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.