Grupo Cibest S.A.

Good morning, ladies and gentlemen, and welcome to Bancolombia's third quarter 2021 earnings conference call. My name is Claudia, 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 call will include forward-looking statements, including statements related to our future performance, capital position, credit-related expenses and credit losses. All forward-looking statements, whether made in this conference call, in future 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 is 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. Carlos Rudd, Investor Relations Director, and Mr. Juan Pablo Espinoza, Chief Economist. I will now turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer. Mr. Juan Carlos, you may begin.

Good morning and welcome to our conference call for the third quarter 2021. I hope all of you and your families are safe and healthy. The Colombian economy continues recovering at a pace better than expected. According to our latest estimates, GDP could grow close to 10% in 2021. And for 2022, we expect a soft landing to a moderate expansion of around 3.6%. The main drivers behind this forecast are the resilient performance of internal demand, particularly private consumption, which will remain dynamic as more households, especially those with the highest incomes, return to pre-COVID spending levels. We also expect private investment to recover. Exports to accelerate and the sectors that were severely hit by the pandemic to go back to 2019 levels. All these were partly compensated by the moderation in global growth and a gradual withdrawal of the fiscal and monetary series. The main risks to our view are the uncertainties surrounding the electoral cycle and eventual new way COVID-19 cases. This positive trend of the economy is reflected in the bank's results, which we consider positive for the first quarter. Given that the trend of a better than expected economic recovery not only applies for Colombia, but in all the geographies where we have presence. Before getting to the details, I want to highlight some key topics. The loan book grew 3.3% compared in the previous quarter. The fees grew 9% in the quarter. Core equity tier one on the full Basel III was 11.8%. and the net income for the quarter was $943 billion. Provision charges for the quarter were $514 billion, down 18% when you compare with the second quarter of 2021, mainly driven by better economic forecasts and the end of UB's program in Colombia and Panama. Our digital platforms, Neki and Bansalonga-Lamano, continue to grow at a selling pace, adding both 14 million clients and 1.4 trillion pesos in deposits. Digital transactions represent 85% of the total transactions and digital sales, 44% of total sales. We continue to grow in our ecosystem strategy after the first year of successful operations. It is already positioned as one of the most relevant in the country, with more than 8 million visits. At this point, I want to turn the presentation to Juan Pablo Espinoza, who will further elaborate on the performance of the Colombian economy. Juan Pablo? Thank you, Juan Carlos. Now, I will ask you to go to slide number three in the presentation. Let me start by saying that traditional analysis has failed to predict and measure accurately the effects that the pandemic has had on the economy. Instead, the development of new ways of understanding economic reality has gained momentum. Most of these advances are based on the use of data. At Bank Colombia, we have been pioneers of this emerging trend in the local financial industry. Our proprietary analytical tools and our large sample of banking transactions allows us to have a comprehensive real-time picture of the state of the Colombian economy. In the first place, our now-casting tracker of overall activity, which follows closely Dan's official figures, points to a year-on-year growth in the third quarter of 14.1%, higher than than latest consensus estimate of 9.2%. A significant contributor to this growth is domestic demand, which according to Bancolombia's cardholder purchases has been accelerating in the past few months. For instance, in the first 20 days of October, these transactions grew 20% compared to 2020 and 8% relative to 2019. Moreover, The graph at the bottom left shows that the volume of deposits to corporate banking accounts by sector and firm size relative to pre-pandemic levels. These figures are good at anticipating sectoral performance, and they are signaling that important contributors to GDP, such as retail, manufacturing, and agriculture sectors, expanded at a strong pace in the third quarter. Furthermore, SMEs revenues are recovering faster than those of large firms. Finally, the number of payroll payments processed through Bancolombia's accounts, which is a proxy for formal labor demand, accelerated during the last quarter. This suggests that the labor market is already reacting to the rebounding economic activity. In turn, this would allow unemployment rate to decline further towards the end of the year. All in all, our indicators point to a widespread and consistent improvement of the Colombian economy after the disruptions caused by the national strike and the reduction of COVID cases. This bodes well for full year 2021 growth expectations, which currently stand at 10%.

Now, let me turn the presentation back to Juan Carlos. Thank you, Juan Pablo.

