Grupo Cibest S.A.

Good morning, ladies and gentlemen, and welcome to Bancolombia's first quarter 2020 earnings conference call. My name is Anna, 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 1 on your touch-tone phone. Please note that this conference is being recorded. Please note that this conference will include forward-looking statements, including statements related to our future performance, capital position, credit-related expenses, and credit losses. All forward-looking statements, whether made in this conference call, in future filings, in press releases, or verbally, address matters that involve risk and uncertainty. Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy, and various other factors that we describe in our reports filed with the SEC. With us today, Mr. Juan Carlos Mora, Chief Executive Officer, Mr. Mauricio Rosillo, Chief Corporate Officer, Mr. Jose Humberto Acosta, Chief Financial Officer. Mr. Rodrigo Prieto, Chief Risk Officer. Mr. Jorge Humberto Hernandez, Chief Accounting Officer. Mr. Alejandro Mejia, 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 and welcome to our conference call for the first quarter of 2020. In these challenging times, we are all navigating through uncertainty for ourselves, our loved ones, and our communities. We hope you are staying healthy and safe. This is a very peculiar quarter. As the rest of the world Colombia and the countries in Central America where we operate have experienced the effects of the spread of the virus with the collateral effects of the lockdowns and the consequential reduction on business activity. As a result, our business plan for 2020 will change in a significant way. At this time, we consider that in the second quarter, we could have a better understanding of what will be the 2020 results. During the quarter, we generated a net income of P336 billion, which is 60% lower than the net income of the first quarter In this call, we want to give you an overview of Pancolombia's situation and the actions that we are taking, as well as the results of the quarter, which were impacted by the COVID-19 outcomes. First, I want to make a quick mention of the macroeconomic environment and the government's and central bank's response to the COVID-19 situation, which we can see on slide number three. As of May 4th, Colombia has close to 8,000 confirmed COVID-19 cases and 350 deaths. The Colombian government declared a state of emergency on March 17th, and a quarantine has been in place since March 23. Construction and manufacturing sectors were allowed to restart operations on April 27. Other measures to contain virus transmission have included travel bans, border closures, and suspension of classes. the rest of the countries in which Bancolombia operates have implemented similar containment actions. Colombian authorities have also announced several economic measures as part of the response to the COVID-19. On the fiscal side, the first package equivalent to 1.4% of GDP for the control of the pandemic containment, and palliative measures. The government has also said that there is a total of 4.7 of the GDP to use in case of a necessity in the situation if the situation aggravates further. On the monetary side, measures include cuts in the reference rate totaling 100 basis points. the strengthening of liquidity provision mechanisms, purchases of public and private fixed income securities by the central bank, the reduction of reserve requirements, and the establishment of additional FX hedging mechanisms. Second, we want to share with you the response from Bancolombia to face the COVID-19 situation. Slide number four gives you some insights. During the last three years, we have created the remote working tools and platforms that allow us to run the business today with no significant disruption. To give you an idea, in Colombia, close to 90% of our employees are working from home and in Panama, 60%. On the commercial front, We have enrolled more than 800,000 new customers in the last three months through Bancolombia, Alamanu, and Neki platforms. Bancolombia has played a key role helping the government distribute financial support to low-income individuals. Our platform has been used to distribute subsidies from the central and local governments to more than six Also, we have taken actions to support our customers in different fronts. For 1.8 million mortgages and personal loan customers, we have granted a grace period of three months. In the SME and corporate loans, we have opened the possibility to restructure credit and extend grace period. As of today, we have extended benefits to around 260,000 companies. In total, we have offered benefits to about 56 trillion pesos worth of loans. Additionally, we have been active granting loans to existing customers with guarantees from the Fondo Nacional de Garantías, National Assurance Fund. These guaranteed loans aim to finance working capital and protect payrolls of a small business and cover up to 90% of the outstanding balance. On slide five, we present the current studies of our channels in Colombia. A key point we want to highlight is the rapid adoption of digital channels during this period. Today, we are operating with 70% of our physical branches, while we are experiencing a big increase in the use of digital channels. In slide six, you can see the rapid adoption of digital banking. The number of digital transactions has increased during the quarter, while the number of transactions through physical channels has decreased. This is an indication of what could happen with our customer attention model in the future. Similarly, our digital platforms, Bancolombia La Mano and Neki, have increased the number of active users at a rapid pace. Just in March and April, Bancolombia La Mano added more than 700,000 new clients. That's three times the monthly average. Similarly, Neki added 500,000 new customers. On the other hand, the Bancolombia mobile app application has reached 4.5 million users. We expect these trends to continue while our customers adopt the broad offer of digital channels and products that we have developed. This is a brief description of the challenges that we face with our customers, our employees, and our operating environment. In addition to the presentation of the first quarter numbers, we want to give you a point of view regarding liquidity, capital, and provisions. As you will understand, it's too early to provide a guidance for the 2020, as things are evolving rapidly in the middle of the COVID-19 development. Now, I want to turn the presentation to Jose Humberto Acosta, who will expand on this aspect. Jose? Thank you, Juan Carlos.

