Grupo Cibest S.A.

Good morning, ladies and gentlemen, and welcome to Bancolombia's third quarter 2020 earnings conference call. My name is Vanessa, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. During the question-and-answer session, if you have a question, please press star then 1 on your touchtone 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 rather made in this conference call, in future filings, in press releases, or verbally, address matters that involve risk and uncertainty. Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general economic and business conditions, changes in currency, exchange rates, and interest rates, introduction of competing products by other companies, lack of acceptance to new products or services by our targeted clients, changes in business strategy, and various other factors that we describe in our reports filed with SEC. With us today, Mr. Juan Carlos Mora, Chief Executive Officer, Mr. Mauricio Rocio, Chief Corporate Officer, Mr. Jose Humberto Acosta, Chief Financial Officer, Mr. Rodrigo Prieto, Chief Risk Officer, Mr. George Humberto Hernandez, Chief Account Officer, Mr. Carlos Rod, Ambassador Relations Director, and Mr. Juan Pablo Espinoza, Chief Economist. I will now turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer of Banco Lomita. Mr. Juan Carlos, you may begin.

Good morning, everybody, and welcome to our conference call for the third quarter of 2020. I hope all of you and your families are safe and healthy. During the third quarter, Colombia ended the mandatory preventive isolation. The country is now facing the double challenge of containing the second peak of infections, while at the same time, gradually reopening the economy. The data have shown that September was the best month since the start of the health crisis, reflecting a better performance of agriculture and mining sectors, complemented by the reactivation of retail and construction, activities that have benefited from more freedom of movement in the main urban centers. While we are still in a very uncertain environment During the third quarter, Bancolombia performed better than the previous one. The net income for this quarter was 280 billion pesos. Before getting to the details of the results, I want to mention two key topics. First, regarding credit risk, we recorded 31% less provision charges compared to the second quarter of this year, as a reflection of a better economic activity and the increase of mobility in the main cities of the country. The cost of risk decreased during the quarter, but it still reflects weak economic outlook related with the pandemic. This provisioning level and the lack in NPL's formation results in a coverage ratio of 232% for the quarter. The second point is regarding our digital strategy for Bancolombia. Digital transformation is a continuous process and a medium to generate solutions that meet the needs of people and companies. This has a higher goal. to promote sustainable economic development to achieve wellbeing for everyone. We started this strategy three years ago, and now we're showing very positive results. The actual health crisis has made possible to see the preparation of the bank in terms of digitalization. From the moment that providing isolation measures led us to limit physical operations, we were able to redirect most of our clients' needs to digital channels. Today, we have more than 12 million digital clients. At this point, I want to turn the presentation to Juan Pablo Espinosa, who will further elaborate on the performance of the Colombian economy. Juan Pablo. Thank you, Juan Carlos.

During the past few months, the Colombian economy has rebounded from the low since in April and May, as lockdowns came to an end. Due to a gradual resumption of activities in most sectors and higher mobility within the country, GDP variation went from minus 15.7% year-on-year during the second quarter to an estimate of minus 9.7% in the third quarter. Moreover, initial data suggests that at the start of the fourth quarter, the pace of contraction has adjusted further, to around minus 7.6% year-on-year. This recent recovery trend is consistent with our full-year, probably adjusted projection of minus 8.1%. Going forward, uncertainty and risks remain significant especially due to the possibility of rising COVID-19 cases that might force authorities to impose new containment measures. Nevertheless, we think that the negative output impact on the economy of such a scenario would not be as large as we saw in the first half of this year. Other relevant risks are the second round effects of the shocks that have taken place since March. including permanent job losses, the reduction of disposable income, and increasing poverty. However, moving into 2021, we also identified several factors that will promote economic growth. Low interest rates and stimulus programs laid by the government in sectors such as infrastructure and housing will combine with a more positive global context and higher terms of trade. As a result, next year we predict that GDP will recover at a probability adjusted rate of 5.2%. Consistent with this, we anticipate a mild improvement in the labor market. We expect that urban unemployment rate will average 19.3% in 2020 and will adjust to 17.3% in 2021. Regarding inflation, given the ample negative output gap, as well as an abundant supply of food, we think that downward pressures will continue to determine the performance of CEI, leading its annual variation to close this year near to 1.5%. Inflation will only start to accelerate gradually in the second half of 2021, and by then activity will start to gain traction, and some relief measures taken during the pandemic are reversed. Hence, by the end of next year, annual CPI change will go back to the lower half of the target range. Against this backdrop, we predict a long period of low and stable interest rates. We expect that reference rate will be at its current level of 1.75%, at least until the second half of 2021. when the central bank will do some upward fine-tuning in order to keep inflation expectations unchecked. Finally, a factor that will drive the performance of the Colombian economy during the next two years will be the adjustment of the central government's deficit after its large widening during the pandemic. Our scenario suggests that the pace of fiscal consolidation will probably be more gradual than initially estimated by authorities. However, implementing actions that lead to an stabilization of public debt will be key to maintain the country's investment rate and give access to external financing. Now, I want to turn the presentation back to Juan Carlos.