Moving to slide four, I want to continue this presentation by explaining the loans and deposits performance. The recovery of the economy has resulted in significant progress in our business. We have experienced an important growth in the number of clients, improved our offer of products and services, and strengthen our digital strategy. All this is clearly reflected in the performance of loans and deposits. The loan book continues showing a steady growth across the three main sectors in a dynamic partially supported by the economic recovery that continues to be evident in the end disbursements. This trend confirms that the bank overcame the economic shock of the pandemic without relevant implications on its financial stability. Since the beginning of the year, the retail and mortgage segments have shown positive trends, whereas the commercial segment started to improve since the second quarter. Because of the expansionary monetary policy, with historically low interest rates, the balance of time deposits decreased over the last 12 months. And these have been compensated with an increase in savings and checking accounts. This has allowed us to reduce the funding cost. However, as the central bank started last month a rate hiking cycle and the loan book is growing at a better pace, We expect the balance in time deposits to raise again in the same direction of the funding costs. Moving to slide five, I'm going to elaborate in the evolution of digital sales and distribution channel. During the first nine months of the year, digital sales have represented 0.4% of all sold products. Digital sales have maintained a steady evolution despite the reactivation of traditional channels and the reopening of the economy. This indicates that the customer experience evolution has accelerated during 2021 towards a permanent adoption of digital channels by many of our clients. I would like to point out one of our strengths, the share of processed transactions. On the lower right side chart of the slide, you can notice that Bancolombia processed 47% of all monetary transactions completed via web and 62% of those processed via mobile phones out of all financial institutions in Colombia. Moving to slide six, I'm going to elaborate about NECI. As you know, NECI is our new bank, targeting primarily young people and focusing on the way they relate with banks. During this quarter, we added 1.5 million new clients, reaching 8.6 million with a very low acquisition cost. Deposits are nearly 1 trillion pesos, and net promoter scores continue increasing with high levels of engagement. Remember that we consider an active client the one interacting at least once a month throughout a monetary transaction, and this is how we leverage the development of our profitability model, having clients with a low acquisition cost and with a high active user ratio. NETI cards are growing fast. We have more than doubled the number reported 12 months ago. Notice that we are not only issuing more plastics, the number of transactions and the volume of payments are increasing at a very solid pace, reaching almost three times the figures observed one year ago. Moving to slide seven, you can see some relevant figures of Pancolombia ala mano. Unlike other countries in the region, the population in Colombia lives throughout the country in several large, medium, and small cities. Pancolombia ala mano targets low-income individuals. We are acting responsibly towards financial inclusion and education. Through our financial inclusion initiatives, We provide mostly free financial services for people to access savings and create tools to become financially empowered and improve their quality of life. And Colombia and Oman have reached almost 6 million clients. The income per client continues increasing. Transactions, especially payrolls and subsidies, remain high. And loans disbursed have tripled over the last year. In slide eight, we present our ESG framework. Our purpose is to promote sustainable economic development to achieve everyone's well-being. Therefore, we provide financial and non-financial solutions to strengthen the productive network of our countries, create sustainable cities and communities, and promote financial inclusion. This commitment is aligned with a global agenda. which is to comply with the UN Sustainable Development Goals, designed to achieve more prosperous societies and protect the planet. Under these three fronts of action in which we believe we can promote our purpose, we have already disbursed during this year 26 trillion pesos, which represents more than 20% of total disbursement. Now, I want to turn the presentation to Jose Humberto Acosta. Jose?