I want to continue this presentation elaborating more about three key topics, liquidity position, capital position, and credit risk. On slide number eight, we present the evolution of the two key aspects of the balance sheet, liquid assets and liabilities. Liquidity is one of the aspects that we are paying special attention to across all four geographies. During the quarter, we have put a special emphasis on increasing the amount of liquid assets and investments that can be easily converted into cash or used as a collateral with the central bank for borrowing purposes. In particular, the last weeks of March and April, we have been seeing a significant inflow of money into Bancolombia. We have gotten significant inflows from money that was in the money market accounts as customer preferred liquid products. And we have experience applied to quality effect in all four geographies. This liquidity has come through checking and savings accounts across all four geographies. We must mention that the increased level of liquidity is not going to be used to accelerate long road, but to maintain a quotient during the current situation. On the liability side, we have been very active tapping lines of credit with international banks. These resources have been used to extend working capital and trade finance facilities to our customers in our international operations. Also, we have used lines of credit with the government second floor banks, which are intended to finance small and medium business with working capital and paycheck needs. the recent evolution of deposits and liabilities have permitted to reduce the funding cost. This strategy aims to have a liquid balance sheet in order to have more financial flexibility. We recognize that these are not normal levels of liquidity and deposits. They are higher than regular levels, and eventually will return to normal levels. On slide number nine, we present the current capital situation of Bancolombia and subsidiaries. We currently have a solid capital position that permits us to face stress situations. As we see, our main operations run with capital well above minimum regulatory requirements. The same applies to the consolidated ratios. We want to emphasize three aspects to consider when looking at the current capital position. Over the last years, Bancolombia has accumulated capital organically by earnings retention and asset growth below 10% on a consolidated basis. In our capital structure, 44% of shareholders' equity is in U.S. dollars, which helps us to maintain capital ratios during periods of currency depreciation. The last liability management transaction conducted in December 2019 permits us to have a stable Tier 2 for at least the next five years. The growth forecast for the next years indicates that our current capital position allows us to develop our business plan, including asset growth, provision charges, and the net income evolution. In general, the Colombian banking system is well capitalized. and the regulators have not indicated any restriction regarding dividend payments. The schedule for passive pre-implementations remains for 2021. As you know, each year we present a dividend proposal to the annual general meeting and shareholders decided what portion to pay as dividend and what portion to appropriate. This year, 2020, we are paying 36% of 2019 net income as a regular dividend and 14% as an extraordinary dividend. Last April, we paid the full amount of the extraordinary dividend and the first installment of the regular payment. On slide number 10, we present the breakdown of provisions during the quarter. I want to point your attention to the impact that we have this quarter from the provision associated to update in parameters. including the deterioration in macroeconomic parameters as expectations related to COVID-19. Regarding provision charges associated to consumer loans, we must mention two drivers for the increase. One is the 29% nominal growth of the consumer loan portfolio between March 2019 and March 2020. This growth occurred mainly in personal loans. And the second is the effect that exchange rate had on the nominal amount of provisions, which are bigger when dollar charges are converted to pesos. Additionally, we did 296 billion in provision associated to COVID-19 impact and change in parameters. Just to give you an idea, the most important parameters that deteriorated was GDP, inflation, and fiscal deficit. Finally, we did some specific provisions for corporate planners. We expect to see a deterioration of the loan portfolio in the second and ongoing quarters as the economy suffers the impact of the lockdown. We don't know yet how much passive loan formation we will have, and therefore, we have not a clear estimation of provision charges for 2020. On slide number 11, we give you a snapshot of our standalone operations. We want to highlight the growth in cash equivalent and investment in securities that we have across all four geographies. This, therefore, has been coordinated across all balance sheets of the group and aims to provide safety and flexibility in each of our four operations. We must highlight the coverage ratios of FASU loans are in between 120 and 225%, which will permit us to face potential deterioration in the coming quarters. In slide 12, we present the long road and the long breakdown. As we mentioned a few slides ago, it's key to highlight the composition of our assets as we increase the amount of cash and equivalents and investments in order to have a better liquidity profile. Loans grew 12% during the quarter, mainly due to the utilization of lines of credit in pesos by corporations and the depreciation of the pesos versus dollars. We do not expect this phase of growth will continue as the economy has slowed down. In the last weeks of the quarter, we started originating loans using the credit facilities designed by the Colombian Secondary Bank. We have originated 480 billion pesos with these lines and have focused in loans with less than two years. Second, loans to SMEs with a guarantee provided by the Fondo Nacional de Garantía. Until today, we have reserved 1.8 billion pesos in loans with this future with channels ranging from 12 to 36 months. And finally, loans to SMEs with our own resource accounting for around 1.1 trillion Colombian pesos. Finally, I want to mention a few facts about our loan portfolio. One is a diversification across several sectors of the economy and the small exposure that we have to oil and gas where we have less than 0.6% of our loans and as an example, airlines and airports where we have less than 0.5%. The second factor is the fact that the 44% of our loans have either warranties or collateral. On slide 13, we see the evolution of margins. Lending margins remain stable during the quarter, in line with the trend observed in the previous quarter of last year. On the other hand, investment margin remains low as some securities in the portfolio lost value in the last weeks of the quarter. The Columbia Center banked up the interest rate twice in the last two meetings, 50 basis points each, setting the reference rate at a level of 3.25%. We could see a pressure of margins due to these actions, but so far, cost of funding has come down as well, thanks to the faster growth in checking and savings accounts. In the following slide, number 14, we see the net interest income and the evolution of the funding cost. Please note the reduction in deposit costs during the quarter. This is the result of the biggest share of checking and savings accounts. This trend contributed to the reduction of the loan-to-deposit ratio to a level of 104%. The second component of the reduction in funding cost was the liability management conducted last December and January. We did one insurance of subordinated debt and another insurance on senior debt, which permitted to reduce the funding cost on these instruments by 140 basis points. In slide 15, we present provision charges. Complementing the explanation at the beginning of the presentation, we experienced an increase in the FASU loan ratio to 3.04% for 90-day FASU, with a coverage ratio of 188%. This coverage ratio is the result of our risk provisioning models based on expected losses. The next slide, number 16, shows the FASU loan formation. New passive loans during the quarter increase in nominal terms due to three factors. First, early impacts of the general lockdown of Colombia and Central America. Second, the depreciation of the peso versus dollar, which causes passive loans from Central America to represent more pesos. And finally, the deterioration of a specific corporate client. Slide 17 shows the evolution of expenses and efficiency. The largest impact in our OPEX is explained by the 20% depreciation of the current OPEX. Nevertheless, regarding COVID-19, we are reviewing the project pipeline in order to postpone or cancel some, and we are reviewing also all the general expenses. Now, I want to turn the presentation to Juan Carlos in order to summarize the most relevant asset. Juan Carlos.