Thank you, Juan Pablo. I want to continue this presentation by walking you through our digital strategy. At Bancolombia, we decided to develop a strategy focused on a holistic relationship of our clients to solve their needs with financial and non-financial solutions. We have studied the context of our clients from life cycles for individuals to production chains for companies. seeking to be relevant in their daily lives. In accordance with this analysis, we have decided to evolve our value proposition towards a business model based on ecosystems, developing a value proposition in which clients and financial and non-financial solutions are in one place. So, we are working on orchestrating the demand and supply of certain ecosystems systems such as housing and mobility through our digital channels. In this way, our more than 1.8 million SMEs and corporate clients have been able to offer their services and products to our more than 15 million clients in Colombia. Through this strategy, we will keep adding new clients, approving digital loans and capturing new data sources to enhance risk Moving to slide five, we can see some figures of this strategy. Bancolombia's QR code as a model to connect formal and informal retailers with more than 8 million digital clients through our digital channel has reached close to 450,000 merchants throughout the country in less than two years. This service allows small businesses to sell digitally and physically, receiving the money from their customer purchases directly to their savings checking Bancolombia La Mano or MECI accounts. With the transaction data of QRs, we have already pre-approved credit lines of more than 430 billion pesos to clients who have not had access to credit from the financial system before. We launched in alliance with Sura Misaliados, the platform that will be available in our digital channels and its purpose is to strengthen independent workers, who represents about 50% of the workforce in Colombia. We pursue to connect 600,000 independent workers in the country with the more than 15,000 million clients of Bancolombia to accompany them in their growth through the formalization and access to digital credit, thanks to the new data sources that the bank will have. Each independent worker will have a digital account such as NETI or Bancolombia La Mano and QR codes to receive payment for services. In the upcoming weeks, our clients will be able to find a personal finance assistant in our app that will help them to manage their day-to-day finances and bring them closer to their housing or mobility goals through financial planning. Additionally, PAN Colombia, aligned with its purpose of orchestrating supply and demand to fully serve the needs of our clients, will launch the Housing and Mobility Solutions, two marketplaces for our clients to find their next home their next vehicle with financing and rental solutions in one place. During the first nine months of the year, Bancolombia distributed more than 2.3 million products through digital channels, which represents 45% of total products sold. Sales through digital channels as of September 2020 have increased by 79%, when compared to the same period of 2019. Digital sales have maintained a steady evolution on a monthly basis despite the reactivation of the physical channels during the reopening of the economy in the third quarter. This performance indicates that the customer experience evolution has accelerated during 2020 towards the permanent adoption of digital channels by many of our clients. The balance of digital time deposits reached by September 4.5 trillion pesos coming from 363 billion in January, showing an important growth throughout the year. Digital sales continue to gain relevance towards reducing the operational expenses. In average, The distribution of the products through digital channels represent only 36% of the cost of selling it via physical channels. The digital competitive environment in Colombia is getting tougher. New players are entering the market, but we have been preparing for this during the last three years. We have a robust client base, products and services coupled with the access to a very competitive funding that give us size and cost advantage. Now, I want to turn the presentation to Jose Acosta. Jose?

