Grupo Cibest S.A.

Please hold the line. The conference will resume shortly. Thank you. 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 target clients, changes in business strategy, and various other factors that we describe in our report filed with the SEC. With us today is Mr. Juan Carlos Mora, Chief Executive Officer, Mr. Mauricio Rosillo, Chief Corporate Officer, Mr. José Humberto Acosta, Chief Financial Officer, Mr. Rodrigo Prieto, Chief Risk Officer, Mr. Carlos Rad, 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. Welcome to our conference call for the fourth quarter of 2021. I would like to begin this call with a brief overview of the performance of the Colombian economy. Colombia is coming out of the COVID-19 pandemic as one of the best performing economies in the region, with an annual GDP growth of 10.6%, mainly driven by the exposure to commodity prices and by the strong pace of recovery of domestic demand. The positive performance of the second half of the year setups the economy for a good 2022. We expect growth to be around 5% above the average of the region. The main risks to our view are the uncertainty surrounding the electoral cycle and inflation higher than the range of the central bank. Let me give you an overview of the results of 2021. The loan book grew 15% over the year and net fees grew 13%. Core equity tier one closed at 11.9, and the net income for 2021 was 4.1 trillion pesos. Provision charges for the year were 2.4 trillion pesos, resulting in a historical low cost of risk of 1.2%. Explained by better macroeconomic forecasts, improvements in the expected loss models, and the economic recovery in the countries where we operate. Our ecosystem strategy closed 2021 as one of the most relevant marketplaces in Colombia, with 11.5 million visits, 87 billion pesos in disbursements, and with a coverage of our QR code in 100% of the municipalities of Colombia. with 1.1 million engaged merchants. This strategy not only has great potential in terms of flows and disbursements through the digital channels, but it has also allowed us to deepen the relationship with our clients, generating more data. Before getting into the details of the results, I want to highlight two relevant topics. On December 2021, we announced the legal separation of NECI from Bancolombia. The structure approved by the Board of Directors is intended to create the necessary vehicles for NECI to have greater flexibility, seeking to capture the value of financial and non-financial businesses at a regional level. This will be implemented during 2022 and this new entity will be 100% owned by Bancolombia. Also, yesterday we announced the dividend proposal to be discussed in the annual shareholders meeting next March. This proposal comes with a structural change in the dividend policy, since we have defined an optimal level of core equity Tier 1 to support the growth we expect. We believe the bank has the capacity to generate capital on a sustained basis in the upcoming years. 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. Now, please go to slide number three in the presentation. During 2021, the Colombian economy surpassed expectations and grew 10.6%, one of the highest rates in Latin America. Around half of this figure is explained by the low base of 2020, when GDP contracted at a revised rate of 7%. The remaining portion represents a genuine process of recovery, which has been led by private consumptions. This component of aggregate demand has responded to several factors, including the spending of excess savings accumulated at the start of the pandemic, as well as ample access to credit and higher mobility within the country. Moreover, exports accelerated during the second half of 2021, thanks to higher commodity prices and an increase in oil and mining production. On the contrary, investment, especially machinery and equipment, fell behind the rest of demand components. Our leading indicators suggest that at the start of 2022, the pace of economic activity, despite some stabilization, has kept momentum. As we move through the year, we expect that economic activity will gradually moderate as global conditions become less supportive policy stimulus is removed, and household consumption stabilizes. Incorporating all these factors, we are currently estimating that in 2022 GDP will grow around 5%. Another significant recent development is the increase in inflation, which moved from 1.6% at the end of 2020 to 5.6% by December 2021. This trend has consolidated recently because of both external and local forces. We expect year-on-year prints to peak in the short term around 8% and then to accelerate and close the year around 6%. In this context, we anticipate that the central bank will advance further in its process of policy normalization. We have adjusted upwards not only the number of rate hikes but also determine a level of repo rate in this cycle to 6.5%. After this economic overview, let me turn the presentations back to Juan Carlos. Juan? Thank you, Juan Pablo.