Thank you, Juan Carlos. Now, turning to slide nine, I want to walk you through the evolution of the relief program. Pre-reliefs continue decreasing. We are gradually returning to normal. This quarter, relief programs in Colombia and Panama finished. During the upcoming quarters, it will be key to follow the evolution of deterioration, restructured loans, and charged shocks. Considering the geographies where the bank operates, our focus is Panama. The percentage of reliefs is decreasing gradually, but it is still 20% of the loan book coming from 26% in the previous quarter. Unlike the other countries in where we operate, Panama maintained the relief program until September 30. This situation required Banismo to allocate considerable resources to reach definitive agreements with clients that were under some relief scheme during this quarter. As a result of this, at the end of September, only 5% of the loans under relief did not have a definitive arrangement. The other 15% of the loans under relief already have a structural solution, and if they meet the rate conditions, they will be transferred to the normal loan portfolio. On this slide, you can notice not only the percentage of the loan book that is under relief, but also its composition by segment and stages. On a consolidated basis, 6% of the loan book continues under relief. They are, in turn, subdivided into 50% for commercial, 21% for retail, and 29% for mortgages. Each composition by stages is as follows. 45% in stage 1, 42% in stage 2, and 12% in stage 3. In slide 10, we present the breakdown of provisions during the quarter. Provision charges for the third quarter were 514 billion pesos. As we did in previous quarters, we want to explain the breakdown. This quarter has the lowest provision charges since the pandemic began, confirming the trend we observed in the first half of the year. As you can notice, in the lower part of the slide, we made a zoom of COVID-19 and parameters obtained. which are the main drivers behind these results. With the end of the relief programs in Colombia and Panama and the expiration of the 94% of the reliefs we granted to our clients, we have been able to gather more and better information that allowed us to improve the methodologies under which we build provisions. During this quarter, we have managed to reach final agreements with clients. Therefore, as they comply, with what has been agreed. We will release provisions. These together, with a better forecast of economic parameters, have generated a release of the balance of previous periods. Specific provisions grew during the quarter due to the default of corporate clients of the construction sector in Colombia. Moving to slide 11, we give you a snapshot of provisions and asset quality. The cost of risk for the quarter was 1%, and for the last 12 months was 2.2%, reflecting the good pace of recovery of our clients. If this trend continues for the last quarter, it is possible that cost of risk for this year might be better than the guidance we gave in the second quarter of 2.3%. During this year, charge-offs have increased, exceeding the levels of 2020. This has two important impacts. First, it reduces the balance of the loan portfolio, and second, it helps reduce the level of past due loans. We maintain solid coverage for 30 and 90 days that allow us to handle the following periods of possible deterioration. On slide 12, we present the consolidated and standalone capital adequacy. Consolidated total solvency ratio stands at a level of 15.3%, while CET1 at 11.8% on their full budget fee for the third quarter. These ratios are well above the minimum regulatory requirements, not only in a consolidated basis, but in the standalone operation. The growth of the shareholders' equity takes place because of the good results of this year. We consider that the leverage of the time is in optimal levels, given the current balance sheet risk, and asset growth expectations. We have enough capital to support the loan book growth in the upcoming years. On the slide 13, we present the liquidity position of the bank. In a consolidated basis, we continue operating with a sufficient level of liquidity. As of this quarter, saving and checking accounts represents 56% of funding structure. This increase has been compensated with a decrease in time deposits and credits with corresponding banks. As we have mentioned during the call, the economic activity and the loan book are showing better trends quarter by quarter, so we expect to gradually increase the balance in time deposits to support this growth. As a result, with the expected hikes from the central bank, the cost of deposits may increase. On slide 14, we present a snapshot of our standalone operations. In general terms, The trend throughout the different geographies operated by PAN Colombia was similar. Stable margins, steady growth of the loan book, increase of expenses, and decrease in provision charges. Over the last years, the trend in the main metrics of the standalone operations is positive. Central American operations represent 28% of assets, but 32% of net income. Now, I want to give you a quick overview of each of the Central American countries where we operate. Let's start with Banco Agromecantil in Guatemala. This quarter, the growth of the portfolio was driven by the consumer portfolio, which reflects the bank's strategy to increase the share in the retail segment within the total portfolio mix. Commercial and mortgages also had a good performance during the quarter, Provision charges showed a recovery thanks to the improvements in the rating commercial clients and in specific provisions. Banco Agricola in El Salvador continued to consolidate the portfolio growth that is boosting emergency recovery. At an accumulated basis, the portfolio grows both in retail and in commercial segments, responding to the dynamics of economic recovery that the country is experiencing, and which is also reflected in a solid recovery of fee income. Finally, banismo. The positive dynamics of loan enforcement evidenced during the second quarter maintained and consolidated in the third quarter, driven by retail loans and the reactivation of the demand from corporate clients. Banismo has leveraged its deposit growth strategy in its renewed digital assets, making possible not only relevant increase, but also a change in the funding mix, where saving and checking accounts have gained share, improving the funding cost. The bank continues overperforming its local peers regarding loans and deposits growth. On slide 15, we see the evolution of margins and net interest income. Net interest margin remains stable in the 5% area, as we were expecting. The rate hiking cycle started in September, and we expect the reference rate to close 2022 in 4.25%. This is going to be positive for months, but will be reflected in the first couple of quarters of next year. Net interest income continued with a steady pace of growth, gradually overcoming 2019 figures. This was mainly driven by the reduction in the funding cost. We continue using the liquidity in a more efficient way as the dynamic of dislodgement improves. Slide 16 shows the evolution of expenses and efficiency. Personal expenses, excluding variable compensation, increased 1% in accumulative figures year-to-date, whereas administrative expenses grew 5%. As a result, operating expenses as of September are 9% up when compared with the same period of 2020. Another driver for expansion in expenses for 2021 is the pace of investment related to digital transformation. A flag-sharing theme shows the evolution of this. NetEase continues to be one of the most resilient lines of the P&L, growing over 10% year-to-date. Payments and collections as well as banking services, have added to their strong performance, although fees from debit, credit cards, and commercial establishments is the line with the largest contribution, thanks to the increase in the volume of transactions and the use of digital channels. Slide 18 shows the profitability metrics. During the pre-first quarter of this year, we have delivered material year-on-year earnings growth, maintaining the pace of investments in digital transformation. The income for the quarter was 943 billion pesos, and return on equity stood at a level of 12.7%. Even though provision charges were the main driver of this result, I want to highlight the good performance of the other lines of the PML in the middle of such a challenging situation. Stable margins, steady growth of NII, and the fast recovery of the income. Finally, it is worth mentioning the impact of the tax reform in Colombia, which implies a recalculation of deferred tax by generating an additional provision of 149 billion pesos.

Now, I want to turn the presentation to Juan Carlos for the closing remarks. Juan? Thank you, José. we are getting back to normal faster than expected.

This quarter, we were positively surprised with the bank's results. The country and its economy are doing better. Our clients, too. Among Colombians ready to support them with a strong balance sheet, liquidity, products, and services. We are looking forward to seeing you all in our virtual investor day next week. where we will elaborate in a detailed way about our digital strategy. After elaborating on these two topics, we 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 one on your touch-tone phone. If you wish to remove yourself from the question queue, please press star then two. If you're using a speakerphone, you may need to pick up the answer before pressing any keys. Once again, if you have a question, please press star then 1 on your telephone. Our first question is from Yuri Fernandez with JP Morgan. Please go ahead.

Hello, good morning. Congrats on the results and thank you for the pursuit of asking questions. I have the first one regarding the asset quality outlook for 2022. You already provided some color in the call, but I guess the indicators, they were good for the quarter, right? And we were concerned with Panama. Panama data was okay. So my question is, what should we expect for asset quality? Is it worth behind? What should be the normalized level of losses for the next year? And I have a second question regarding your digital initiatives. I guess Nike is a very good platform. Like when we look to the KPIs, number of users, ratings, Google trains, you know, you name it. But we are starting to see some peers entering the Columbia market, like some fintechs, some big ones. So just like a high level view for you, how do you see this competition evolving in Columbia with some new players coming? What are the challenges in the market? What you are doing to prepare the company for those new guys? Thank you.

