Good morning, ladies and gentlemen, and welcome to Bancolombia's presentation of its proposed corporate evolution. My name is Shomali, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. During the question-and-answer 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 SEC 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. In connection with the proposed corporate evolution transaction, Bancolombia S.A. will file important documents with the SEC, including a registration statement on Form F-4 and amendments thereto. Investors are urged to carefully read all such documents as they become available because they will contain important information. Investors may obtain copies of the documents when available, free of charge on the SEC's website, as well as from Bancolombia's investor relations section. With us today is Mr.
Juan Carlos Mora, Chief Executive Officer, Mr. Mauricio Botero Wolff, Chief Strategy and Financial Officer, Mr. Rodrigo Prieto, Chief Risk Officer, Mrs. Catalina Tobón, Investor Relations and Capital Markets Director, and Mrs. Laura Clavijo, Chief Economist. I will now turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer. Mr. Juan Carlos, you may begin.
Good morning and welcome to this conference call in which we will discuss the rationale and expected results of our recently announced corporate evolution project, which is subject to regulatory and shareholders' approvals. To begin, please go to slide number two. As we are constantly searching for alternatives to create value, we are very satisfied to announce that we have decided to propose to our shareholders the evolution of our corporate structure by creating a new holding company, Grupo Cibest, that will serve as a parent for all Bancolombia's lines of business, catalyzing tangible benefits to our clients and all other stakeholders. Our main goal is to optimize our business, strengthen capital allocation, and enhance our value distribution capacity, for example, through share repurchase programs not currently allowed for banks in Colombia.
The proposed transformation per se will not entail changes to our operations, sources of income, profit generation capacity, debt structure, divestment of assets, nor the withdrawal from any of our current lines of business. Therefore, there will not be material changes for Bancolombia's clients, personnel, or suppliers resulting from the execution of the transaction, as all the entities will continue operating as usual and will maintain its financial strength and the capacity to fulfill all its obligations. Moreover, the location of current local and international publicly traded debt will remain unchanged. However, operating under this new holding company will grant us flexibility for our corporate development, as it allows us to better adapt to the evolving and highly competitive banking landscape and to pursue further organic growth on our financial and non-financial businesses, eliminating the disparity with some regional banking leaders that already have theirs.
Bancolombia's shareholder base, as well as the underlying value of their shares, will remain the same as all shareholders will receive shares of the new holding company through an exchange process at a one-to-one conversion ratio. Additionally, an application will be made to list the holding company's common and preferred shares on the Colombian Stock Exchange and its preferred shares on the New York Stock Exchange through American Depositary Receipts. In addition to discussions with regulators, we have also held discussions throughout the process with key third parties, including credit rating agencies, and look forward to engaging in conversation with MSCI, among others. Please go to slide three. Historically, Bancolombia has operated as a bank and a holding company at the same time.
In other words, the entity owning the banking license in Colombia has been also the parent company of all the operating entities, by virtue of which a series of financial and non-financial businesses coexist, combining banking operations in different regions with innovative edge technology-driven businesses as Nequi, Wenia, and Wompi. However, this structural condition embeds financial inefficiencies, regulatory complexities, and operational constraints due to the stringent regulatory framework applicable to banking entities, which we seek to solve with the execution of the proposed corporate evolution as the currently known Grupo Bancolombia, meaning the current consolidated operation will evolve into a newly created holding company and a consolidated Colombian operation. Please go to slide four for a simplified explanation of the main steps of the transaction. The proposed corporate reorganization implies a series of legal transactions involving the transfers of assets and merger of certain entities to reach the final structure.
As a first step, the new holding company called Grupo Cibest will be created, which, by virtue of a series of legal corporate transactions, which we will explain, will be the beneficiary of 100% of the equity of the current Grupo Bancolombia, that is, the consolidated operation. Therefore, all assets will remain under the same perimeter, which will now be held by Grupo Cibest. As a second step, Bancolombia Panamá will transfer Banco Agrícola and BAM to a new company established in Colombia, which will eventually merge into Bancolombia with Bancolombia as a surviving entity. In parallel, Banca de Inversión will transfer to Bancolombia a selected portfolio of assets, including Renting Colombia, Negocios Digitales, Nequi, and other assets. And finally, as the third step, Bancolombia will transfer Banistmo, Banco Agrícola, BAM, Nequi, Renting Colombia, Wenia, Wompi, and other selected investments to Grupo Cibest as the holding company.