Moving to slide four, I want to continue this presentation with a summary of how we faced the pandemic. During this challenging time, Our main goal was to support our different stakeholders. For those clients that needed support with their obligations, we applied the debtor support program. As not all clients recover at the same rate, at Bancolombia, we continue to offer alternatives for debtors, even after the program has ended. We reduced payment terms to 30 days or less for our suppliers, giving priority to those that, due to their size and possibility of financial leverage, needed more liquidity. Through our channels, we continue helping the government in the delivery of subsidies for vulnerable households in all corners of the country, as well as companies whose operations were affected by the pandemic. We also support the vaccination plan, accompanying the government with resources for the purchase of vaccines, donating 22,000 doses. We have also implemented a hybrid work model to keep supporting our employees. On slide five, we present our ESG framework. Our ESG strategy focuses in three main topics strengthening the productive network promoting sustainable cities and communities and fostering financial inclusion in each of these aspects we observed considerable progress comparing 2020 and 2021 in 2021 we mobilize almost 37 trillion pesos towards our ESG strategy, exceeding our $30 trillion goal. This amount represents more than 20% of the Bancolombia's disbursements. We have a commitment to promote sectors that drive the transition to a low-carbon economy where we disbursed in 2021 close to $4.6 trillion in activities such as sustainable construction, electric and hybrid mobility, renewable energies, circular economy, sustainable agriculture, among others. Moving to slide six, 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, reaching more than 25 million. We improved our offer of products and services and strengthened our digital strategy. All this is clearly reflected in the performance of the loans and deposits. The loan book continues showing a steady growth across the three main segments. This trend confirms that the bank overcame the economic shock of the pandemic without relevant implication of its financial stability. The retail and mortgage segments showed a positive trend throughout the year, whereas the commercial segment started to improve since the second half. In this last segment, we are seeing a good opportunity of growth in SMEs. During the first three quarters of the year, we increased the balance in saving and checking accounts. And this was compensated with a decrease in time deposits. However, as the central bank started the rate hiking cycle and the loan book grew at a better pace, in the last quarter, the balance in time deposits increased to support this growth. Moving to slide seven, I'm going to elaborate in the evolution of digital sales. During the year, digital sales represented 43% of total sales. Digital sales have maintained a steady evolution despite the reactivation of traditional channels. During 2021, the customers accelerated the adoption of digital channels. In slide eight, I'm going to elaborate in the evolution of our payments services. One of the main strengths of the bank is the level of processed transactions. As you can observe on this slide, credit and debit card transactions volume returned to pre-COVID levels, while the net fees have already exceeded pre-COVID figures. I would like to highlight that in both debit and credit cards, Our share of transactions is far higher than our share of outstanding cards showing the power of our channels. A fact worth noting is the composition of debit card fees. Fees generated by merchant transactions has remarkably increased during the last few years. the acquiring business has expanded its share within the total revenue, leveraged on the growth of POS adoption, as well as electronic payments evolution. As a result, monthly maintenance fees for individual accounts have a lower participation, showing progression towards diversifying sources of income. Moving to slide 9, I am going to elaborate about NECI. Neki continues showing positive trends. We closed 2021 with 10 million clients, 1.3 trillion pesos in deposits, high levels of NPS, and low acquisition cost. During December, Neki reached 1 million daily active users, of which almost 30% used the marketplace. Neki cards are growing fast. We have more than doubled the number reported 12 months ago. Bear in mind that we are not only issuing more plastics, the number of transactions and the volume of payments are increasing at a very solid pace. As a result of the information that we have gathered from our clients, during the last quarter of the year, Neki's loan book started showing a very positive trend. moving from an average balance of 1.3 billion pesos in the third quarter to 39 billion in the fourth quarter. Now, I want to turn the presentation to Jose Acosta to give you additional details on our performance during 2021. Jose Humberto. Thank you, Juan Carlos.