Thank you, Julie, for your questions.

Your first one is regarding asset quality and what to expect for 2022. Let me start by saying that we are in the process of normalizing the provision charges. The third quarter was not normal. It was very low. We expect the fourth quarter to have some non-recurring charges. So we should end the cost of risk for 2021 around 2 to 2.1%. As of 2022, we expect to go towards a long-term cost of risk of 1 Columbia, which should be around 1.8 to 1.9. You mentioned Panama and Banismo, but even though that we expect the cycle of normalization in Panama to be a little bit longer, the other operations to perform more in line of what we expect is going to be the cost of risk, the long-term cost of risk, which, as I said, should be around 1.8%, 1.9%. Your second question, digital strategy and new competitors entering into the Colombian market. We've been preparing for this for a long time. You mentioned Neki. We started Neki 2015, and now I think we have a platform that is prepared to compete face-to-face with all new FinTech entrants to the market. But it's not just Neki. What we have been doing in Bancolombia is preparing for this competition in terms of what are our products offerings and how we can develop and evolve our products to compete in the market. Remember that Colombia has regulated interest rates. We have a cap on interest rates, which is not the case in other countries. So competing in the Colombian market through interest rates is difficult due to caps and to reach high-risk individuals it's not that easy because the interest rate cuts not allow that. On the other hand, we are also prepared to compete on the evolution of fees regarding particularly the growth of credit cards. As I mentioned, we have been preparing for this for a long time, diversifying our source of income. Competition is going to be hard. We don't have

We have no doubts about it, but I think we have been preparing for this for a long time. Thank you.

Our next question is from Andres Soto with Santander. Please go ahead.

Good morning. Thank you for the presentation. My first question is a follow-up regarding cost of risk and the guidance. for the year is 2 and 2.1%, and that looks still pretty conservative considering that during the first nine months of the year, you are at around 1.6%, so that implies 2.5% cost of risk for the fourth quarter. And when I look at your numbers for this year, the quarter, sorry, And I normalized the cost of risk by the provision releases that you had. Apparently, what you should have had is around 1.5%. So I would like to understand why are you still conservative about the cost of risk expectation for the rest of this year?

Thank you, Andrés.

Let me elaborate a little bit more on the cost of risk and what we are expecting. If we analyze the cost of this for the last 12 months, it's 2.2%. And I know we have the fourth quarter of 2020 in that calculation, which was pretty high. But what we are expecting for 24th quarter of 2021 is there are some uh issues that are going to release some provision for example we need to assess if we need to recalculate the growth of the economy in order to introduce that number to the models but also in a more normalized way is going to reflect the real situation of the of the economy in the sense of how the clients are already out. We have also Panama. Remember that the moratorium ended September 30th in Panama. So, fourth quarter is going to be probably high on provisions on Banismo, which we need to incorporate on that balance sheet. So the fourth quarter is going to be a mix of provision releases and also we need to add provisions. So that's why we have been conservative in the sense that provision charges or the cost of release, I'm sorry, for the whole year should be around 2%. It could be less. It depends at the end on the performance of the clients. during the fourth quarter in which as i said it's more normalized and we start to see all those customers that we restructure how are going to pay so maybe we are a little bit conservative but that's because there's still uncertainty on how the fourth quarter is going is going to be in terms of of payments of power banks.

Thank you, Juan Carlos. My second question is regarding your loan growth expectations for 2022. You say that you're expecting a GDP growth for Colombia of 3.6%. So I would like to see what are your thoughts in terms of how this translates in terms of loan growth next year. And based on this and your current capitalization ratios, How do you feel about your current dividend distribution?

Sure, Andres.

As you mentioned, we are expecting GDP to grow around 3.6, 3.7% next year. And so that will allow us to have a long growth around 10% for the year. And regarding distribution, we saw the second half of this year a pickup in the growth of retail loans, and also in the third quarter, commercial loans started to pick up again, out of the low. So, regarding distribution, we are very focused on SMEs, and we expect that segment to grow faster, and those are commercial loans, even though they perform more in terms of risk, but also in terms of the income that they generate. So we don't expect a dramatic change in distribution of the loan book in terms commercial and retail loans. Retail loans could go a little bit higher, but as I said, it's not going to affect dramatically the distribution of the loan book.

Just to clarify, what I meant by distribution was dividend distribution. If you're giving your current distribution ratios, you're expecting, yeah.

Thank you. I am sorry. I'm sorry. I thought you were talking about the distribution. I'm sorry, I'm going to talk about dividends. Sorry. Dividends, let me say this. We have a clear policy of distribution. Distribution has been around 30 to 50 percent during many years, and we are expecting that policy to continue. We will need to present the proposal to the. 1st, to the board of directors, and then to the shareholders meeting. But we want to present the proposal that. Oh, it's going to be all in line with our, our policy, long term policy, which, as I said, it's 50% of the net income. of Colombia, usually, because that's the one that distributes .