Bancolombia's shareholders, except Grupo Cibest, will receive one share of Grupo Cibest per share held in Bancolombia, and their shares in Bancolombia will be canceled. Please go to slide five. Grupo Cibest will be incorporated in Colombia and will continue to operate under SEC and BVC guidelines, ensuring transparency to our investors. Also, banking entities will continue to be supervised by their respective regulators, and the location of publicly traded debt will remain unchanged. From a corporate governance perspective, Grupo Cibest will have a board of directors with independent members, with its respective support committees, while all C-suite directors will maintain a corporate role. The principal operation continues to be Colombia, accounting for approximately 70% of the group's total loans, deposits, and net income, effectively complemented with our regional operations in Central America, which serves as a valuable source of diversification in hard currency.
Moreover, we expect all our international and local ratings to be confirmed as per the discussions held with the rating agencies. Also, I want to highlight that Grupo Cibest has been designed as a light and necessary-only structure and will be a cost-neutral operation as per the reallocation of resources from current budgets. On top of that, the steps required to complete the corporate evolution have been structured in such a way that it's tax-neutral under the Colombian tax regime. Please go to slide number six.
The proposed corporate evolution will catalyze tangible benefits in the near and long term to all stakeholders stemming from, first, a more effective capital allocation strategy that will optimize Core Equity Tier 1 and the value distribution capacity by virtue of the separation of Central America and the non-financial businesses, as it will isolate the regulated entity in Colombia from goodwill deductions, external risk, and reduce its exposure to FX volatility, as we will further elaborate. Also, under the new structure, we will be able to implement share buyback programs not permitted to banking entities in Colombia. Second, it will confer more flexibility for corporate development, as in the case of acquisitions, capitalizations, and divestments, and facilitate the execution of each subsidiary's strategy according to its own risk and opportunities.
Third, it grants flexibility and agility for digital and non-financial businesses and other transformation endeavors as it separates them from the banking license and its inherent restrictions. Fourth, it enhances Bancolombia's equity story as it reveals the inherited value of the group's different lines of business and simplifies messaging to stakeholders. Moreover, there will be a new set of performance metrics to evaluate Grupo Cibest and its investments. Fifth, the evolution will bring along a holding company perspective while it preserves its solid corporate governance and sound SOX-compliant internal control system and regulatory supervision in each country. And finally, it aligns the structure with large publicly traded banking entities in Latin America. Please go to slide seven. The most significant source of capital allocation efficiency arises from the separation of goodwill from the regulated banking entity in Colombia, as it deducted from Tier 1 and total solvency ratios calculations.
As per second quarter, goodwill and other intangible assets accounted for roughly 24% of gross solvency, second largest stake representing almost half of the Colombian standalone banking entities' weighted assets. Thus, by virtue of the deconsolidation, COP 9.6 trillion will no longer be deducted from solvency ratio calculations, generating a capital relief that gives rise to capital allocation efficiency. Moreover, the separation of the Central American operation from the Colombian banking entity will reduce its risk-weighted asset density and its solvency ratio sensitivity to foreign exchange, such that for each COP 500 increase, the FX sensitivity falls from a current 47 basis points today of Core Equity Tier 1 drop to a 5 basis points drop, providing desired stability to our capital ratios. Please go to slide number eight.
Despite the transfer of the subsidiaries to the new holding company, deconsolidated Colombian operations will preserve healthy solvency ratios, as the removal of risk-weighted assets and the goodwill relief offsets most of the deconsolidation of capital. Arguably, these will become better quality ratios reflecting tangible assets with a minor FX impact. As a way of illustration, if the proposed transaction had been executed during the second quarter, the Tier 1 will have an almost 630 basis points drop, explained by less core equity coupled with a 266 basis points increase due to the risk-weighted asset reduction and almost 300 basis points goodwill deduction relief. All in all, the pro forma Tier 1 will have been 10.3%, providing a 433 basis points cushion to the minimum regulatory requirements. Likewise, total solvency will have been 12.5%, in line with the actual figure for second quarter.
Furthermore, we maintain our year-end Core Equity Tier 1 target of 11% for the consolidated Colombian operation. Please turn to slide nine. By virtue of its design under the proposed corporate evolution, the operating entities will remain unchanged and preserve its solvency ratio, while the corporate governance models will provide alignment between the operating entities and the holding company, thus maintaining the dividend flow to the holding. Based on our calculations, using the current available information, we expect the holding on an individual basis to post a double leverage ratio close to 105%, a healthy level for bank holding companies within the credit rating agency's comfortability scope. Consistently, the tangible common equity ratio will be around 92%. From a leverage capacity perspective, the double leverage plowback will reach 56%, whereas the dividend coverage will be around 44%.