Now, turning to slide 10, I want to walk you through the evolution of the relief program. Great reliefs are almost done with only 1.9% of the consolidated loan book under relief. During 2022, it will be key to follow the evolution of the duration, restructure loans, and charge-offs. The trend in the geographies where the bank operates was similar. Less provisions and better loan quality indicators when compared with 2020. In slide 11, we present the breakdown of provisions during the quarter. Provision charges for the year were 2.4 trillion pesos, mainly explained by the provision reversal due to a better macroeconomic forecast and less provisions related to COVID-19. In the slide, you can observe in different points of time the forecast of GDP we had for 2021 in each of the four countries where we have presence. For example, we started 2021 with an estimated of 5.7% GDP growth in Colombia, and finished the year with one of 10.2%. Moving to slide 12, we give you a snapshot of provisions in asset quality. Cost of risk for the year was 1.2%, lower than the normalized cost of risk these banks should have under normal circumstances. As we explained in the previous slides, The main drivers were economic recovery, less provisions related to significant impaired clients, and improvements in the expected loss models. During this year, charge-offs have increased 86% when compared with 2020, driven by the retail segment. This has two important impacts. First, it reduces the balance of the loan portfolio, and second, it helps reduce the past due loans. I want to highlight the 90 days coverage level of 231% with which we closed 2021. This responds partially to the fact that after the end of the reliefs, the amount of restructural loans increased. And even though these loans are provisioned, they are performing or in a grace period. This shows a solid enough coverage to face 2022. On slide 13, we present the liquidity position of the bank. In a consolidated basis, we continue operating with sufficient levels of liquidity. At the end of 2021, saving and checking accounts represent 61% of funding structure. This growth is mainly explained by the growth in the number of customers thanks to the bank's digital strategy. This increase has been compensated with a decrease in time deposits and credits with other financial institutions. As we have mentioned during the call, the economic activity and the loan book are showing better trends quarter by quarter. For this reason, the balance in time deposits, savings and checking accounts will increase at a similar pace during 2022 to support this growth. On slide 14, we present an overview of Colombia, and Central America. Central America is gaining relevance in the group as we have been able to improve the standalone operation despite the challenges. At the end of 2021, as region, the loan book reached $15 billion and 2.6 million clients. 2021 results were better than expected and the trend throughout the different geographies was similar. Reactivation of the loan portfolio, increase in saving and checking accounts, stable margins, strong capital position, increase of expenses, and decrease in provision charges. We are replicating the experience we had in Colombia in Central America. From the digital strategy, we see the opportunity to grow in deposits, clients, and fees. I want to highlight some key aspects from the standalone operations. After the end of the relief program in Panama, the performance of clients of Banismo who are coming out of their reliefs is better than expected. During the year, the retail clients reactivated, mortgage had a positive dynamic, and the corporate disbursements showed a positive trend. El Salvador is facing a challenging fiscal situation, but Banco Agricola keeps maintaining its good operational metrics with a return on equity of 19% for 2021. And in Guatemala, we have positive perspective with the economic activity of the country. That is reflected in the growth of the loan book. That's why we are being more aggressive in the retail segment. On slide 15, we see the evolution of margins and net interest income. Net interest margin closed 2021 in 5.1%, with an expansion of 20 basis points. despite the low interest rates, explained by three main drivers. First, more efficient funding structure, leverage in CASA deposits. Second, a good performance over the year of the regional mortgage segments. And third, the beginning back in September of the rate hikes by the Columbia Central Bank. Net interest income grew 8.9% over the year because of the 26% reduction in interest expenses. For 2022, even though we foresee an increase in the funding cost, we expect a good performance of the NII due to the loan book growth and increasing the interest generated by the loan book. And for the NIM, we are expecting an expansion of at least 100 basis funds due to the rate hikes. We expect the reference rate to close 2022 in 6.5%. Remember that we have an asset-sensitive condition, where approximately 70% of our assets are floating, while only 34% of our liabilities. Slide 16 shows the evolution of expenses and efficiency. Operating expenses increased 14.6% during 2021. In this slide, you can observe that general expenses and salaries of employees are under control. The main driver of this variation were First, the variable compensation of employees. Remember, we can sell during 2020, and because of the good results of 2021, this payment returns. This item explains almost 50% of the 14% increase. Second, renting expenses due to the asset depreciation. Despite being registered as an operating expense for accounting reasons, This element is directly associated to the operating leasing, which outstands as one of the business lines with the highest growth within the balance sheet and explains 2.4% out of 14% increase of expenses for the bank. On third, investments related to digital transformation that shows an expansion of 38% during the year. These efforts are reflecting the higher amount of transactions and the new clients engaged that have permitted us to grow in loans and fee generation. This component explains 1.5% of the bank's total 14% expenses growth. With that in mind, these three items together illustrated 11.4% out of the total 14.6% increase in expenses. Slide 17 shows the evolution of fees. Net fees continue to be one of the most resilient lines on the P&L, growing 13% over the year. 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. For 2022, we expect net fees to grow between 10% and 11%. Slide number 18 shows the profitability metrics. During all the quarters of this year, we delivered positive results, maintaining the pace of investments in deals and formations. Net income for the year was 4.1 trillion pesos, and return on equity stood at a level of 14%. Even though the decrease in provision charges were the main driver of this result, I want to highlight the good performance of the other lines of the P&L. Stable margins, thanks to the efforts made on the funding cost, and steady growth of NII and the fast recovery of fee income. For 2022, we expect, with the implementation of last year's tax reform in Colombia, an effective tax rate in the 35% area. On Incline 19, we present a consolidated and standalone capital adequacy. Consolidated total solvency ratio stands at a level of 15.5%, while CET1 at a level of 11.9% under full Basin 3 for the year. These ratios are well above the minimum regulatory requirements, not only in a consolidated basis, but in the standalone operations. As Juan mentioned in his opening remarks, yesterday we announced our dividend proposal from 2021. We want to be clear that we have been preparing for this proposal in previous years, but because of the pandemic, we had to postpone it. Equity is the line of the balance sheet that has grown the most in recent years. The implementation of Basel III was positive for the capital ratios, and we are expecting a moderated organic growth of the balance sheet in the next three years. This is a structural change in our dividend policy, and the bank has the capacity to generate capital in a sustained basis in the upcoming years. The new dividend policy defines as an optimal core equity tier one range from 11 to 12% to operate the bank in the next few years. Based on the current macroeconomic conditions and in our profitability, and the growth expectations. Therefore, in the next years, the dividend payment will be based on this range. Now, I want to turn the presentation to Juan Carlos for the closing remarks. Juan Carlos.