Thank you, Juan Carlos. Now, turning on slide seven, I want to walk you through the evolution of the relief program in our loan book. Price relief have decreased from June to September by 30%, coming from 44% to 14% in a consolidated basis. Out of total loans under relief, corporate loans represent 46%, consumer represents 22%, mortgages 19%, and SMEs 12%. This trend shows the evolution in the first wave of reliefs across the board. In Colombia, 10% of total loans are still under relief. However, this percentage should come down to 4% in October, 3% in November, and less than 1% by December. Regarding Central America, the relief program is as follows. In Banco Agromercantil, we have 1% of the total loan book on the relief. In Banco Agrícola en El Salvador, we have 21%, which should come down to 0% by December. And finally, in Banismo, we have 45% of the total low broke under relief. This proportion may vary until December because of the moratorium low in Panama. Even though the moratorium low is until December 2020, the regulator in Panama gave an extension of the terms of the low until June 2021. On slide 8, we present the breakdown of the first wave reliefs and the PACT program in Colombia. Regarding credit reliefs in Colombia, we want to point out that the first wave of reliefs is almost done and now represents 6.9% of total loans as of September. It is important to highlight that 88% of loans after the relief ended are performing. 8% of the loans have been canceled and 4% are 30 days past due, which is a very positive indicator on the improvement in the payment capacity of our clients. Regarding PATH, remember that this program began in August and will end in December 2020, and we have to offer different alternatives of payment for our clients. It is important to highlight that those alternatives are by demand. Structural solutions of medium and long term will be granted according to the individual client condition. That program accounts for 3.1% of total loans as of September. Out of the total program, the 43% are structural solutions for corporates, 34% for consumers and mortgages, and 23% for SMEs. The solutions are basically three. grace periods, deferred payments, and tenor extension. In the slide 9, we present the breakdown of provisions during the quarter. As we did the previous quarter, we want to explain the provisions breakdown. First, provisions associated to the update of macro scenarios and COVID-19 represented 37% of the total provision expenses as of September. We want to highlight that the expectations for macro-viables deteriorated from the second quarter to the third quarter of this year in most of the geographies, reflecting the still uncertain economic environment in which the bank operates. Second, regarding provision charges associated to the consumer loans, we must mention that those correspond to a normal pace of deterioration and represents 32% of the total provisions as of September. Moving to slide 10, we give you a snapshot of the composition by stages and their coverage. Regarding the composition by stages, during the quarter, we can see that there was an important increase in stage 2. This increase was explained by three aspects. First, clients in which the relief ended did not get a structural solution and not to have the capacity to pay yet. Therefore, they became very day past due. Second, the number of clients in watch list increased. And third, the output of the risk assessment of our expert models resulted in higher risk. On the other hand, the slight increase in stage 3 was due to a higher number of clients in watch list and a higher deterioration in loans that were not part of the relief programs and that overpassed the 90-day threshold. Coverage by stages shows a strong protection of the balance sheet. Our levels of coverage are aligned with the average of the financial system. Slide 11. We present provision charges and allowances. Cost of risk for the quarter for the last 12 months was 3.4%. Cost of risk without COVID-19 effect was 2.3% for the quarter and 2.4% for the last 12 months. As a result of our provisioning models, the level of allowances has increased as a proportion of the total loan portfolio, protecting the balance sheet in an environment that is still uncertain. It is important to mention that even though the provision level was lower than the one reported in the second quarter, we expect that provision charges to increase for the fourth quarter because of the end of the previous wave reliefs, worsening of macro-variables in Central America, and the increase of structural solutions under the PATH program. The next slide shows the past year low formation and coverage. New past year lows during the quarter increased mainly due to Higher NPL formation related with the end of the release. Therefore, some clients became passive mainly in credit card, personal loans, and mortgages. Also, there was a corporate client related to biofuel production that defaulted during the quarter. This client is highly provisioned with a coverage of 84%. The coverage ratio rose to 232% explained by the provisions based in expert models. clients in watch list, and past due loans requirements. Also, bear in mind that our risk provision models are based on expected losses under IFRS 9. On slide 13, we present the capital situation of Bancolombia and subsidiaries. Total service ratio stands at a level of 14.8%, while CET1 at 11.4% for the third quarter. well above the minimum regulatory requirements. These levels leave the bank in the high range of our solvency target. This increase in the capital ratios is explained by the reclassification of existing resource in the occasional reserve to the bank's legal reserve, approved by the extraordinary shareholders meeting last July. This is a remarkable fact Having a strong capital position is a fundamental pillar to face the new future. The adoption of Basel III in Colombia is scheduled to start its implementation in January of 2021. The effect of the accounting reclassification we did anticipated most of the Basel III impact, so we are not expecting a material change in the ratios for January. but because of FedEx volatility and uncertainty regarding year-end results, ratios may vary. On slide 14, we present the liquidity position of the bank. In a consolidated basis, we are expecting high liquidity levels to maintain for this year due to low demand in the loan portfolio and low dynamics in withdrawals from saving and checking accounts. Saving and checking accounts have consolidated as the main funding vehicle with 50% share of the total funding. I want to highlight that throughout the year, we have achieved a continuous decrease in the funding cost, reducing 64 basis points in the last 12 months. In addition to the increase in saving and checking accounts, this improvement is explained by the following reasons. First, the liability management transactions we executed last year and in January this year, allowed us to exchange all bonds with high coupons for more cost and capital efficient ones. And second, the decreasing credit lines with financial institutions. On slide 15, we present a snapshot of our stand-alone operations. In general terms, the trend throughout the different geographies operated by Bancolombia is similar. Margins under pressure, fees recovering as economies started to reactivate, non- or slightly growth of the loan book, and a solid position in terms of capital and liquidity. In the same way, coverage ratios have been one of the key indicators in Colombia and in the Central American subsidiaries, sustaining a level of 232% in a consolidated base. Amid the many challenges ahead, we would like to point out the positive evolution in terms of efficiency to bring down the cost-to-income ratios consistently in the four operations, such as coordinated effort of contributing gradually to profitability ratios. On slide 16, we see the evolution of margins and net interest income. Lending margins continue under pressure during the third quarter, explained by several reasons. First, the increase in Stage 3 clients under IFRS 9 that generates fewer interest income. Second, during this year in Colombia, the cut of rates by the central bank has reached already 250 basis points. We don't expect further cuts for this year. Third, The mix between consumer and corporate loans will continue to impact the margin. The driver for growth will be in corporate loans. And finally, the loans and the reliefs and PAC program will return a lower interest rate because of the structural solutions of grace periods, deferred payments, and tenor extensions. On the other hand, it is important to note that the decrease in cost of funds has added receivings and partial offset the compression to our lending margins, which ended the quarter at a level of 5.5%. We are expecting mean at around 5% area for the year end. Slide 17 shows the evolution of expenses and efficiency. The trends in cost efficiency for the bank continue to show an encouraging outlook. During the first nine months of 2020, total operating expenses have contracted already more than 1% when compared to the same period of 2019. General expenses have remained relatively stable, growing less than 1% below inflation rates. reflecting the management actions to maintain a strong cost control. Moreover, personal expenses have significantly contributed to the improvement of operational burden, dropping more than 7%, mainly attributed to bonus plans related to employee benefits. Our cost-to-income ratio stands at a level of 49.7% for the third quarter of this year. the depreciation of the local currency had an impact on efficiency. When excluding the FX impact and cumulative figures, the reduction in operational expenses for the first three quarters of the year, we have reached more than 4%. For 2020, we are expecting to report a variation between 0% and 2% of our operating expenses. Regarding income tax, the figure shows a recovery of 11 billion pesos, mainly explained by the Colombian operation. Such amount refers to the tax impact related to fiscal concepts such as tax discounts, liability management operations, and tax yields resulting from the second quarter net losses. Slide number 18 shows the evolution of fees. Fees have been resilient during 2020, During this quarter, they grew 12% when compared to the second quarter of 2020 and decreased 2% when compared to the third quarter of last year. Lines such as debit and credit cards, bank assurance, trust, brokerage, and investment banking have contributed to the performance of fees during the year. In bank assurance, we have grown 20% for the year. We expect these products will continue leading the growth next year. Now, I want to turn the presentation to Juan Carlos for the closing remarks. Juan Carlos.

