in charge associated with that reduction of the stock of clients classified in Stage Three, which increases the net interest income and provisions. Additionally, as we do every fourth quarter, we updated the parameters and historical data to run the provisioning models. These adjustments cost a one-off charge of COP 140 billion, which are not directly related to any specific case. Taking out of these three components, the normalized provision cost was COP 600 billion, which indicated a clear improvement in the credit conditions of our portfolio. The next slide, number six, shows the quality of the loan portfolio during the quarter. Past-due loans ratio declined for both commercial and consumer loans for 30 and 90 days.
The 90-days past-due loan ratio went down to 3.08%, which shows an improvement of the loan portfolio across all segments, particularly in Colombia. Regarding the other countries, we do not see a major impact in the trends. Similarly, coverage is increasing for 30 and 90 days. The most important metric regarding the credit cycle is the amount of new past-due loans generated during the quarter. The COP 4 billion indicates a strong recovery in the overall credit conditions of the portfolio, especially in the corporate and SME segments.
We expect to maintain the recovery path in 2019, and we forecast the cost of credit to be at around 2%. This metric includes additional charges that we might require to increase the coverage of some corporate cases mentioned before. Slide number seven shows the evolution of expenses and efficiency. The key point in 2018 was the annual growth in expenses of 3.6%.
This is the result of our cost control initiatives and the process optimization. We forecast to maintain this path in 2019, and as a result, cost to income will be at around 48%. As we can see in the slide number eight, the bank continues its strategy to increase capillarity and migrate to low-cost channels. The distribution of products and transaction costs are two of the largest costs of Bancolombia. Therefore, it is key to increase the operational leverage. The total number of transactions increased by 12% in 2018. Nevertheless, when we analyze each channel, we see a structural trend. The fast growth in banking agents and mobile, and the reduction in physical branches. This is the shift that we are looking for. The outcome of our strategy is a reduction of the average cost per transaction and the capacity to grow faster than the market.
The next slide, number nine, shows the outcome of our business strategy in the consumer and SME segments during 2018. We grew 10% of our base of personal clients, which equates to more than 1 million new clients. Several products also grew in line with our commercial strategy. Credit and debit cards in particular, are growing at high single digits, and the market share of billing and purchases in Colombia hit record highs, 25% in credit cards and 43% in debit cards. Finally, we wish to highlight our strategy to grow the consumer loan portfolio, which contributes to the loan portfolio mix that we want to have. Our expectations are based on the fact that the trends defining the future of the banking operation are positive. Growth will remain in line with our forecast for all geographies, reaching 7% for the year.
Regarding margins, we will continue optimizing the funding structure and promoting retail loans in the portfolio mix in order to maintain the NIMs at a level of 5.8%. Fees should maintain a positive trend given the growing number of transactions in Colombia and the launching of new products in the other geographies. We forecast 10% fee growth. In 2019, we see a normalization of the cycle. The stock of past-due loans is not growing as we forecast a cost of risk of 2%, which includes provision charges for our large corporate clients. Similarly, we do not forecast large PTL runoffs, and as a result, the 90-day past-due loan ratio should be at around 2.7% at the end of the year.
We will keep our cost control initiatives in order to have an annual growth of OpEx at around 3.5% and reach a cost to income at a level of 48% at the end of the year. With this combination, we forecast a return on equity of 12.5%. After elaborating on these key topics, we want to open the line for questions. Thank you.
Thank you. We will now begin the question-and-answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touchtone phone. We have a question from Jason Mollin from Scotiabank. Please go ahead.
Thank you for the opportunity to ask a question. Talking about this 12.5% ROE, let's call it soft guidance for 2019, how should we think about that versus I'm imagining that's a recurring run rate because we're not going to have special case provisions or you didn't mention any kind of one-off issues in that number. Where would you say the ROE was in 2018 kind of normalizing in a comparable basis? An important part, I guess, of that 12.5% ROE would be what is your outlook for taxes given the recent increase in the corporate tax rate for financial for banks in Colombia? Thank you very much.
Okay. Thank you, Jason. Regarding taxes, we have not seen an incremental in tax. The statutory tax for 2019 will be 37%, and the last tax reform implies that the tax will be this year, 37%, next year, 35%, then 2021, 34%, and then 2022, 30%. Based on that consideration of the statutory tax, we are contemplated to get a level of return on equity of at around 15% in 2020, assuming the normalization of cost of risk will be on the area of 1.8%. Again, this year we are expecting 2%, but next year, cost of risk, that will be the shift transition, the return on equity will be at a level of 15%.
Our next question is from Juliana Maya, from Davivienda Corredores. Please go ahead.
Good morning. Thank you for the presentation. I have a question regarding the SUAM transactions. Once the transaction is done and you receive the resources, what are you planning to do with this capital?