Thank you, Jose. As a summary, I want to highlight that digital channels will play a relevant role on our strategy to be the pillar of our future developments. Long-growth will be difficult to forecast at this moment. But we will continue assessing the developments of the economies in which we operate to see how credit demand is going to evolve. Free income, which has a high correlation with economic activity, tend to be lower this year. Margins may have a compression and will be correlated to the central bank's monetary policy. Provisions will increase, but as we mentioned before, it is still difficult to predict its growth for the year. Finally, regarding expenses, we will face new challenges in this new operational environment, which will require us to be more selective with the projects that we undertake. Expenses is going to be a big focus of our activities, our strategy in order to be very, very efficient on this front. With this, 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 1 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 first before pressing the numbers. Please limit yourself to one question to be able to accommodate for other parties. Once again, if you have a question, please press star, then 1 on your touch-tone phone. And we have a question from Andres Soto from Statender. Please go ahead.

Good morning, gentlemen. I hope you and your families are doing well. Thank you for the details about the cost of risk in your presentation. I noticed that if I exclude the parameter update and the specific corporate provisions, your cost of risk will have been at 1.8%, which is what you have guided for earlier this year. So I would like to understand first, What was the GDP assumption in your model update, and if we could expect additional updates in second two or later this year due to further model adjustments? And second, regarding the specific corporate provisions, I would like to understand how many clients, what is the total exposure, and what are the current coverage for those cases? Thank you.