Great. Thank you for your answers, Juan Carlos, and congratulations on the results. Thank you, Andres.

Our next question is from Jorge Cury with Morgan Stanley. Please go ahead.

Hi. Good morning, everyone. Thanks for the call. I hope everyone's doing great. I wanted to ask two questions. One is on expenses for the quarter. They were up a lot quarter on quarter and year on year. I wanted to hear from you if there were some extraordinary items there or you brought forward some of expenses in the fourth quarter and what the expectation is for the full year and for next year. And then on net interest margins, you sort of like alluded to rising rates and that having a positive impact on margins. I wanted to see if you could maybe quantify where do you think your margins will be next year given the normalized level of benchmark interest rates. Thank you.

Thank you, Jorge.

First one, expenses. To analyze expenses, we need to take into account several items. First, labor costs. Labor costs or expenses have grown around 1%, so they are pretty much under control. Bonuses, the variable compensation, which is growing a lot. Since we didn't have variable compensation or we didn't register variable compensation during 2020, so the comparison, it's showing a very high number of that. On general expenses, we have some extraordinary issues related to digital transformation, but also those depreciations relating to our printing business. So, for the year, we will see numbers close to the figure that we have now, 9 or 10% low. But let me tell you something else. We have in Colombia, inflation that is close to 5%. Also, we have a depreciation which has been close to 11 percent. So, the pressure on the cost from that part is there, and it's one-off in terms of that it's affecting this. We are not going to see a performance in terms of expenses that is going to be very good during this year due to those extraordinary issues. We will keep our program in close control and the measures of what we are doing, and we expect that to take effect during 2022. So, those are the explanations. If you compare, for example, the 19 expenses until September and 21 expenses, the growth is less than 7% still, because we have some issues regarding, as I mentioned, but a more normalized way, the 2020, it's a year that affects the changes in expenses due.

It was a very strange year for us. Hello?

Regarding memes, I will pass this question to Jorge Humberto to elaborate on memes and the effects on the memes. Jorge.

Thank you, Juan. Regarding NIEM, Jorge, as you can see, we were able this year to sustain the NIEM at a level of 5%, and this is basically and mostly because of the reducing of expenses of the interest rates because of our deposit base. Next year, our sensitivity is for every 100 basis points that change the central bank, our sensitivity will be at around 8 bids. That means that we are going to see an expansion of the NIEM beginning the second quarter of next year. And maybe we are going to, if the interest rates at the end of the year closes at a level of 4.5 to 5%, maybe you are going to see an expansion of NIM in between 40 to 50 basis points or even more in our NIM portfolio. Remember that our NIM is composed by lending NIM for the portfolio, which is 5.6, and securities NIM that is 0.8. And the proportion is 80, 20%.

Thanks. Thanks, everyone.

Bye-bye.

Thanks again.

Our next question is from Ernesto Gabilondo with Bank of America.

Please go ahead. Hi.

Good morning, Juan Carlos, Jose Humberto, Carlos, and good morning to all your team. Thanks for the presentation and for the opportunity. I have three questions from my side. The first one is on the political landscape. We continue to see Pedro leading in the presidential polls, so I would appreciate if you can share with us what have you been hearing from his proposals. I don't know what have you been hearing, if he's wanting to implement higher taxes or banking fees. Anything from what you have heard I think will be very helpful. And then my second question is on NECI. We have seen the rest of the region developing digital banks. and willing to do spin-offs at some point. So considering that you already have a good number of clients and that you're starting to become profitable, what else do you need to consider for a potential spin-off and a listing of NECI? And then my last question is on your effective tax rate. We think it was high during the quarter considering the new tax reform.

So, how should we think about the effective tax rate for the last quarter next year? Thank you.

Thank you, Ernesto.

I'm going to take the first two questions, and I'm going to ask . Political landscape, it's still early. we will have our first round on May presidential election and we have a lot of candidates. So the political plan state is not clear at this point. Regarding the candidate that is leaving Poland He has been around for a long time. He was a mayor of Bogota. So he has been known for a long time, as I mentioned. Regarding concrete proposals, we haven't seen yet something concrete. There are some comments, some tweets around some issues, As I mentioned, it's still early to see what are the concrete proposals and what is going to be the platform that he or any other country are going to use to present his name to the voters. So I would say, Ernesto, that we need to wait and see. As you know, we have two rounds in Colombia, so there is going to be the first one in which there is going to be probably some candidates. I don't know the number, but it will be a very high number. And then we will have the final race between two candidates. I think we will need to wait. until next year to see a clear view of the proposals they are going to present. Regarding Nike, we are, as you mentioned, we have a platform that is now growing at a very good pace. We have close to 9 million users. with a very effective clients that use platform. So what we are doing, we are considering when is the right time to start seeing issue that all the regulatory issues are covered, What type of license are you going to apply for? So there are many issues. We are still in the early stages to analyze if that is a good move for us. The third question, I will pass it to Jose.

Thank you, Juan. Ernesto, as you mentioned, this is a one-off, and this is because of your calculation of the deferred taxes, and we are expecting at the end of the year the taxation for Bancolombia for the entire group will be 32% at the end of the year. We are expecting next year, because of the tax reform, we are going to get the level of 34%, 35%. And the 32% of this year at the end of December, it is explained mainly because the main source of net income comes from the Bancolombia in which the

we have the higher statutory tax.