Okay. Yes, we announced the sale of a stake in SUAM in December.
SURA Asset Management.
SURA Asset Management. We announced a stake of 3.5% that we were shareholders, and that represent for us a net income for approximately COP 45 billion, which is not material in terms of the results of the bank.
Our next question is from Yuri Fernandes from JP Morgan. Please go ahead.
Thank you, gentlemen, for the opportunity of making questions. I have a question on your cost of risk, the 2% number. I understood that this includes one-off provisions, let's say the corporate cases. Does this number include reversals of those provisions? How do you plan to treat the payment of Ruta del Sol that you receive in January? Should that be like a reversal of provisions? Should you book that as NII? Also, if you can give some color, if you expect to receive the missing 50% of that loan, just provide some color on that exposure. Thank you.
Thank you, Yuri. Just to put it on nominal terms, our expectation of provisions in 2019 will be COP 3.5 trillion in provisions. That is contemplating increased provision in certain cases, like for example, in mass transportation system, we will get a level at around 75%. The year-end was 57% coverage. We are contemplating that, and it is including the 2% cost of risk. Also remember that in the case of Electricaribe, at the end of the year, our level of provision was 93%. Also we are contemplating just a marginal increase in provisioning. Again, assuming that we have to increase provisions in those clients, that's our expectation, the COP 3.5 trillion at the end of the year.
Yuri, let me elaborate a little bit on your question. We are expecting a cost of credit of around 2%, as you mentioned, that's taking into consideration the additional provisioning that we need to do on those corporate customers. We don't include the reversal of any of those provisions. It's not included there. Related to your question about Ruta del Sol, with this particular case, we receive a payment, as you mentioned. It's already included on the outstanding debt. We are in conversations, and there are also some legal procedures around this case that we think will lead to additional payments in the future. Meanwhile, we have a coverage of 34% in that case, and we think that it's enough due to the situation of this particular client at this point.
Okay. Thank you, gentlemen.
Our next question is from Thiago Batista from Itaú. Please go ahead.
Hi, everyone. Thank you for taking my question. I would like to ask about loan growth. You mentioned during the call that you expect high single-digit growth for 2019. Can you give us a sense of the growth you are expecting for each of your segments? Thank you.
Okay, Thiago. Thank you. Yes. We are expecting on the upper side of the loan growth, the consumer loans, that would be on the area of 11%-12%. In the middle of the range will be the mortgage business, especially in Colombia, the loan growth will be at around 10%. On the lower part will be commercial, which includes corporations and SMEs, the loan growth will be 8%-9%. We have to highlight that this trend will be particular different in commercial loans because the commercial loan grew last year was weak, was below 6%. That's the key driver of loan growth this year, the commercial loans.
Very clear. Thank you.
Our next question is from Sebastian Gallego from Credicorp Capital. Please go ahead.
Hi, good morning. Thanks for the presentation. I have two questions. The first one, you didn't say much during the call about Panama. Can you elaborate on the results of Panama and what you're expecting going forward? The second question is related to capital, and particularly to Basel III. Can you provide any more color on any progress regarding Basel III and what you expect going forward on timings regarding Basel III? Thank you.
Thank you, Sebastian. Yes, regarding the Banistmo operation, to put some context, remember that the GDP growth for the country has been dropping, and the number at the end was on the low 3% of GDP, and that impacted our business in that operation. The loan growth was close to zero, and we are expecting for this year to gain some traction and to begin to grow in between 5%-6%. What happened with Banistmo is they have been doing a big effort in efficiency, and they are right now at the area of the 52% efficiency level. We expect that Banistmo, in 2019, will help and provide to the bank in a consolidated basis with loan growth, with lower level of expenses, and in fee income growth as well, because we are replicating the same products in Panama. That's the situation with Banistmo.
Sebastian, let me summarize what José Humberto said. We are happy with the trend. We have some challenges coming from the macro of the country, which is not bad at all, but it is slowing down a little bit. Efficiency of Banistmo is around 50%, which is very good for us. The ROE is in the low double digits. Still, we have a way to go, but we are happy with the trend again. We have challenges related to loan growth in 2019 and also fee growth. We are happy with the trend in Panama.
Regarding your second question, Sebastian, Basel III, we made calculations assuming that change of risk-weighted, and just to give you a precise number, our density, because of the change of risk-weighted asset, will come from 76% to 65%. If you do the math, that implies that beginning next year, under Basel III, probably our Tier One will increase in between 100 basis points and 150 basis points.
Very clear. Thank you so much.
You are welcome, Sebastian.
Our next question is from Ernesto Gabilondo from Bank of America Merrill Lynch. Please go ahead.