Thank you, José Humberto. After one of the most challenging situations the world has faced in the recent history, 2021 was a transition year. We are very proud of the results we just presented, and we are quite aware of the challenges ahead. We are ready to support our more than 25 million clients and all our stakeholders in the period emerging after the pandemic with a strong balance sheet, liquidity, products, and services. I want to close this call giving our 2022 guidance. We are going to return to our normal cost of risk levels of around 1.8%. We are expecting the notebook to grow between 7% and 9%. The cost-to-income ratio between 47% and 49%. And finally, with the ROE at the end of the year between 14% and 15%, which we believe is our medium-term profitability level. 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 remove from the queue, please press the pound sign of the arch key. If you are using a speakerphone, you may need to pick up the handset before pressing the numbers. Once again, if you have a question, please press star, then one on your phone. The first question is from Ernesto Gabilondo of Bank of America. Please go ahead.

Hi, good morning, Juan Carlos, José Humberto, Carlos, and good morning to all your team. Congratulations on your results. I have three questions on my side. The first one is from the Gilinski Group. is wondering if you can help us to understand how many board Cs has the NIMS key group obtained so far, and when do you expect to have the full picture of the board's composition at SUDA? And also related to this topic, would you be evaluating a potential merger with Sudaneris? And then my second question is on NICI, as you have said in your presentation and before, when Colombia has separated NECI from the traditional operations. So is this the objective to start providing some key performance indicators? And I don't know the specific P&L for NECI. Is that correct? What do you expect to start providing those metrics? How do you see today as the most profitable product in NECI And also, it will be interesting to know if NIC is already profitable or whether it's better to be so. And then our last question is on your ROE expectations. I know that you're guiding between 14% to 15%. However, when putting all together your guidance on the new dividend payout ratio, it seems this year's ROE is more around the 15%. So we've got to double check if this is something reasonable to expect. Thank you.

Thank you, Ernesto. Let me address your further questions. The first one related the tender offer for Grupo Sura. As you know, there was a first tender offer in which the Linsky Group now has a participation over 25% on Grupo Sura. That's the fact. Now there is another tender offer on progress, but we don't know the result yet. The tender offer will be closed on February 28th and at that point we will know what is going to be the participation of the group in Grupo Sura. So far what we know is that they already have a participation. The shareholders meeting of Grupo Sura is scheduled to be at the end of March and at that moment we will know how many things they are going to have on the Grupo Sura board. That's what the information that we have already and we need to wait and see how things develop in the future. Related to Your second part of the question, a merger, the tender offer documents, they express, the Grup express that they had the intention to present as a possibility to Grupo Sura to consider a possible, a potential merger between the Grupo Surab and Colombia conglomerate and Grupo Sulameris conglomerate. Now, that's the only information that we have. We, again, need to wait and see how that develops. The only information that we have is the one that I mentioned that is on the documents of the tender offer. The second question regarding NECI, As we announced at the end of last year, we are in the process of separating NECI. That will take, we think, the whole year. So we are separating NECI as an independent entity, and we are in the process of creating the legal entities and asking for the regulatory or going to the superintendency of finance to ask for approval of NECI as a separate entity. So during this year, we will continue reporting NECI performance, and we will increase our disclosure since we are moving to be a separate entity. Once it's a separate entity, we will fully report the performance and the metrics of Meki. We are very happy with the performance, as we mentioned. We ended last year with more than 10 million clients. The pace of new customers is very, very high. Also, we are increasing the number of loans, and it's also increasing at a very good pace. We are also very happy. And that's our path to profitability. NECI is not profitable yet, but it has all the potential to be very profitable since we already have that number of clients in which we can start cross-selling them and adding additional products, including credit, which is, we think it has a very high potential. So we'll be disclosing, as I said, more information, but That will probably be once NECI is a separate entity. Regarding ROE, as you mentioned, our guidance for the ROE of 2022 is between 14% and 15%. We think that it's a target that we can meet. You said your models are more around 15%. You could be right. There are some uncertainties around the ROE. One is probably the most... What is going to be the key element, I think, during this year is interest rates in Colombia. How are we going to transmit the interest rate hikes? to the market. So it could depend. We are pretty certain that we can achieve the 14%, but we think that is a high upside that we can reach 15%. That's why our guidance is between 14% and 15%, Ernesto.

Super helpful, Juan Carlos. Thank you very much.

You are very welcome, Ernesto.

The next question is from Jason Molly of Scotiabank. Please go ahead.