Thank you, Jose. As a summary, I would like to highlight several elements of the third quarter results. The balance sheet structure remains solid. We are expecting the loan portfolio to remain stable or could even have a single low-digit growth for the end of the year. The funding composition shows high liquidity levels, diversification and cost reduction, and solvency levels are more than enough to face this economic cycle. This year has high levels of uncertainty We think that the fourth quarter of the year will reflect more accurately the performance of our clients in terms of their payment capacity and therefore we could know what will happen in terms of risk. Bancolombia is well prepared to face the new normal. We have a stronger capital and liquidity position. A better cost structure and more diversified portfolio of products and services leveraged by a robust digital strategy with a positive evolution of digital platforms that have allowed us to gain over 4 million new clients during the year. After elaborating on these key topics, I want to open the line for questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star, then 1 on your touch-tone phone. If you wish to be moved from the queue, please press the pound sign or the cash key. If you're using a speakerphone, you may need to pick up the headset first before pressing the numbers. Again, because of constricted time, we allow one question per participant. Once again, if you have a question, please press star, then 1 on your touch-tone phone. Our first question comes from Tiago Batista. Your line's open.

Yes. Hi, guys. Good morning. I have a question about asset quality. So if you can comment, how fast do you believe that the cost of risk in Colombia will normalize it? So to be more specific, in 2021, next year, do you have any sense on the level of cost of risk and if it's possible to see let's say, kind of still high level of provisions in the first half, and then some normalization in the second half. So if you can talk a little bit, I know that is tough question, but on how you can see the dynamics of cost of risk going forward. And another one, very briefly one, and linked with this cost of risk, is how fast will be the normalization of the bank's ROE? So if you can comment what we can expect for next year, If it's high single digit, close to 10, above that. So only big numbers or big indication on how fast would be the recovery of the bank's results.

We are expecting maybe, as we mentioned on the screen, a certain level, the same level of provisions or even a little bit more this next quarter of the year. What we expect next year. Next year we are expecting the first half maybe to maintain a certain level of provisioning because of two factors. First, because of the PATH program, which means there will be more clients of restructuring that will require provisions. And the second factor that would be because of the Banismo operation in Panama, they will finish partially the relief program. So we are going to see the same effect that we are seeing here in Colombia during the second half of the year. So those are the two reasons why we believe that the first half of the year, the provisions will maintain certain level. When we are going to reach the new normal in terms of cost of risk, a new normal meaning in between 2% area, maybe in two years. And this is basically because of the effects of COVID-19. Regarding your second question, regarding return on equity, obviously because this is a high correlated with the cost of risk. We believe that the next two years, the return on equity will be single digit and we will go back to the double digit return on equity in two years. I mean, beginning in 2023.

Our next question comes from Ernesto Gabilando from BOA.