Thank you. Hi, good morning, everyone, and thanks for the opportunity. Sorry, I entered late to the call. Can you provide again your guidance for the year? Then two questions. The first one is in terms of expenses. How much room do you see to maintain low single-digit growth in this line? Can you provide more details on your digital channel strategy to maintain those levels? Then the final question is a follow-up in terms of Basel III. What will be the timeline for this and if you're expecting lower risk-weighted assets while implementing Basel III? Thank you.
Okay, Ernesto. Four questions. The first answer is Basel III. That will be implemented on January the 1st. That will be implemented during four years, increasing the buffers, but fully implemented the Tier One on January the 1st. The implementation, the result will be a higher level of Tier One because of the change of the risk-weighted. Regarding your third question, the guidance, again, loan growth at around 7%. NIM, that would be at the area of 5.8%. Fee income growth, that would be at a level of 10%. Cost of risk, which is relevant for your models, could be at around 2%. The level of past due for 90 days, that would be at a level of 2.7%.
Regarding your second question, expenses, I would say that this is one of our flagship, the way we are controlling the expenses. We expect to be on the area of inflation. This year, again, in 2019, we are expecting 3.5%. This is supported basically because of the cost control initiatives. Regarding your question, the digital channel. In the digital channel, we are doing very interesting things. There are many clients that are using digital channels. We are in Colombia, for example. Out of the 10 million clients that we have, 4 million is using digital channels. The app, the Internet, it's more than 70% of the transactions on a daily basis. We are moving the clients to use those channels. Also, this is interesting because the things that we are doing in Colombia, we are replicating in our other geographies.
You will expect the same trend in our operations in Banistmo, in Guatemala, and in Salvador.
Thank you very much, José Humberto. Are you providing guidance in terms of net income growth?
Yes. The guidance is that will be double-digit income growth, and more specific guidance will be the return on equity could be at around 12.5% at the end of the year.
Perfect. Thank you very much.
Mm-hmm.
We have a question from Mark Lane from Lazard. Please go ahead.
Thanks for the opportunity. You shared with us new customers you've acquired in the past year. Could you just provide some granularity on how these customers were acquired, and also maybe share with us what you expect the rate of customer acquisition going forward?
Thank you, Mark, for your question. Yes, we are very happy with the result and the acquisition of new customers. As you mentioned, there were new 1 million net new customers. Around 800,000 were persons, individuals, and around 200,000 SMEs. The strategy is, basically, we are adding new functionalities on our relation with the customers. Digital is a key part of this strategy, and many of the customers can enroll and acquire products now with Bancolombia through the digital channels. That has been key. Also our digital strategy related mobile banking, we have two platforms that are growing really at a very good pace. In the case of our we have now 1.3 million customers. To just remind you, that platform, it's just mobile platform, and it's targeting low-income individuals to do basic banking. For us, it's the door to enter to the financial world.
We also have another digital platform. We call it Nequi. It's targeting young adults that starting doing their business and their transactions, and that also has been very successful. Today, we have close to 900,000 customers on that platform. Also on the traditional banking, we are also offering additional features. The other key element on acquiring customers, it's analytics. We are doing or performing an analysis that allow us to target new customers in a very precise way.
Thank you very much. Thanks.
You're welcome, Mark.
We have a question from Natalia Corfield from JP Morgan. Please go ahead.
Thank you for the question. I have two questions. The first one is related to the coverage levels that you just mentioned about Compañía Hotel del Sol and Electricaribe and mass transportation. I would like to know if this is related to Colombian GAAP or if this is IFRS. Also, connected to this, it would be good to refresh if your capitalization, the number of 13.47%, is this taking into account IFRS or is it based on Colombian GAAP? Those are my two questions.
Thank you, Natalia. All the numbers that you are seeing are under full IFRS. It is contemplated all the risk.
Of 57% for instance, the mass transportation companies. This is based on IFRS, not Colombian GAAP.
Exactly. It's IFRS, which is tougher in terms of provisioning level. The capital level that you are seeing is also under IFRS contemplated all the risk-weighted assets as well.
All right. Okay. Thank you.
Mm-hmm. My pleasure.
Our next question is from Andrés Soto from Santander. Please go ahead.
Hi. Thank you for the opportunity. My question is regarding net interest margin. If I understood correctly, you guys are expecting stable NIM for 2019. I would like to understand what is the assumption that you are making there in terms of central bank rate, and in general terms, in terms of the rates of your loans and how this plays out in a context of some credit growth acceleration that probably is going to put some pressures on the funding side. Thank you.
Thank you. We are going to translate to Juan Pablo to answer the view of the interest rates in Colombia.