Thank you, Andres. Regarding your first question, We updated our parameters with the forecasted GDP of the decline of GDP of 2.7%. Further updates, I think we will come once we have more data. So your analysis is correct. We have the parameters update. And other than that, the provisions are the one you mentioned. With this, I want to pass your second question to Jose Humberto.

Yes. Thank you, Juan Carlos. Regarding the exposure of corporate clients, we are basically talking about two corporate clients here in Colombia that already passed you. That's the reason why the level of provisioning for corporate is mainly explained for these couple of corporate clients. And going back to your question of GDP, just to give you an idea, and that we change every quarter for complementing the answer of Juan Carlos. For example, for the Panamanian situation, we are assuming a GDP drop of minus 2.4%. That explains why the increase of the COVID-19 provisioning.

Our next question is from Ernesto Gabilondo from Bank of America. Please go ahead.

Hi. Good morning, Juan Carlos and Jose Humberto. Thanks for taking questions. My first question is on loan growth. We know that the peso-denominated portfolio came at double-digit growth. So can you elaborate what was behind that? Was it mainly explained from corporates and SMEs withdrawing credit lines? An individual is requesting for more credit during the grace period. How should we think about loan growth in the next quarter? Then my second question is on provision charges and cost of risk. As you mentioned in your presentation, you have already created an impairment of 296 billion Colombian pesos due to expected losses from COVID-19. However, when do you expect the peak of provisions and how should we think about the cost of risk in the next quarter? And then finally, my last question is on your capital ratio. Your common equity tier one ratio stood at 9.1%. Well, I believe that with battle three, you could be around 10.5%. However, considering that Bancolombia is a semi-tank, don't you think that you will be complying just in the limit? Thank you.

Thank you, Ernesto, for your questions. I will take the first one regarding the loan growth, and I will pass the second and third questions to Jose Humberto. as you could imagine, once the pandemic was clear that was going to affect the economy and countries started to talk about lockdowns and the effects on the economy, corporate clients starting to ask for money. So March was a month in which we have a big demand of corporates, mainly corporates, asking for money to provide, for them to have enough liquidity to pass this period. So the demand in March, as I mentioned, was very big, and that is the cause of the growth of the commercial loans on our portfolio. So the economy was growing well in Colombia during the first two months, and we have demand, but in March, that demand was caused for the pandemic. So that created the loan growth to grow, the commercial loans to grow around 12% year on year. So basically it was looking for liquidity. With this, I want to pass your questions to Jose Humberto, and if he wants to complement this answer, please go ahead, Jose.

Thank you, Juan. Yes, just very clear, complementing the first question is, in terms of U.S. dollars, the low growth was close to 1%, and in terms of local currency was, as Juan mentioned, 10%. And if the first wave of the first quarter was because of the corporate clients, on the next coming three quarters, maybe that will be impacted basically because of consumer loans and because of SMEs, not because of corporates. Going back to your second question, yes, as we are modeling the COVID provisions under the model of expected losses, probably in the second quarter, you will see a materialization of the new numbers of GDP new numbers on unemployment level, new numbers of a fiscal deficit. So probably we will touch the highest point maybe on the second quarter once we have a valid data to adjust the expected losses model. And because on the second quarter you'll realize how you are impacted the second half of the year. This is our perception. Regarding the capital ratio of the 9.1 that you mentioned, yes. If it were on the Basel III, that number will jump 150 basis points. That's correct. But I want you to highlight two factors. This year, we are not expecting to have a long road of the original that we planned of 10%. So that would be a factor that support or maintain the level of solving situation under control. And the second factor is the fact that the 44% of our equity So that will give us some comfort in terms of FX variations. So based on those calculations, based on the long portfolio will be stable, we don't foresee any particular concern regarding the levels of G1 and G2 ratio.

Our next question is from Gabriel Nobrega from Citibank. Please go ahead.

Hi, everyone. Good morning, and thank you for the opportunity to ask questions. I actually have two questions as a follow-up. The first one, regarding these two corporate cases which went delinquent this quarter, could you just maybe share with us what is your exposure there and what's your coverage levels as well? And as for my second follow-up, it's actually on capital. I understand what you just said, maintaining these... similar levels, but I wanted to ask about your payout ratio and what you're expecting for dividends being that you weren't going to grow, but at the same time, you could have a higher risk from higher RWA as well. Thank you.

Thank you, Gabriel, for your questions. Let me pass them to Jose Humberto.