Hi, good morning, Juan Carlos, Juan Pablo, Jose Humberto, and good morning, everyone. Thanks for the opportunity. My first question is on the deferred portfolio. Can you walk us through the first and second round of the deferred loans? I believe that initially 50% of the portfolio was integrated by different loans. And as of today, it's only 14%. So can you repeat how much of this first round is current, restructured and delayed? And for the second round, how much do you expect to be restructured and delayed? And when do you expect to communicate the payment behavior of the second round? And very quickly, a second question in terms of taxes. I believe you have a couple of quarters with no taxes. So how should we think about effective tax rate during the last quarter and for the year? Thank you.

Thank you, Ernesto. Let me elaborate on your question. Related, they refer... parts of the portfolio. Currently in Colombia, we have around 10% of the total portfolio with some kind of relief. 14 in total, in a total portfolio on a consolidated basis. The total portfolio is performing, that part of the portfolio is performing close to 90% are current. So the other part was canceled. So just 4% is 30 days past due loans. So that behavior, we think is a good behavior, shows. that the payment capacity of the clients was affected, but still they have cash flow to serve their portfolios. Related taxes, you are right, we had lower taxes because of some tax shields and some particularly is of the quarter, but we expect the tax rate on a consolidated basis to be between 10 and 15%. So it's going, there are going to be some tax charges at the end of the year related to how are we going to behave. And I want to refer to Tiago's question since I was not able to answer. Definitely 2021 will be a transition year. It's going to be a better year than 2020, but it's not going to be a normal one, definitely. So, cost of risk is going to move towards a mid-term normalized figure. but still is going to be above that level. We defined that our cost of risk, mid-term loss cost of risk should be around 1.7, 1.9. And definitely next year will be, as I said, better, but not on that range. And related ROEs, the... Again, transition year, we think that ROEs should be around on the top of a single-digit figure, but we will see how it's going to perform. The performance of the portfolio is encouraging. We think that it's performing better than we expected. but we need to wait and see how the 2021 will develop. I want to pass to José Humberto Acosta if we want to add something to these topics.

No, Juan. I think the answer is complete, so I have no comments.

Our next question comes from Sebastian Gallego.

Hi, good morning, everyone. Thanks for the presentation. My question today will be devoted to Central America. We saw a mixed performance across different regions. I just want to understand in more detail some of the trends, particularly when we saw, as we saw net losses in Guatemala, but a strong result in El Salvador. Also considering as well the situation of Panama, if you can provide a bit more color on the expectation on what could happen, given that the beliefs are still high, as you mentioned on the script. And maybe the second question is related to capital. You mentioned on the script that Basel III should not materially affect the capital ratios. The question here is, At the very beginning, banks in Colombia were expecting kind of a positive effect due to the implementation of Basel III. Are you no longer expecting that positive effect? Thank you.

Thank you, Sebastian. Related Central American operations, we need to divide it in the three countries in which we operate. Let me start with El Salvador. Banco Agrícola is performing very well. The situation there shows that the bank, the non-performing loans are performing well, as I mentioned. So profitability of the bank is good. Operational ratios are fine. Remittances, which are a very, important part of the Salvadorian economy are performing well, very well, I could say. Same thing in Guatemala, by the way. So it's not something that is just related to Salvadorians, but it is more related to Central Americans in the U.S., mainly. So remittances are performing well. The operations in El Salvador are normal. Guatemala is Also, the economy is performing, I could say, well. We have losses because we have some provisions that I could say are extraordinary. normalizing our operation in Guatemala. What I mean by normalizing, we have standards about coverage ratios, how to provision, and we are on that way. So we are doing our job on Guatemala, but I am positive around the performance of the economy and positive on the performance of Banco Agro Mercantil, but it will still need some additional adjustments that will affect the performance of Banco Agromercantil in the near future. So I could qualify the performance of both banks good. The case of Panama is a little bit different. We are, as Sebastian mentioned and we mentioned, under still under some moratorium that don't allow us to see what is the real asset quality. And we will remain on that situation for a little while. So we need to wait and see how the economy is going to perform. But still, we don't have much information. We are working with our clients. providing them solutions related to their particular cases. But in the case of Panama, I could say that we should wait for the moratorium to end to see what is the real asset quality in Panama. Related capital, we had an extraordinary shareholder meeting at the end of July, we moved reserves to be a permanent reserve. So what that movement did was to improve our capital ratios, but still there are some You mentioned Basel III implementation, and Basel III implementation will start in Colombia beginning next year, and we'll still, we will see some positive effect on the capital ratios. The density of the assets is going to change for better, lower, so that it will improve our ratios. We need to start accounting some additional buffers, like the operational risk and systemic, but all in all, we will still have some benefits on capital ratios from the implementation of Basel III.