Our next question is from Tito Labarta with Goldman Sachs. Please go ahead.

Hi, good morning, everyone. Thanks for taking my question. Just two quick follow-ups, actually. First, following up on the expenses, in terms of the efficiency ratio, given the growth in expenses already picked up, how do we think about that efficiency going forward and given the investments you're doing? Could it be some cost savings with the digital initiatives, or is that the expense is going to be sort of higher initially? Just help us think about the evolution of that efficiency ratio. And then just follow up quickly on the tax rate. The tax rate just go up, you know, roughly 5% for next year, given the new tax rate. So it should be like around 35% or so, I guess, in Colombia, offset by the lower tax rates in the other countries, just to confirm for next year how that tax rate should be.

Thank you. Thank you, Tito. Experts on efficiency ratio.

Efficiency ratio this year is going to be a little bit above 50%, which is our target. So we expect the efficiency ratio to go below 50 next year. And you mentioned our digital strategy and digital investments that should add efficiency to our operations. So as I mentioned earlier, this is not a good year to analyze expenses since we have some extraordinary issues around the expenses. So we expect next year to be more normal and we will return to our path of having efficiency ratios below 50 and looking more to mid-40s in the mid-term, which is our goal. Regarding tax rates, the effect of the tax rates for 2021 for the small group should be around 30% as Fosilberto mentioned. And that is driven mainly by Colombia, in which, as you know, we had a tax reform. So we need to calculate the deferral taxes on goodwill. And we have a special effect on 2021. After 2021, we will have the full effect of the tax reform. the Colombia tax reform that will increase our tax rate to close to 34%, mainly driven again by Colombia. I don't know if Jose Humberto would like to add something to this.

No, Juan, that is very clear. Next year, 30% to 38%, including the special tax that you mentioned. That is clear.

Okay, so just to clarify, so for next year, around 34% in Colombia, and then I guess you have lower tax rates in the other countries, right? So the consolidated tax rates will be more or less?

In Colombia, next year will be 35% plus the 3% additional that will be maintained until 2025.

In Guatemala and Panama, the taxation will be 25%.

For people to clarify, the tax rates for the whole group on a quarterly basis for 2022 should be around $30,000.

Okay, understood. Thank you very much.

Our next question is from Olavo Artudo with UBS. Please go ahead.

Thank you, Jose. Thank you, Carlos. And good morning, everybody. Thanks for taking my question. I just wanted to understand more about the digital initiatives of the bank, I mean, back in La Mano. So in a few words, I would like to know what is the profile of these clients? I mean, how much of them are low or high income? I know that the focus of La Mano is targeted to low-income individuals. How many have already a current account at Bulk Colombia? What are the new products or services these clients usually demand?

So it's difficult. Thank you. Thank you.

I have some difficulties here, but I'm trying to answer. your questions. Regarding the profile of NECI and Bancolombia among all clients, let me say this. The clients of NECI are mainly young adults between 18 and 35, which are usually not clients of banks, So they are having their first banking relation with us. And they are using Neki as a savings account and also as a platform to do some payments, some transfers. And now we are introducing loans on the Neki platform. And let me say that we have, in the case of Neki, 40% of the clients of Neki are also clients of Bankolonia. 60% are just clients of Neki. And that allows us to have a very good mix and to know and to understand very well those clients. Bancolombia La Mano, in which we have close to 6 million clients, those are more clients in rural areas where they have access to banking services through our platform and also use the banking agents that we have throughout the country, more than 21,000, to do the cash-in and cash-out. So it's a way of covering, with these two platforms, a big part of the population, and those numbers add. So we have close to 9 million customers in the U.S. and close to 6 million customers in Barcelona. a million customers in both platforms. And again, it cannot be in the two platforms. Either you are in Nike or you are in Bancolombia Alamano. In the case of Bancolombia Alamano, now we have more than 300,000 clients that already have credit. So if you Banco de la Mano is now a platform in which clients could access to credit and those numbers will increase. So that's how the clients of those platforms are. Okay, very clear. But just to follow up on this topic, I just wanted to hear from you, given the digital initiatives of other banks, I just wanted to hear from you, what is the main competitors of Bancolombia just in terms of these digital initiatives? Let me see if I got the question right. The digital competition, now we have a very different participants. We have some traditional banks that ask ourselves to move quickly to have a digital platform and we are competing and we are really giving options to the clients and to the market and we are gaining market share. Those are the traditional banks, which are basically two. We are basically two banks to do this strategy. And then we have and other participants. We have some other platforms that are entering through a project, basically a credit card. And there are some offerings around credit cards on digital platforms and that. in Greece competition during the next year for sure. And there are other participants offering credit, but they are not very big now. So what we think is that since we started six years ago now, and we now have a base of clients that we speak enough, we can take advantage and keep offering new products to those clients. So competition will increase for sure, but we think we are very prepared to take advantage of what we have in this market.

Okay, this was very clear. Thank you, Jose. Thank you, Carlos, again. Thank you very much.

Our next question is from Hork Friedman with Citibank. Please go ahead.

Thank you very much. Can you hear me well because I am with your phones?

Yes, I can hear you well.