Yeah. Basically, in terms of monetary policy, we're expecting for this year a very mild upward move in the reference rate of around 50 basis points, and that those movements will be more probably be happening in the second half of the year.
The reason for that is that the economy is recovering, but it's still below growing, below potential. Secondly, there are some price pressures on the economy, but they are very controlled. We expect that the inflation will be around the target range of the central bank. That lead us to think that the central bank will be moving towards more neutral stance on monetary policy, which is consistent with what I just mentioned of 50 basis points increase in the second half of the year.
Thank you, Juan Pablo. How we are going to maintain the NIM? Let's divide it in two different scenarios. In the Colombian scenario, as Juan mentioned, we are expecting a hike of 50 basis points in the second half of this year. Meanwhile, we are replacing some of the highest level of interest rate of time deposits and bonds. We are replacing part of the bonds that it's finalizing this year. That will help us to sustain the cost of funding at a level that we are projected. In the U.S. dollar world, it is the opposite. You see that the interest rates came up, we had the opportunity to expand the NIM, especially in El Salvador, and we are seeing something of that in Guatemala. If you combine both effects of a U.S. dollar and local currency, we were able to sustain that NIM.
Again, replacing part of the funds that came from bonds, going to the cheaper way to funding, checking accounts and savings accounts.
Our next question is from Carlos Rodriguez from Ultraserfinco. Please go ahead.
Good morning, gentlemen, and thank you for the conference call. Just a follow-up on Panama. I just want to know your expectations for the country and if you are worried at some point, because we have seen some deceleration in some sectors, and if you are worried of the provision occurring and the operation in that country. Thank you.
As Juan mentioned in the previous question, we are seeing a very positive trend in the Banistmo operation. We are implementing products. We are implementing new ways to do business there. We are seeing for the next coming years a long road positive. On the funding side, we have a strong customer base as well, so we don't foresee any specific concern. Obviously, all depends of the performance of the country, of the GDP, but again, we are forecasting a much better performance the next two, three years. To date, as Juan mentioned, the return on equity of the production it's double digit on the lowest, and we are expecting to reach a level of 13% in the next two, three years of return on equity.
Okay, thank you. My second question is regarding the cost of funding. What is the number that is the bottom that we can see in the mid-term? As you previously said, that you are replacing the bonds and the deposit with the checking and saving accounts. Currently we have 2.1%. Do you have any number or guidance that you could share with us?
Yes. If your question is the average cost of funding, that will be almost at the same level with ups and downs. The down is we are replacing the bonds, the ups is we are moving forward to checking accounts. The net balance is we will maintain the same cost of funding that we are having today. You can see that on the final pages of the presentation. The funding cost closing the year is 3.1%. We are expecting to be at the area of 3% - 3.2% at the end of 2019.
Great. Thank you very much.
Our next question is from Carlos Gomez from HSBC. Please go ahead. Mr. Gomez, you may initiate with your question.
Yes. Sorry, one minute. Thank you for taking the question. You mentioned that you may get an additional 100 basis points in Tier One capital, after the implementation of Basel III. We wonder how you see capital going forward. If you start to generate more, will you increase the dividend payout or would you contemplate acquisitions, and if so, where? Thank you.
Yes. The level that we are reaching next year, as you mentioned, increasing 100 basis points. In our forecast, we believe that this is enough capital for the next coming years. We are not contemplating any particular change in our dividend policy because, again, you have to consider also long road in the next coming years, and the implementation also will take four years in terms of the buffers. We have to have also a buffer for the buffers for the next coming four years.
Okay, you are ruling out any acquisitions for time being?
Sorry?
You are ruling out, you are not contemplating acquisitions for the time being?
I'm sorry, Carlos. In previous conference call, we have been sending a clear message that right now our focus is to improve international operations because you know that there is, down the road, an improvement in NIMs, in return equities. In Colombia, we have to optimize the momentum of the economy and to take advantage gaining some competition. We are not contemplating any particular acquisition.
That makes sense. Thank you very much.
Mm-hmm.
Our last question is from Jason Mollin from Scotiabank. Please go ahead.
My question has been answered. Thank you very much.
We have no further questions at this time. Thank you, ladies and gentlemen. I will now turn back the presentation to Mr. Mora, Chief Executive Officer of Bancolombia, for final remarks.
Thank you. I just want to summarize. We have very good results in 2018, on a tough environment. We are positive about the 2019. We think that the trends lead us to believe that 2018 is going to be a year in which we consolidate the strategies that we have been implementing in the last two years. The pace that we have seen in the past and during this year confirm that view. We expect that this year, as I said, is going to be very positive. Thank you again for your interest in this conference call, and we expect to see you on the next conference call for the first quarter 2018. Thank you very much. Have a good day.
This concludes today's conference. Thank you for participating. You may now disconnect.