And as a reminder, please limit your question to one question per participant due to restricted time. Our next question comes from Jason Malin.

yes hi thanks for the opportunity uh my question is a follow-up on the payments um being made by the first wave of rescheduled loans i think you showed uh almost 88 percent in the uh in the presentation and you were saying almost 90 can you give us that evolution what was that in the second quarter i think it was not nearly as good so i wanted to understand better that evolution And then as a follow-up on capital, but more so on the movement and shareholders' equity in the quarter, we saw a boost above the net income generated. And I believe a portion also came from translating the dollar capital equity you have in Central America. If you can give us some specifics on what is the dollar equity equity? that you have and how did that impact it and if there was any other impact because it seems like it was a larger impact than just that FX movement. Thank you.

Thank you, Jason. Let me take your first question and I will pass the second one to José Humberto. During the second quarter, around 44% of our portfolio was under some kind of So during that period, indicators actually improved. The MPLs were down, but that was because of that particular situation that a lot of our portfolio was under some kind of relief. Second quarter is not a quarter in which we can have good information about the performance. Even though we keep doing provisions, coverage ratios improve. Third quarter, now that the first wave of reliefs ended, as we mentioned, and now we enter in a different phase, which is more structural phase of restructuring the clients or the customers, the client loans, it's much clearer how the loan portfolio is performing. And as I mentioned before, it's performing well Let me say that even though in general the economy is affected and of course some payment capacity of some clients is affected, but it's performing well. So second quarter for me was the quarter in which we didn't get much information of the actual quality. Third quarter give us more information and we are We are confident that what we have seen is good. Let me say that economic activity in Colombia, September, October has been good. We see much more activity around sectors that were very affected and that is encouraging. But still, as we mentioned, in our presentation, still there are a lot of uncertainty around if these trends are going to consolidate or not. But what we are seeing at this moment with information that we have is that the loan portfolios are performing according to what we were expecting or even a little bit better. Let me pass your question around capital to Jose Humberto.

Thank you, Juan Carlos. Yes, the equity, it is improving and it's increasing because of a combination of three factors. The first one, as you mentioned, Molly, today we have more than 30% of our equity is in U.S. dollar, and you have to take into consideration that the valuation of the currency of 20%, so this is the first reason why. the equity is increasing. The second one is the net income cumulative. We are having half billion pesos in net income till September, so it is reflected also on the equity side. And the third reason is we announced the complete acquisition of Banco Agromercantil. That was 40% of the operation. That also is reflecting on the equity. And going back to the point of solvency ratio, the impact of the... moving some reserves from occasional to legal reserves, the real impact was, in terms of solvency ratio, at around 200 basis points.

Our next question comes from Carlos Gomez.

Yes, hi, good morning. It's also clarification of what you said before. You were very clear at that time in terms of taxes for this year, but I don't think you gave guidance for 2021. Also, you referred to more provisions in the fourth quarter. I mean, the profitability of the group was already reduced to 4% already this quarter. So should we expect a loss in the last quarter of the year? And again, related to this and given your capital position, do you have any expectations for dividends for next year? Thank you.

Thank you, Carlos. Let me take your second and third comments, and I will pass the first one to José Humberto. Fourth quarter, what we expect during the fourth quarter. What we are seeing is that we are going, we're moving to a more normalized situation. What means normalized? Normalized meaning that the loan portfolio performance is going to reflect the current situation of the economy. We were, as I mentioned before, on the release during the second quarter. The third quarter is more accurate in terms of reflecting the situation of the economy. But fourth quarter is going to show us how is that situation. So we are saying that we could have more provisions during the fourth quarter because we don't know yet how the clients are going to perform in terms of payments. Those that are still under some kind of relief. But on the other hand, what I, And I mentioned that the performance of the economy, how the economic activity is behaving, some sectors are showing better results than expected. On the other hand, unemployment rate, it's recovering a bit, so we need to see if that trend continues. So to be more direct and to conclude, We could have higher provisions during the fourth quarter, but still we don't know. We think that the economy is performing a little bit better than we were expecting. And in terms of losses, we think that on the performance of the bank in terms of income, fee income, what we are doing on expenses could, or should work on a positive way and our expectations are that that actions or that things that we are doing could make us to have a quarter in which we don't have But still, we don't know. And I want to be clear that still there is some uncertainty, and we are not now very clear on how the last quarter is going to perform. Related dividends, it will depend. It will depend on how the year ends. in terms of net income. We are now on the third quarter, on the positive side. It is related to your question about the performance of the fourth quarter. If you ask me, I am positive about the performance of the fourth quarter, but still we have a lot of uncertainty. Let me pass your... Other question to Jose Humberto.