Hello, everyone. Thanks for the opportunity to ask questions. I have some follow-up questions related to what you've been talking about. First, I believe at the beginning of the presentation you mentioned one risk, one potential risk to the outlook is on the political side. If you can give us perhaps some of the positive risks and negative risks that you see could come about in Colombia. My second question is a follow-up on what you talked about, the structural change in the dividend policy. If you can explain the main rationale for these structural changes. You did just comment that you have been considering this kind of change in the past. but COVID got in the way. If you can talk about maybe that process of making this change, I think it's very constructive personally. And lastly, on the ROE guidance, I believe you said ROE at the end of the year, 14 to 15. So does that mean, like, just in the fourth quarter, you're going to be getting to that? This is a gradual process to get there? And is this just the number that you expect in the fourth quarter rather than for the whole year? And maybe if you can provide another line item on the tax front since that can be a large factor in hitting the bottom line. So maybe you can give us your views on taxes. Thank you.

Thank you, Jason. Let me start with your first point about risks and the political aspects of those risks. As you all know, Colombia is facing during this first semester an election process. Congress will be, a new Congress will be elected 13th of March. And there will be presidential elections May and June. There are sentences related to any political process, I think, in any country. So at this point, what we know is that on the presidential one, there are many candidates. And we we still don't know how that is going to develop. We will have information after March 13, in which I think we will know what candidates are going to run for presidency for sure. And at that moment, we will have a more clear picture of the situation. But let me add that Colombia, has a very strong tradition of very strong institutions and democracy we think is an asset of any country. So there are incentives, of course. We don't think they are going to affect materially the results of the economy and of the bank during 2022. but the results from the positive or negative side could have some effect, I think more for 2023 than for 2022. Your second question regarding our change on dividend policy. As you may remember, we announced last November a change on our dividend policy. The board of directors discussed the matter and what we have now as a dividend policy is that the payout ratio will be related with our core tier one levels. So what we are setting is the optimal level of core tier one that at this point we set between 11% and 12%. And with the net income that we generate during the year, we set the target and the portion of the net income that is not adding or is above that level of core Tier 1 will be our dividend for that year. But it's a structural change. And you mentioned that we were seeing this before the pandemic. As you also may remember, we had an extraordinary dividend during 2019 that it was the road to that change, structural change on our dividend policy. So what you could expect in the future is that we set the target of Q1, then we have the net income, and also what we expect as the loan book growth that is going to be another aspect that we need to incorporate into this equation. to define the dividends for the next year. So with that exercise is how we are going to present to the Shareholders' Meeting next March a dividend of 3 billion pesos. And we expect in the future, or what we expect in the future, keep applying this formula that I mentioned. And ROE, I think what we see is a 14 to 15% ROE for the full year 2022. It's not just the last quarter. As you saw, we achieved a 14% ROE for the full 2021. So what we expect for 2022 is, again, an ROE for the full year between 14 and 15%, Jason. And taxes. The next one is taxes. I'm sorry. As you know, there was a tax reform in Colombia that increased the statutory rate for banks to 38%. So that rate will apply for our revenues of 2022. With all the deduction and the different aspects of the fiscal laws in Colombia, we set our rate to be between 35 and 36 percent. But it's good to notice that we incorporate that rate on our guidance. So that 14, 15% takes into consideration that tax rate, Jason.

Thank you very much.

You are very welcome.

The next question is from Yuri Fernandez of J.P. Morgan. Please go ahead.