All in all, what these estimations reflect is that the new holding company will have sufficient leverage capacity, which, coupled with a secure dividend flow and access to liquidity sources, will provide an enhanced value distribution capacity to unlock value to all our shareholders without incurring further operational non-financial risks. Please go to slide 10. Finally, we want to highlight that under the holding company structure, we will be able to execute share buybacks programs as a new way to distribute value to our shareholders, as these are not enabled for banking entities under Colombian regulations. Within this mechanism, as optimal as it is EPS accretive, allows us to distribute proportionate value to all our shareholders and, most important, offers the market a strong signal of our confidence in the value of our shares.
As a part of the corporate evolution proposal to shareholders and subject to their approval, we will also propose an up to $300 million buyback program directed to all our shareholders to be fully executed on a medium term according to the execution of our financial plan and capital needs. Please turn to slide 11. The execution process is currently on its first stage, with the completion of key milestones such as the incorporation of the holding company, the submission of the regulatory approval to supervisory authorities in the countries in which we operate, and the rating assessment discussions with credit rating agencies. Going forward, company efforts will be focused on discussing with the SEC and the other regulators, listing of the new shares, marketing efforts, discussions with MSCI, and preparation for a extraordinary shareholders' meeting, amongst others.
According to our timeline, we expect the process to be completed in the first half of 2025, assuming all the necessary approvals, including approvals from shareholders, are granted on time. With this, we conclude our remarks. Now, we 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 touch-tone 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 before pressing the numbers. Once again, if you have a question, please press star, then one on your touch-tone phone. Please wait while we poll for questions. Our first question comes from the line of Nicolás Uribe with Bank of America. Please proceed with your question.
Thanks very much, Juan Carlos and team, for the chance to ask questions. I have two questions. The first one is if you're going to need consent from bondholders for these changes in corporate structure because the way I see it is you have said the issuer of the bonds outstanding is going to remain Bancolombia. But given that Bancolombia is no longer going to consolidate the Central American subsidiaries, bondholders would lose access to about 30% of the total assets. So first question is, are you going to need consent from bondholders of Bancolombia for these changes in corporate structure? And then second question, something you kind of alluded to, assuming this is all done, you're going to be able to raise funding through different vehicles, not just Bancolombia, but also, for example, the new holding company.
Is there going to be a preference to raise senior debt and separately subordinated debt through either the existing Bancolombia or the new holding company? That's my second question. Thanks.
Thank you, Nicholas. Let me give a couple of general commentaries on your questions, and then I am going to pass the first one to Claudia Echavarría , who is our general counsel and secretary of the bank, and the second one to Mauricio Botero Wolff on the answers. We are clear that we don't need a consent from the bondholders since the debt that is publicly traded, it's going to remain in the entities that the debt is today, so we don't think that we don't need a consent, or we are pretty sure that we don't need it. Regarding the second question, we are going to have much more flexibility, and we will have access to different vehicles in order to touch the market, so we will have more flexibility. Now, with that, let me pass the first question to Claudia.
Thank you, Juan. Thank you, Nicholas. As Juan Carlos mentioned, we are confident we do not need consent from bondholders since we are not transferring, leasing, or selling substantially all of our properties or assets to another entity. As you mentioned, the assets that are being transferred account for approximately 30% of the bank's current assets, so this would not qualify for an event that would require consent under the indenture.
Okay. And.
Thank you.
And.
Nicholas.
Go ahead, Mauricio.
Sure. About the second question, the new structure gives us a lot of flexibility. So we will be able to issue subordinated bonds, AT1s, and even senior bonds, either in Grupo Cibest, in Bancolombia, Banistmo, or any other Central American operation. We do not intend to issue any bonds in the short term. That's not our plan because, as you can see, according to our double leverage ratio, we are fine in terms of leverage, but the flexibility of the new structure allows us to tap the market with any instrument at any point.
Thanks very much for all of that. If I can do just a quick follow-up, given that you just said you don't plan to issue debt in the short term, last week you announced you're going to be calling the 2029 Tier 2s in December. So then I assume that capital, which I think is about 80 basis points, is not going to be replaced at this time. You're not planning to issue tier two or any kind of debt in the short term?