Yes, Gabriel. Most relevant case that we are having today is Bioenergy. It's a subsidiary of Ecopetrol that we are working with them. This is one of the most relevant. And we have another specific case regarding energy industry in Panama. Those were the most relevant cases that we are having today. Regarding your second question. We don't foresee, we are not sure about what will happen with the dividend payout ratio for next year, because this is a clear message that we're happening in Colombia. Our net income is dropping 60% compared with the first quarter of last year. So all depends of what we design for the second half, what will be our guidance in terms of long-growth and in terms of cost of risk, that that deviation will be important. we don't have a clear position about the dividend payout for the next coming years or even for the next coming year. And in terms of the risk-weighted assets, just to give an idea, again, the density will change. The composition is not changing a lot in terms of commercial and consumer loans. So we believe that if Basel III will take place on January the 1st, our density will drop more than from 77, 76 to at around 65% releasing a kind of capital for sub-incubations.

Our next question is from Julio Nalcique from Davidian de Corredores. Please go ahead.

Hi, everyone. I have three questions. So the first one is, related to the impact, like if you can give us more impact on what's happening on the equity method. The second one is about what is the expectation that you all have in the percentage of the total commission that are exposed mainly to the situation. And the third one is that if you can give us a little bit more color about the losses model which are the parameters that you have, the GDP, inflation rate, and exchange rate. Thank you.

Julian, in the second question, you refer to the fees or could you repeat me your second question, please?

Yeah, yeah, it's about the fees. Like what are the, in the total commission or the total fees, what are the, like the products that are more explosive, because as we all know, some of them are no longer charged.

Okay. Thank you, Julian. Let me take that question, and I will pass the other to José Humberto. What we are seeing is a huge increase in the use of our digital channels. Our digital platforms, Bancolombia La Mano, Nike, The use of our app, my mobile app, it's increasing a lot. That's good. We, as I mentioned, we expect that the fee growth is going to be impacted. But on the other hand, since we are acquiring customers at a very, very fast pace, that is going to help on fee income. So in general, what we are doing is we are supporting our customers with giving them grace periods on loans, but we are not waiving the fees in general. We are waiving some fees on withdrawals, We are waiving some fees on some specific transactions, but the gross amount or the amount of fees still we are charging them. That could be changing in the future, but we will try to maintain as much as possible the fee charges that we are charging to our customers. So the growth, we still expect the growth on the year, but will be lower than the one we forecasted for this year. With this, I pass to Jose Humberto for answering your two questions.

Thank you, Juan. Yes, regarding your question of the equity method, we have three impacts. in the equity method. The first one is the joint venture that we have with Exito, the credit card Tuya, because the same reason of COVID-19, they have to adjust the models, and as a result, they drop the level of income that we have to register. The second one, in fact, is what happened with Proteccion. Also, they reduced the level of income, so we have to adjust the numbers also on equity method. And there is a third element. We have another JD of the Fondo Inmobiliario and Viva Mall, which is malls and real estate that also, because of the situation, were affected. So those are the three main effects why the number drops. Regarding your third question, the lost models, as we mentioned at the beginning, just to highlight, we have three elements for adjusting the models for provision. Fiscal deficit, GDP, unemployment rate. And again, just to give an idea, originally for Colombia, our GDP expected was 3.2, 3.3, and we reduced to minus 0.8. And in Panama, we had, for example, a GDP originated at around 3 point something. I don't remember exactly, 3.2, 3.3 as well. And the new number for adjusting, it is minus 2.8%. Those are the most relevant data that affects the level of provisioning.

Our next question is from Carlos Rodriguez from . Please go ahead.

Good morning, everyone, and thank you, Juan Carlos and Jose Humberto, for the presentation. I have two questions. The first one is regarding asset quality, and if you could give us more detail as of the close of April and how these $56 billion credit reliefs are affecting new past due loans and provision in April compared to March. And my second question is related to Banagricola and its solvency ratio, and if it's a concern to you, the current level, and if there is any plan to increase the solvency ratio. Thank you.

Thank you, Carlos. I will take your first question, and I will pass your second one to Jose Humberto. Regarding asset quality and what we are seeing, we have been very active providing support to our customers. So we are restructuring a lot of credits, particularly to our retail customers. We proactively move to give them additional credit. So the asset quality, we are seeing that the asset quality is behaving as we were expecting. And we are receiving more payments than we were expecting. So in general, what we see is a good behavior. regarding the payments and regarding asset quality since we move fast to provide those new terms to retail customers. Also, on the commercial side, we are working with our customers, and as I mentioned, we work with two companies. 260,000 customers providing them new terms for their loans. So to summarize, the behavior we are seeing is better than the one we expected. Let me pass your second question to Jose Humberto.