Yeah, I can. Thank you. Thank you. Thank you.

So hello, everyone. Congratulations on the results. And I have just a couple of follow-ups as well. Initially, if you could just clarify and give us a bit more granularity about the reasons for the deferred tax readjustments causing a negative impact in this quarter. And I explain why my question. The point is that when you know, the taxation increased in Brazil at least. We, you know, revaluated the tax credit stock, you know, appreciating that stock. And this caused actually a positive effect, an extraordinary positive effect in the quarter when the banks revaluated upwards their stocks of tax credits. Not sure if in your case you had tax liabilities and that was why you ended up having a higher deferred tax, not lower. So this is the first question, just a clarification on what really caused the impact and if you had tax liabilities or tax credits, tax assets. And the second question, Just a follow-up here on the digital initiatives. When I look into NACI and Alamano, it's interesting because you are evolving well in both, but some of the KPIs differ quite substantially. For instance, you are at 65% of active users in NACI versus 55% uh one year ago when you look into uh you know alamano uh it's much lower no just 41 percent and that this has not really increased versus uh last year which was at 40 percent uh the same happens to nps uh you know naki has uh approximately 81 In the case of Alamanno, you have 64. So just wondering what you are seeing in terms of challenges for Alamanno for you not to achieve the same KPIs versus what you are achieving already at NACI. Thank you.

Thank you, Jock.

Let me take your second question, and we will ask Consul Merck to take your first one related to deferral taxes and why it was a negative feedback. Neki and Bancolombia La Mano are different platforms. And Neki, it's a new bank and it acts as a new bank. And even though it's under the umbrella of Bancolombia's books, it's separate in terms of how it relates to customers,

Pardon me, just hold the line one moment while we reconnect.

I think Juan is having some issues regarding the call. Let me answer, York, your second question. Meanwhile, Juan is reconnected again. You're right. And in terms of deferred tax, when we recalculate deferred tax based on the new tax reform, we have three elements. The loan portfolio, the bonds, both, as you mentioned, cause a positive effect on the deferred. But there is another element, which is the goodwill. In the case of goodwill, because we have 8 billion pesos in goodwill, it is the other way around. And that's the reason why it affects our taxation. And you can see the 38% taxation this quarter. But this is because of the combination of these three factors. The first two, loans and bonds, are positive, as you mentioned. But the third element, which is bigger than the other two, it is affected in a negative way. That explains why the tax increase.

Perfect. Very clear, Jose. Thank you very much.

No, no, no. My pleasure. Juan, you can continue with the question without me.

I don't believe we have him back. Just one moment.

Okay, I think it's Juan having again some issues. Complementing the answer of Juan, as in the previous question, we have two different profiles in NECI and Ahorra La Mano, and there are big difference. First, NECI is more oriented to people who lives in the cities, and Ahorra La Mano is more oriented to people rural who lives in the small towns. So we complement the offer. The challenge is how we are able to maintain the activity for the first 30 days. And we feel proud saying that we have a very positive numbers in both. And the reason is because we are using not only to receive, for example, in the case of low income population, different subsidies, but also because they are actively using for transactional way. Juan, you can continue with the answer. Now you are connected.

Thank you, Jose.

I am sorry I disconnected from the call. I was answering York, and those are different platforms, as I mentioned. So Neki is more neobank. It's not related to banks. It's different products. And Bancolombia La Mano is an offering from a bank and targeting lower income individuals with less education, so we have more challenges there. The 55 active users that you mentioned in Bancolombia and Amano is not a bad number. I think it's actually pretty good compared with other platforms. And we are measuring this as one-month activity. An activity is a monetary transaction. It's not just entering the platform to consult the platform. the balance of the product. It's more like a huge transaction. So 55 in NECI is better because we have better results on NECI. And the NPS that you mentioned, 64 compared to 81, 64 is not bad. The point is that 81 is extraordinary good. in case of NECI. So we have challenges to keep evolving the Bancolombia Lamanos platform, but we are very comfortable with those two strategies. And as I mentioned in an answer before, those clients add in. So it's a total of close to 15 million clients in these two platforms that are accessing financial products in a very simple way. and accessing also the physical channels of Juan Colombia, which is a big advantage. So those, the customers of both platforms have access to the ATM network, Juan Colombia's ATM network, also the banking agent network, which I mentioned is more than 21,000. bank agents around the country.

That's perfect. Thank you very much for the answers. Thank you, Joe.

Our next question is from Carlos Gomez, which is SBC New York. Please go ahead.

Thank you for taking the question and for extending the call. I want to come back to the tax issue. I know we are debating it today. But just to clarify the last thing that you mentioned, you have the positive impact for loans and for bonds. You have a negative for goodwill. But coming back to what you asked, if in the future we have a reduction in the effective tax rate, should we expect a negative impact in your results in the short term because of the reversal of what you did today? And the second is when we go to next year or the year after once we normalize your credit provisions, And given how your business is set up today and the tax rates that we have, what, again, is the sustainable ROE that you think the bank can produce?

Thank you.