Nicholas, in the short term, we feel comfortable with the levels of capital that we have. So no. And Mauricio, if you want to elaborate a little bit more, please go ahead.
Yes. What we have been talking about, Nicholas, is a guidance of 1.5% of Tier 2. That's the level that we feel comfortable with. And as you can see, if you add up the 34s and the 29s, we would be well above that level. So calling the bonds and without replacing those bonds, we're still going to be fine in Tier 2 capital levels.
Thanks very much, guys.
Thank you.
Thank you, Nicholas.
Thank you. Our next question comes from the line of Carlos Gómez with HSBC. Please proceed with your question.
Hello, good afternoon, and thank you for the detailed explanation and presentation. My question refers to Beyond Bancolombia to the Grupo Sura and Grupo Argos. I understand that this is a transaction which is optimizing the capital for the bank and for the financial company, but is Bancolombia playing any role in the possible reconfiguration of the rest of the company groups? I'm talking about Argos, Sura. Would you participate in that in any way, or do you see yourselves as completely separate, and they remain as shareholders of yours, and that is that? Thank you.
Thank you, Carlos. As you said, this is completely separated from what is happening around Grupo Sura or Grupo Argos. This corporate structure evolution of Bancolombia intends to capture value inside Grupo Cibest with what we describe as using capital better to have more flexibility on our corporate structure, to have the structure also allow us that the market understands better where we have the investments, the business. So those are the main goals. Also, the possibility to have share buybacks is also that is important for us. So it's related on how we make our corporate structure more efficient and allow us to move forward in our strategic plan, not related with other companies.
Very clear. Thank you so much.
Thank you, Carlos.
Thank you. Our next question comes from the line of Andrés Soto with Santander. Please proceed with your question. Andrés, are you on the line?
Yes. Sorry about that. Good morning to all. Thank you for the presentation, and congratulations on the transaction. I just have a question about dividend policy. I understand the benefit of this structure regarding the potential for stock buybacks, but I would like to understand what are going to be the metric that you are going to look at when you define how much the holding company is going to be able to distribute as dividends?
Thank you, Andrés. We declared in the past that our dividend policy, it's connected with the leverage and the level of capital that we need to operate and to develop our strategy, and that will continue in the same way, so what we were doing in the past, we will continue doing that in terms of that we have our leverage or the capital ratios targets, and once we set those targets, we will distribute what remains or is above that level. What is important for us is that now we have an additional instrument that we didn't have in the past, or we don't have right now, and we will have it once this transaction is approved and is finished: the stock buybacks, so dividend policy will continue.
But what is important to notice is that due to the structure that we are proposing, it's more efficient in terms of how we allocate capital. That allows us probably to have more resources available to distribute. I don't know, Mauricio, if you want to complement something about what Andrés is asking.
Yes, Juan Carlos. I would just like to highlight that the next dividend distribution is going to be under Bancolombia's responsibility still because the General Shareholders' Assembly, according to the timeline that we just described, is going to take place before this evolution is approved. So Bancolombia will propose and declare the dividend payment for 2025, and we are going to see Grupo Cibest playing a role in 2026. But the metrics are exactly what Juan Carlos just mentioned, according to Tier 1 end-of-the-year ratios.
Understood. Looking at your leverage ratios, you mentioned double leverage at 103% and tangible core equity versus total assets at 9%. What level do you think is possible for Bancolombia, for Grupo, the holding company over the medium term?
Andrés, let me give you just a view, and Mauricio could complement. But a double leverage for around 115-120 is something that is compatible with maintaining our ratings with the rating agencies. We think that we'll feel comfortable with those levels. So we have room to increase our leverage due to the number that we will have once this transaction is completed. I don't know, Mauricio, if you have any comments.
No, Juan. That's very clear.
Thank you both, and congratulations on the transaction.
Thank you very much, Andrés.
Thank you. As a reminder, if anyone has any questions, you may press star one on your telephone keypad to join the queue. And we have no further questions at this time. I'll now turn the call back over to management for closing remarks.
Thank you very much, everyone, for participating in this conference call. We will dedicate our corporate efforts on developing all the necessary steps to complete our transaction, as we mentioned, hopefully at the middle of 2025. We will keep you informed of any developments that it's worth it for you to know. Meanwhile, we expect to have you on our third quarter conference call result in a couple of weeks. Thank you, everybody, and have a good afternoon.
This concludes today's conference. Thank you for participating. You may now disconnect.