Thank you, everybody, and congrats on the quarter. I have a follow-up on margins. I guess you mentioned 100 bps potential expansion on INS. So I guess it's on the annual INS, so the 5.1 year-end, right, going to 6. That is above the 2018-19 levels. And I would like to understand where this 100 bps margin expansion is coming from. I remember in previous calls, you mentioned your asset sensitivity rates was around 8 to 9 bps every 100 bps. So my first question is, are you seeing a higher sensitivity now on better funding or something like that? So my first question is, How much of this 100 bps increase in margins is coming potentially from improved rates? And I have a second one regarding costs, right? You put in one of the slides some data showing the increase of your digital channels for sales, for transactions, and we see branches and other physical channels not recovering as much from 2020. That I think was a very easy comps. So, so my question is, why not a more aggressive cost optimization plan for, for, for Columbia? Right? Because we saw branches being closed in the past, but I don't remember seeing a very major drop in the number of employees. So why not given like your digital channels are growing, you are investing on digital. So why not a more aggressive. I don't know, DNA structure for the company, driving this cost to income, not from 47 to 49, but even going to the low 40s in the coming years. Thank you very much. Thank you, Judy. Let me address your questions. I will start with the margin. As you know, and it's happening all over, central banks are increasing the rates. That's the case in Colombia, and we are expecting rates to increase to fight inflation, and that's going to be one of the aspects that is going to improve our margin. We are coming from very low interest rates, and that increase in interest rates in the market are going to expand our margin. It's good to notice also that our decomposition of consumer loans on our total known books is now 22%. And we think that that allow us to transfer faster the increases in interest rates, but also we have higher margins on that credit. So that's why I'm going to pass that question to Jose Humberto to give you more color on that. But what we believe is increasing interest rates and our loan book compositions are going to help us on the margin, and that's why we are expecting an increase of 100 bits on the margin. And let me address also your second question, and then I pass to José Humberto to complement my answer. Yes, we are improving our digital channel presence. We are very happy with how that is developing. how our clients are adopting the new channels, new products. But this is a path that we cannot stop. It's not that we are at the end of this journey. So we need to keep investing and we are going to incorporate What we are gaining on incorporating new digital channels, our digital transformation, that will be incorporated in the next years. So it's going to be incorporated, I am sure. It's not going to be during 2022 yet. Because we need to keep investing in that transformation. If we stop that, the ability to compete of the bank is going to be affected. So our view is we need to maintain an equilibrium between the short-term and the short-term results and the long-term performance. results of the bank and that digital transformation. So we started that journey some years ago, but still we need to continue in that journey for maybe two, three more years. And the other thing that I think is going to affect this New technologies, new behaviors of the consumers, new competitors are going to be there and we need to keep investing. It's not something that you create a plan and you end that plan and that's all done. You need to keep working. But for me, the key point is that we, at the end, are returning the profitability that the investors are requiring. And I think that 14% to 15% that we are announcing for 2022, and that is in line with our midterm guidance, it's the key point in this point, Jury. Let me now pass the line to Jose Humberto to give you more information on margins. Thank you, Juan Carlos.

Good morning, Jury. I think the best way to explain what is happening with the name expansion in the bank is through three different paths. The first one, as explained, Juan, the composition of the loan portfolio right now, the consumer weight is 22%, but also we have to highlight what is going on in the commercial loan portfolio with SMEs. We are improving and we are increasing our loan portfolio in that SMEs section. It is helping us on the asset side. The second part is the way we are getting funding. Now we have a different way to fund the business because remember that checking accounts and savings accounts, it is around 70% of the total funding that we are having from our customers. So this is very low interest rates and we have only 35% of this liability in terms of floating. Meanwhile, on the asset side, we have 70% of our long portfolio is floating, so the repricing will be faster because, again, the structure of funding is different. And the third way, the reason why the new expansion will happen this year is because you can see interest rates coming from 3% at the beginning of this year, and then we end to 6.5%, almost double. So that explains the different speed or pace of repricing of the assets.

No, that's super clear, Zomberto. Thank you. Thank you very much, Juan Carlos, for the explanation as well. And congrats again for the question. Thank you, Yuri. Thank you, Yuri.

The next question is from Andres Soto of Santander. Please go ahead.

Good morning, Juan Carlos Osumberto. Thank you for the presentation and congratulations on the results. My question is related to your digital strategy. In this year, 2021, you show significant progress in terms of the rollout of several services, including NICU cards and QR payments. for Bancolombia. I would like to dig a little bit deeper on the QR side. Which clients are you targeting in this approach? How many clients you already have? I believe you mentioned 1 million. I would like to confirm that. And more generally speaking, my question is how you guys plan to manage this transition in which, as you showed in this presentation, Colombia has a significant share in in debit and credit card transactions and now you are rolling out which are a very important source of Bancolombians profitability in terms of fees and and these alternatives I assume are exempt of fees so I would like to understand how you guys are managing this transition from highly profitable products that are probably expiring and while you are rolling out these new round of products that at the beginning probably are going to cost a little bit in terms of profitability.

Thank you, Andres. That's a very interesting question. Let me describe a little bit how the Colombian markets, the Colombian market its own payments. The acceptance of credit cards and debit cards is limited. Just to give you a figure, there are around 500,000 EOSs in Colombia. But the potential is very high. And our strategy is to cover those businesses, mainly small and medium businesses that do not accept cards today through the QR strategy, QR code strategy. So what we are targeting is that small and medium enterprises that do not accept digital payments or cards today So what we are covering is one part of the market that is not addressed today. You are right, we have 1.2 million QR codes in the market now. So what we are doing is that we are enabling those small businesses to accept digital payments and they do not accepted in the future in the past i'm sorry so at the end what we are doing is expanding the market so that's not hurting our business the car business it's adding efficiency to the payment uh the network and to the acquiring or to the acquisition business but we also know that the debit and credit card business is going to evolve So what we are doing is preparing for that evolution, complementing and addressing part of the market that was not served. And we are very happy with that strategy. And let me add that those payments are giving us very good information that we feed on our models to also address those customers with other products and do the cross-selling. As I mentioned, we are very happy with the volume that we have, and we keep evolving, and I think the numbers and the figures are going to continue growing. allowing our digital platforms to become a payment method. So Neki and Bancolombia La Mano and also the Bancolombia app are now payment tools that the usage of our platforms are increasing. So it's a very virtuous circle that is helping us a lot in our strategy, Andresi.