Thank you, Juan. Carlos, yes, what happened until September, as we mentioned on this previous, because of the net losses and we registered in the second quarter, we have this tax recovery. And remember that we had the liability management exercise exchanging sub-debt. And also they gave us a tax shield. So that's the reason why we have right now a tax recovery. going to happen at the end of the year is maybe some persons will have net income and in those operations the statutory tax will be in between 35 to 36%. That's the reason why our guidance could be the tax at the end of the year will be on the range of 10 to 15% as Juan mentioned. Next year we are going to see the performance of the different operations that we are having. Remember that our statutory tax in Colombia will be 36%. Salvador, 35%. The other two operations in Guatemala and Panama, 25%. So if you blend a combined, maybe our taxation, our tax rate, effective tax rate next year will be on the range of 25% area. But again, it depends on the performance of the cost of risk, depends on the recovery of the economies in which we operate, depends on the loan growth that we are going to see maybe in the second half of this year.

Our next question comes from Alonso Garcia.

Good morning, everyone. Thank you for taking my question. I just wanted to touch base on the OPEC side. I mean, this year, the past two quarters, OPEC has been a positive surprise. I just want to understand how much of this positive surprise is explained by the much lower activity this year amid the pandemic and how much of these cost savings are here to stay. I just want to understand after zero to 2% OPEX growth this year, how much should we expect next year and in the coming years if we should expect OPEX growth aligned with inflation going forward? and also how you think of your efficiency ratio in a midterm perspective. Thank you.

Thank you, Alonso. Let me give you some color and then I pass your question to Jose Humberto for comments. Related how structural are the measures that we are taking related OPEX. There are some measures that are more related to what is happening during this year and related to the peculiar situation that we are living. Let me elaborate a little bit. Bonuses, for example, is one topic that is peculiar of this year. that is going to go on a more normalized way in the future. But other than that, we are working on structural measures that are going to stay. And our target on efficiency definitely is keep improving efficiency. That has two main drivers, of course. How are we going to control OPEX? We, for next year, we expect some growth, real growth, but Still, we think that the program that we are undertaking to cost control are going to have positive effects in 2020. So we will have some growth in 2021 since we need to maintain investments and keep providing the bank with tools to compete in the market. But we will expect income to recover. So efficiency ratio should improve next year. And we should go back to continuous improving of efficiency ratio in the future. With this, I want to pass your question to José Humberto for additional comments.

Thank you, Carlos. And also if you double check the numbers of each operation individually, all of them are growing negative in terms of expenses. We have been doing our job as Juan mentioned. Just to give you a couple of examples. In terms of headcount, we are always almost maintaining the same number of headcount that a year ago we have been doing some efforts in different geographies. In terms of branches, this year we have been reducing 17 branches, one seven, in some operations in Panama, in Colombia, and also in El Salvador. So at the end of the day, we are creating the foundation of the new way to do business, new way to distribute our products. So again, you have to take in consideration that there were an inflation in Colombia of effects, I'm sorry, effects depreciation of ecology of 11% percentage. If you discount that, the negative growth could be at around minus 4% in expenses. So we are doing our job, and as Juan mentioned, we are expecting to maintain these OPECs under control in the next coming two years.

Our next question comes from Yuri Fernandez.

Hi, Juan Carlos, Jose Humberto. Thank you for the opportunity of asking questions. I have a very quick one on margins. I heard on your presentation saying like dot look is challenging because of the mix, the rate pressure, the pod program. And you mentioned means around 5% by year end. And I just want to check what this 5% means. Because if we look to the total margins now, this quarter I think was 4.9. So is this an improvement, like of 10 dips? Or when you say around five, you are talking about the margins on loans. That was 5.5. So, you know, an additional 50 bits pressure for the 4Q. So I just want to understand a little bit more the dynamics of the margins for the 4Q and as a result for 2021. And if I may, a second one on provisions, we see Bancolombia doing more provisions than peers overall. And we know that all the banks in Colombia, at least the way we look here, right, they are under IFRS 9 and they should provision as expected losses. But still, we see a very big difference between you and some of your peers. And I know it's hard to talk about peers, but what are things happening here? Like you think Bancolombia had the worst underwriting. It's a different mix. or maybe peers are having different assumptions on the expected losses model. How do you address this big discrepancy of you building a lot of allowances on the loans and some peers not doing as much as you are? Thank you.

Thank you, Yuri, for your question. Let me take your second one, and I will pass your first one related names to Rosenberg. As you said, it's difficult to talk about but we can talk about ourselves. What we are doing is we are assessing the great risk on a position that we want to be on the conservative side. As you mentioned, we are working on inspecting losses But there are some parts of that provision in that it's how you tackle the situation. And let me give you some more details. When you incorporate in your models the expected performance of the economy, it's very different when you expect some official forecast to mention a GDP decline of 6% during 2020, or you expect a 8% decline during, and that's going to affect your provisions. So it depends on what the banks are using, even though we operate in similar conditions. And related to your question, is all the writing process worse than the others? I don't think so. And numbers show that, because you see how the other indicators behave, and there's no big difference how the MPLs, how the credits moving from 30 days past due to 90 days past due behave. There are not big difference among the different banks. So at the end, it's how you incorporate your view of the future. And if you incorporate it faster, or you are waiting and see and you will do it later. That's my view on that question, Yuri. Let me pass your question related provisions to Jose Humberto.