Thank you, Juan. Regarding, Carlos, your second question, Banco Agricola, the situation in terms of absorbency ratio, I have to remind you that Banco Agricola is one of the better performers in our group. Just to give you an idea and to give you some comfort about the level of absorbency that we have, today we have a coverage ratio of more than 280%. that it is a buffer that we are having. It is the most profitable operation. We are not seeing a huge deterioration of the loan portfolio, so we are maintaining a very good performance. And the reason why the number drops is basically because the dividend policy, they generate 90%, 95% of the dividend, and we are accumulating that dividend in our Bancolombia Panama operation. Remember that we have in Bancolombia Panama almost $1.9 billion, and that is the result of the capital that we are or the dividends that we are receiving from our subsidiaries. So, again, we don't have any particular concern regarding capital. And the reason why it drops is basically because of the dividends.

Our next question is from Alonso Garcia from Credit Suisse. Please go ahead.

Good morning, everyone. Thank you for taking my question. My question is, again, on cost of risk and massive quality. So if we go back to 2007, you had a cost of risk of 1.8%, which is very similar to the 1.9% you reported last year. And then during 2008 and 2009, amid the subprime crisis, your cost of risk matured and deteriorated. So I just wanted to to ask if you think or why you think this crisis could be reasonably expected to be better or worse in terms of cost of risk and provisions compared to back then based on the state of the economy, but especially based on your portfolio mix and based on the current leverage in terms of households and corporates now compared to back then. And my second question would be if you could discuss how your liquidity metrics performed during the quarter. I noticed that your loans to deposit ratio actually declined during the quarter compared to 2019, which is, of course, positive. But if you could discuss the performance of other metrics, such as the liquidity coverage ratio or the net stable funding ratio, that would be great. Thank you very much.

Thank you, Alonso, for your questions. I will take the first one, and I will pass the second one to Jose Humberto. Cost of risk, that's key. I mean, and many of you have asked questions around cost of risk. You mentioned 2007 cost of risk of 1.8. We were moving towards a a normalized cost of credit of around 1.7. Our cost of risk in 2019 was 1.9%. What can we expect regarding cost of risk? It is close related to what is going to happen with economic activity, mainly in Colombia. As I mentioned, On my presentation, Colombia allowed some sectors to start working again one week ago. That's construction and manufacturing. Now we have information that a good number of companies started to work and start moving towards a normalized So that's going to be key. And I think Colombia has done a very good job on controlling this situation. And now it's allowing the economy to start moving. And on the other hand, we have been very proactive working with our customers. And the key here is to anticipate to the difficulties that the customers are going to have. Because they will have difficulties. So we move proactively working with them. So the cost of risk is going to increase, no doubt about it. How much is going to be, we still don't know. It's going to be similar to the 2008 a number or 2009, remember in our case, the effect of the 2009 crisis was different. We were not hit as hard as many other economies. So here I think the effect is going to be higher in Colombia because this crisis is different. But we think that we have all the tools to manage The situation with our customers, we are moving proactively. It's going to be an increase in cost of risk, no doubt about it. How much it's going to be, we will have a clear picture probably on the second quarter of this year when we know how much economic activity is going to be at that moment and how hard the economy is going to be hit. With this, let me pass your second question to José Humberto.

Thank you, Juan. Yes, regarding your question about liquidity, yes, just to give an idea, we double the size of the liquidity that we are having on a regular basis here in Colombia and also in the geographies. We have an internal way to measure that, which is the liquidity horizontal. A liquidity horizon means the case that you are able to support all the liabilities and to disburse all the commitments. And usually we manage that number between 45 to 60, 70 days. Today we have more than 100 days of liquidity horizon. So this is the first way to understand that we have right now. double the size of the liquidity. But again, as we mentioned in the script, we have not contemplated that extra liquidity as a general purpose for loan portfolio, because we know that these inflows of liquidity, they will go back again, maybe to the assets under management or to the fiduciary. So, but today, in local currency, more than comfortable, as well as in U.S. dollars. Also, in order to increase our level of liquidity in U.S. dollar, we went to the market and we raised money through the international banks. So that gives us one of the pillars during these days, which is to maintain a high level of liquidity.

And as a reminder, if you would please limit yourself to one question to be able to accommodate all parties on the line. Our next question is from Jason Mullen from Scotiabank. Please go ahead. Jason, your line is now open. Our next question is from Natalia Casas from , please go ahead.