That's very clear. Thank you, Carlos. Do you have any estimate of the potential size of this market of QR payments considering the SMEs that are not taking credit cards at this point?

The whole market, the addressable market could be around 4.5 million. We think that we can address half of that market in our strategy. So it's a big market. And as I mentioned, it's very – those small businesses move into digital and accepting payments on physical stores, but also on e-commerce, I think, are a great potential, and that's where our strategy is heading, Andres.

Absolutely. Thank you for the answer, and congratulations again.

Thank you, Andres.

The next question is from Tito Labarta of Goldman Sachs. Please go ahead.

Hi. Good morning, everyone. Thank you for the call and taking my question. My question is on your cost of risk guidance. You mentioned that you expect it to normalize back to 1.8% for this year. But just curious, do you expect to get there immediately in one queue and stay at those levels for a year? Will it be more of a gradual increase to get back to those levels? And, you know, what kind of underlying asset quality assumption do you have for there? I mean, asset quality is holding up fairly well. Do you expect to see some deterioration from here, any color in terms of where NPLs can be by year end as well? Thank you.

Thank you, Tito. What we expect is that during 2022, as we mentioned, there will be a normalization of the cost of rates of around 1.8%. It's going to be gradual. There were affected by what happened in 2020 and 2021. So we saw a big swing between those two years. So now what we are moving is gradually returning to 1.8%. It was, as you mentioned, our long-term guidance for cost of freeze. So we expect that during this first semester, that cost will normalize, and then we will end the year with that cost around 1.8%. And let me pass to Jose Humberto if he has any additional information to complement the answer.

Thank you Juan. Just in terms of NPOs, we are foreseeing a kind of stabilization of that level. And for in the second half of the year, you are going to see the normalized cost of risk and normalized MPL levels.

Okay, thank you. And just any comment in terms of the different segments and how MPLs can evolve between consumers and commercial and SMEs?

I think commercial was one of the main segments that shows a gradual improving in terms of NPS. And in the last round will be the consumer loans, and we are foreseeing a normalization again beginning the second half of the year.

Okay, great. Thanks so much.

Thank you. Thank you, Tito.

The next question is from Carlos Gomez of HSBC. Please go ahead.

Good morning, and congratulations on the results. A couple of questions. The first one refers to your expense level. It was higher this year, we understand, because you were able to normalize the bonus payments to your employees. Is that correct? Is this the level of expense that we should expect on a normal basis, or would you say it was higher or lower? The second refers to your structure. We have seen some of your peers in Colombia segregating the Central American assets to facilitate their capital management. In your case, would you consider at some point a separate listing for what you do not have in Colombia to make it easier to adjust the capital structure? And finally, under any circumstances you get involved in the offerings, I mean, could you possibly justify perhaps that there is a case for Bancolombia to make an offer for the shares of Sura or any other company in the conglomerate? Thank you very much.

Thank you, Carlos. Let me address your second and third points, and then Jose Humberto will elaborate on the expenses level. We are not considering any changes on our structure to facilitate the capital management. I think we are comfortable on how we are doing the structure that we have. So, at this point, we are not considering any evolution on our structure in the sense that you mentioned. Regarding your third question, the answer is no. We are not, from the regulation, we are not allowed to do that. So, it's a category no. And the first point was in there.

Yes, Carlos, the peak deviation of the expenses in general terms, the 14% that you are seeing on the presentation, it explains 50% out of this 14% because of the labor cost. As you mentioned, this is mostly because of the bonus plan. Going back to your question, we are not foreseeing a peak increase in terms of labor cost for these 22 years because It is now comparable with the 2021. So you are not going to see a big change on that line.

Okay, that's very clear. And by the way, thank you very much for the answer on SURA. And that's a question we have to pose, and it's very clear on your side. When you mentioned regulation, would regulation allow a merger between you and another financial institution in Colombia, given that you're already the large one. I imagine you have approached them for any other possible takeover target that there has been in the market. Do you think it is reasonable to expect that a merger between Banco Colombia and somebody else could be considered, or do you think it is more likely to be rejected? Thank you.