Thank you. Yuri, yes, you're right. There are a combination of factors that have big pressure of the NIM. But just to give you an idea what's going to happen in the fourth queue. What is happening right now in this queue, the third queue is there is an increase in stage two credits, because now people are increasing the level of past due for 30 days to 90 days. In the next quarter, you are going to see an increase of the 90 day past due. And when you get the 90 day past due, you have to increase the provisioning, but also you don't have to uproot interest. So that will impact. the NII for the four quarters basically because of the stage three incremental. The other reason is we did our job reducing our funding costs. And you see that the numbers is dropping 69 basis points the whole year. We did our job and marginally, we are not seeing more space to reduce the funding costs on the same trend. That's the reason why we are expecting 5.1, 5.2% area NIMS at the end of the year. And we are expecting to maintain the 5% for the whole year 2021.

Jose, Yuri was asking about NIMS. Could you give some information about what we are expecting? We mentioned during the remarks that we are expecting by year end a NIMS around 5%. we reported 4.9%. We still need to see how interest rates will evolve, but please, Jose, give Yuri some more information about the NIM.

Yeah, I'm sorry about that, yes. We were talking about the lending NIM of the loan portfolio. If you combine the 5.5 of the lending portfolio NIM With the securities portfolio mean that it is 1.7, that's the reason why it is right now at a level of 4.9%. For us, it's very complex to realize how will be or which number will be at the end of the year the combined mean. We are just referring to the mean of the lending portfolio that currently is 5.5 and at the end of the year that will be 5.2. And the whole need will depend on the performance of the security portfolio.

Our last question comes from Andres Soto.

Good morning. Thank you for the presentation. My question is related to digital strategy. When we look at your numbers, it's really impressive what you have achieved. in terms of digital adoption and increasing clients via digital. So my question is related to what is your target in terms of digital strategy, meaning are you looking at this either as a way to increase your market share in consumer loans? Are you looking at this as a way to improve your efficiency? you should have reduction in expenses, shutting down branches, or just defensive strategy. And this is connected to your medium-term guidance, where you say that you don't expect returning to double-digit ROE till 2023, which implies that based on the cost of risk assumption, that basically implies that your margin is not going to expand that much, so I don't see that much of a mixed benefit in there. You are expecting, and expenses will need to continue increasing in nominal terms year after year, so I don't see that being reflected as efficiency. So I'm kind of puzzled how we can incorporate the results of digital in terms of profitability.

Thank you, Andrés, for your question. The digital strategy is going to serve as a defense strategy, but that's not the main goal of the digital strategy. As we mentioned, we have been developing all the actions and all we need to really become a digital player in the markets in which we operate. We have been doing this now for more than three years. And during this crisis, this health crisis, that strategy is getting a boost. Adoption has been very, very high from our clients. But we were, I could say, prepared for that. So numbers are very, we feel very comfortable and happy with the numbers that we are seeing, how our clients are adopting new possibilities to deal with the bank and to access our products. And as we mentioned, not just the financial products, but how we move in being more involved in everyday life of our customers. So in terms of numbers, we mentioned we are getting in the pace of 300,000 new customers a month. Now digital sales are improving, even though people could go to branches still the digital sales keep growing. So market share, definitely we are getting market share. I can say that. And we will keep getting market share because we have the capabilities to capture this new way in which clients want to relate with the banks. And we have the tools and we have now the possibility is more how the clients adopt what we are offering them more than if we are prepared to offer them the different alternatives on the digital side. So we definitely, we are getting back to share and we see it during these periods. There is a lot of comments about FinTechs and how FinTechs, and FinTechs are going, are playing a good role, and they are very good players, but we, since we have been working on this for a while now, we are able to present an offer to the consumers that equals the alternatives that some fintechs could offer to the market. It's a strategy to grow, and we are seeing that it's paying results. Definitely, it's going to have another effect, which is an effect on expenses. As you know, an expense that is important for banks is related to the branch network. We, in a way that we are moving to towards a digital offer and digital relationship with our customers, branch are going to evolve and that cost could change. So as a consequence of the strategy, we will see a better performance of our costs. At the end, it's a midterm strategy that is designed to gain market share, to be a very active player and to compete in the market that is going to have an effect on OPEX and will work as a defense for new participants in the market that we will find a player that is very well positioned to compete with the new alternatives that are going to be in the market.

Thank you. There are no further questions. I'll turn the call over back to Juan Carlos Mora, CEO, for closing remarks.

I want to thank all of you for your participation in this call and your interest in the Bancolombia results. We will have... I think that the fourth quarter is going to show us how is the real situation of the economy and related to that to our clients. I am positive that what we are seeing is good. We will see that... next year when we are together to present the full year results conference call in which we will expect you to be with us. So thank you very much again for your interest and have a good day.

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