Hi, thank you for the call. Well, according to your presentation, around 40% of increasing the provision expenses was caused by COVID-19, which means that The remaining 60% increase was caused by the normal operation of the bank. According to my numbers, this brings to an arrow around 11%, which is not very good to me and to the history of the bank. So I would like to understand what's going on in Central America. what happened there, which are those corporate clients that played this impact in their P&L, and if you expect further provisions from these operations without thinking about COVID and the current crisis. Thank you.

Thank you, Natalia, for your question. your question to Jose Humberto. Jose? Okay, Jose Humberto is having some issues with the call. Let me answer your question. Provisions, we have, as you mentioned, several issues around provision. We have the effect of COVID-19 and the update of parameters that for the quarter that's around 300 billion pesos on provisions. Then we have some provisions related to our retail portfolio. As you know, we increased our portfolio of consumer loans last year. And the portfolio was performing well until February, the expectations that we and the we were following, we were performing according to our expectations. Then, March, we got the heat of the COVID-19, and some customers that we didn't have enough time to work with them and restructure their credits were impacted and were past due. Specifically, Panama was hit by that. Other than that, we have some effects on corporate clients. We mentioned Bioenergy, which is a petro-company. Then in Panama, we have some other corporate customers that we have to provision. So those are the effects for the quarter. What we could expect for those clients We will need to have additional provisions on them. The coverage ratio of many of them are close to 50, 60%. So we are, we have been provisioning them. So we will need additional provisions. So we will have the effect of the COVID-19. which we had some in the first quarter, then we will see what is the effect in the future. And we still will have some effects from those corporate clients, mainly in Central America, Panama mainly at this moment. But we have provisions that cover them. As I mentioned, cost of risk is going to increase And we are taking into account in the cost of risk not just the effects of COVID-19, but also the effects of additional provisions on those corporate customers.

Our next question is from Yuri Fernandez from JP Morgan. Please go ahead.

Thank you, Germaine. Thank you, Juan Carlos, Rosalberto. I have two questions. The first one is regarding the capital, the 44% capital in U.S.

dollars Rosalberto mentioned. I remember this number being around 20% in the past, even in 2019. So my question is if you move, you know, your long, let's say long exposure to dollars this quarter, And also to have any kind of sensitivity, if the peso depreciate, how much we could see on a benefit for your capital. Because I think like about 30% of your assets, they are more or less in foreign currencies, right? So now I think you have a long dollar position. And my second question is regarding the renegotiated loans, the 41% of your loans in Colombia. I would like to know if you have this number for Central America. So basically how Central America renegotiated loans are tracking. And also, if you have any kind of estimates of potential NPL for those renegotiated loans. Because I know it's not totally apples to apples, but in other countries, usually the renegotiated book runs with five times more delinquents than the average book. So just trying to get any color on how much losses can we get. Because, again, 41% of renegotiated loans, I totally get that's the right thing to do. But still, it's a high number, right? Thank you very much. Thank you, Yuri. Let me pass your questions to José Humberto. Let's see if he reconnected to the call.

Yes, I'm here, Juan. Thank you very much. Yes, Yuri. Your first question, there are two reasons why the number went up in U.S. dollars from 20%, as you mentioned, to 44%. The first one is when we decreed dividends this year that was 50% of the net income, all of these dividends were paid in pesos. So the number in peso drops, and the number in U.S. dollars right now have more quotient. And the second reason is because the net income of the last year of the international operation were positive, that also helped us to increase the level of equity in our subsidiary in Banco Colombia Panama. So because of these two reasons, now the weight of the equity in U.S. dollars is heavier than we had a year ago. Regarding your sensitivity, we made some calculations, Judy, and for every 100 cases of devaluation, you will be affected the solvency ratio around four to five basis points. That's the math. And again, remember that we have 37% of our assets is in U.S. dollars, so we have the protection, a kind of protection on the equity side. Regarding your second question, the status of the negotiator renegotiation in Central America is not at the same volumes as in Colombia. Juan mentioned that we are doing here a very good job, more than 40% of the loan portfolio within grace period. In agricola, we are doing less than that. And also in Banco Agri, in Banismo, in Panama, also we are doing less than that. Of course, we are reacting as a first wave with individuals through mortgage and consumer as a second wave with SMEs and corporates. But relatively, the size of the volumes there are lower than you are seeing in Colombia. And regarding what happened with the deterioration with these grace period loans, remember that under IFRS 3, I'm sorry, under IFRS, you have to update No matter if you have a loan with a grace period, but if you belong to a sector with a huge deterioration, you have, the bank will have to do a provision level. So no matter if the clients are right now with grace period, we will have to adjust every quarter based on market conditions, new provisions.