Thank you, Carlos. I will take the second question regarding the sustainable ROE. The midterm ROE of Juan Colombia should be around 14%, 13 and 15%. That's our target. And we think we could achieve that in 2023. Still, 2022 will be a year that we need to do some additional adjustments. It's going to be lower double digits. Digit ROE and the 2023 should be the year in which we reach that midterm ROE closer to or between 13 and 15 percent. Jose, could you take Carlos' first question regarding certification around taxes?

Yes, Juan. Yes, Carlos, as you mentioned, this is a one-off. It is affecting the third quarter tax. And again, at the end of the year, we will expect the 32%. And yes, next year, we will expect the 34%, 35% tax. And also, obviously, it will affect the profitability because we were not expecting that increase in taxation. But again, this is a one-off, and you are not going to see a recalculation of that next year, assuming that deferred tax will maintain the same 35%. I don't know if that answers the question, Carlos.

No, the question is if in the future there is yet another tax reform, you usually have one every two years, and this time the tax rate goes down. If the tax rate goes down, we should expect one of negative impact, right?

Correct. That's correct. If the taxation comes down, the recalculation of goodwill will affect in a different way, as you mentioned. That's correct.

Okay. Thank you. And if I can follow up on the ROE question. For this year, you had a very specific outlook when we were talking at the end of 2020, and you were quite down, but you were expecting 6% to 8%. In the end, you are going to report a much better number. Is it mostly the asset quality or other factors? Now looking back at most of the year is gone. Are there other factors that have made this year better than you feared initially?

Carlos, it's mainly driven by asset quality that was better than we expected. But I would like to highlight that All lines except expenses of the bank are doing pretty well. Net interest income, with the pressure that we had on margins and on interest rates, we can handle that through the cost of funds. Then the fees are performing well. So, it's driven mainly by quality, which is going through or it's towards a normalized number. But we had a very challenging period during the 2020 and even 2021. The bank and fees and.

net interest margins, net interest income perform well. That's clear. Thank you so much. Thank you.

Our next question is from Jason Mullin with Scotiabank. Please go ahead.

Hi. Thank you very much for the opportunity to ask questions from Carlos Sanberto. I have a follow-up on the digital efforts on Neki and Bancolombia La Mano. I mean, we're seeing this very rapid growth, for instance, in Neki, the number of users in the quarter alone from 7.1 million to 8.6 million, and then on the Bancolombia La Mano from 5.4 million to 5.7 million. And you're showing, which is very interesting, the customer acquisition costs of $0.33 at Nikki and $0.36 at Avant Colombia La Mano. If you can talk a little bit about how you're driving this growth in clients and what is incorporated in that acquisition cost. And is that something that, in many ways, I think you could say it looks very low, but just How you view that? Could it be lower? Could it be higher? How should we think of that going forward? Thank you.

Thank you. Thank you, Jason.

As you mentioned, figures or numbers are very good on our digital platforms. And the growth that we are seeing, it's very positive. And I like to highlight that that growth is because what we are offering is really useful for the people that is applying to this platform. It's very easy to be a client of one of these platforms. And once you are a client, you can just sign in in five minutes. And what you need is your identity number and two or more or three more data. And so that explains why. And what is happening is that we are creating a network effect. which means that we already have the numbers and the connection with Bancolombia. So people are really seeing that it's useful for them to have access to cash, to do the cashing through our Bancolombia's network. So at the end, it's a combination of a platform with easy-to-use products, with the power of the Bancolombia's networks, ATMs and also banking agents, which allow cash in and cash out in a very easy way, a very convenient way, and all around the country. So that's also a way to transfer money to do payments. We are also integrated in our QR strategy. back to our payments strategy with Bancolombia. So you can use both Plataforms and Nike and Bancolombia La Mano to do payments with QR in a way that allow to use your money in a very convenient way. Regarding acquisition costs, we already invest in the technology. what we and marketing around acquiring customers in this number of clients is also very efficient. So, we are including the direct cost of marketing and in that acquisition cost. we don't expect that number to go lower or higher we think we are in a in a in a figure that is it's very good and we will continue seeing that that figure in the future can you remind us again for nikki and colombia like what percentage of the clients are are new to the banking sector or new or are

already clients of Bancolombia, just to get a sense of is it converting, is that acquisition cost converting a client at Bancolombia into Neki or Neki or how should we think about that?

Yes, Jason.

60% of the clients are new clients for Bancolombia in the case of Neki. 40% are clients that are also clients of Bancolombia. So 60% are new clients. And these also, we are leveraging this because that 40% that are clients, common clients with Bancolombia, We have a lot of information about them, meaning that we can use analytics to really access those clients with loans, offers. So it's a combination, and that 60% are new. So that's the combination that we have in the case of. Bancolombia, Alamanu, the overlap is a little bit higher. But many, many of around 45% of the clients are new for the banking system. So they are using Bancolombia, Alamanu as their main financial services platform.

Thank you. Very helpful. Thank you, Jason.

This concludes the time allocated for questions on today's call. I would now like to turn the conference back over to management for any closing remarks.

Thank you, everybody, for your participation on the third quarter's conference call. It has been a quarter in which we have good results. We will see how the year ends, but with the fourth quarter, we are positive that even though we will have some specific issues related provisions, it will be at the end of 2021. So, thank you, everybody, and I hope to see you on our next conference call in which we will present the 2021 results.

Have a good day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.