Our next question is from from Credit Corp Capital. Please go ahead.

Hi, good morning, everyone, and thanks for the presentation. I have three questions. The first one, can you provide some color about the treatment on risk-weighted assets coming from guaranteed loans, particularly the ones that have been announced in Colombia? Second question is regarding Central America. You have been focusing quite a lot in Colombia but can you provide more details on your business strategy for the Central American operation under the current environment? And third question, going back to loan growth, you mentioned that you expect an acceleration of loan growth, but how does this contrast with the fact that the government is pushing for the initiatives with guaranteed loans? Thank you.

Thank you, Sebastian. Let me take your third question, and it's related to the first question, and then I will pass your other question to José Humberto. Loan growth. We, as I mentioned, we have a big demand for credit lines at the end of the quarter. That was due to the situation that emerged. What we are seeing is that the people are more cautious around asking for loans. So we will maintain a prudent approach of awarding credit. So that's So that's what we are expecting, that the loan growth is not going to be very strong during this year. We will work a lot with clients, restructuring. We will give them some additional credit, but the demand is not going to be very high, we think, because of the slowdown on economic activity. Regarding the loans that the government is giving some guarantees, those loans are a small portion of our portfolio, really. The total line that the government is offering at this moment is $12 trillion pesos. That was close to the total we disbursed in March. So it's not a huge amount that is going to take a big effect. And on the total loans in Colombia, those figures are not going to move significantly, the numbers. In our case, we have disbursed around 250 billion pesos of those lines with government guarantees. That number is going to increase, which is good, and it's good for the economy, and it's good for everybody. The significance of those numbers in the Bancolombia side is not very significant. It's not going to change dramatically the numbers. We complement that with loans that we provide with funds from government second-floor banks, which provide us with liquidity. those loans will continue growing but are not going to be significant. With this, I pass your other questions to José Humberto.

Thank you, Juan. Regarding your first question, the treatment of the risk-weighted assets, I have to highlight two parts. First, in the case, for example, of mortgage, our loan-to-value is below 40%. Today it's currently 39%. So you can assume that the consumer capital is low, and under Basel III will be lower than or around 25%, and today it counts 50%. That gives you an idea what happened. And the second number is 44% of our total loan portfolio, we have a warranty. That also implies that we have lower consumer or risk-weighted assets, and under Basel III, If the corporate has a rating or if SME has a warranty, we will reduce our consumer capital from 100% to maybe 80% or 60%. So the idea is for 2021, because of Basel III, we will release capital because the density will change. Regarding your second question, what we are doing in Central America, and I have to remind you our original plans. Our original plans were focus on consumer in those geographies replicated the same experience that we are having in colombia but because with kobe our main challenge right now is support our clients give them facilities maybe at the end of the day we would maintain the same composition that we are having in each geography so for example in the case of banco agricola it's almost 45% consumer, 45% corporate at the end of the year would maybe deal with the same area, and the same would happen in the other operations. So recap is supporting the clients, offering them grace period, supporting them for working capital facilities, and we don't expect a major shift in the composition of the loan portfolio.

Thank you, ladies and gentlemen. I will now turn back the presentation to Mr. Mora, Chief Executive Officer of Banco Lombre for final remarks.

Thank you everybody for attending this call. I want to wake up and highlight a couple of ideas. First, we took all the needed measures to protect our employees and our customers, and we are operating normally at this moment with close to 90% of our employees working from home in Colombia and with high figures also in the other countries. So we are operating normally, protecting our employees and our customers in the four countries in which we have operations. Second, we took all the needed measures to have enough liquidity to affront this situation, and we have been very successful on having that liquidity. Our deposits grew. We have funds from correspondent banks, so our liquidity position is comfortable and And we have very good liquid assets at this moment. Third, regarding solvency, we are taking all the needed measures to work to have the solvency to go through this period. And we feel comfortable that the quality of our capital and the size of our capital is more than enough. to support the situation that we are facing. And fourth, we are working very close with our customers to support them, to understand their needs and to anticipate the situations that they are facing so we can work together to have the smallest effect possible on past due loans and delinquency. We will have effects. They are going to be significant. But I think with the measures that we are taking, we can handle them. With this, I sincerely hope that the situation in the world will improve soon. Take care for yourselves and stay healthy. See you on our conference for the second quarter 2020. Thank you.

This concludes today's conference. Thank you for participating. You may now disconnect.