Carlos, Yeah, it is allowed by the regulation. We can merge with other financial institutions. There are two sides of your question. It is allowed, it is possible, it has happened in the past. It's part of regular business in the industry, as you know. In Colombia, it's the same thing. Now, the other side of that is that any... possible merger or other form of allowing different institutions to work together goes to the financial regulator, but also the competition regulator. So we, as you mentioned, we have around 26% of the Colombian market as a whole. And the competition authority will have to have a word on any potential, but in any case, not just the one that we have been talking, but in any other form of acquisition or merger.

Very clear. Thank you so much. You're very welcome, Curtis.

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

Hi. Good morning, everyone. Thank you for taking my question. I actually just have a follow-up on taxes. You are going for a range of 35% to 36%. So I just wanted to check if this is the same level you foresee for the mid to long term, or is there any particular reason why this year it might be a bit higher? I don't know if maybe in the coming years we will see more balance mixed in terms of earnings contribution from the different geographies, which have a lower tax rate compared to Colombia, and maybe the tax rate in the future could be a bit lower for the group. So I don't know if you could provide some color on that. Thank you very much.

Thank you, Alonso. As you mentioned, the tax reform in Colombia had now, as you started to tell me, a great of 38% for financial institutions. And that's what we have now. And we are forecasting our performance based on that statutory rate for Colombia. So we don't expect any changes unless there are changes on the river. Let me add something. That's a temporary increase on for three years. So after three years, we come back to 35% statutory rate. So it's temporary. So next three years, we will have that statutory rate in Colombia. And as you mentioned, there are different rates in the different countries in which we operate. And, of course, the performance of those operations in Central America will affect the tax rate. But it's good to notice that Colombia is, as you know, 70, 72 percent of the whole rule. So the effect will be marginal on the statutory or on the effective tax rate alone.

Minister, thank you very much. You are very welcome, Alonso.

The next question is from Jose Cuenca of Citigroup. Please go ahead.

Hi, everyone. Thank you for taking my question. Just a couple of follow-ups. In terms of loan growth and loan performance in general, just wanted to get a sense from you of what you're currently seeing in terms of competition. Do you see, like, for instance, let's say the need to perhaps offer more competitive rates in order to foster loan growth? Any comment on that would be really helpful. And the next question, just to, I think you already commented, but in terms of MPLs, if I'm understanding correctly, it would be reasonable to expect like a normalization or an optic towards the second half of 2022, given your growth in the consumer and SME books. And in this sense, just wanted to get your opinion on what coverage level would you be feeling comfortable with? Thank you.

Thank you, Hussein. Let me address your first question, and I'll pass your second one to Humberto. Long-growth. We are foreseeing long-growth between 7% and 9%. We think that's reasonable. We updated our GDP growth for Colombia for 2022 to 5.5%. So with that level of growth, I think it's reasonable to expect a long road between 7% and 9%. And in the other geographies, we are also seeing a good dynamic on the economy. Expecting Competition is there, and I think it's strong competition in Colombia. New players are coming, but I firmly believe that Bancolombia is very well positioned to compete. We have a coverage, a very good network on Colombia. Our digital strategy is, I think, very clear and it's producing the results. So I don't expect that we have to affect our net income, I'm sorry, our net interest margin because of competition, and that's going to affect the volume. It could be an upside on the long run, depending on how strong and how the economies develop during 2022. Regarding your second question, let me pass that to Hosenberg.

Thank you, Juan. Jose, yes. The 7% that we are expecting, long road, 7 to 9, the main driver will be consumer, the top with 10%, and the lower bracket will be commercial, 6 to 7%. And that's one of the reasons we believe that the normalization, again, will be on the second half, because there is no one specific main driver of the long road. There will be three segments at the same pace. And yes, we are expecting to maintain the same level of coverage, meaning that for 30 days we will be in the area of 120%. And for 90 days, we will expect our 180 to 200 basis points, 200% of coverage. Great.

Thank you.

Thank you, Jose. Thank you.

The last question is from Alonso Aramburu of BTG. Please go ahead.

Yes, hi, good morning, and thank you for the call. I wanted to ask a little bit about Panama. It seems that that's the only geography where profitability really hasn't picked up in 2021. Can you comment what you expect in 2022 in Panama, and if you can get potentially two double digital ROEs in that country, which hasn't been the case, I think, for a few years now?

Thank you. Thank you, Alonso. And the answer to the last part of the question is yes, we expect to go back to or to go to double-digit ROEs. It's good to notice that Panama, the release in Panama ended September 2021, so still we are seeing a lack on how the customers are performing. So it's going to take within six months to really know what is the situation of those customers, how they are going to perform. But we are seeing very positive results or better than expected results so far. So we are positive on the performance for 2022. And also I would like to add that Ipanismo is growing faster than the market in both deposits and loans. So we I agree with you that the BANITSMO is behind the other operations in which we have presence, but we are positive that 2022 will evolve and BANITSMO will have the results in line with our expectation, which is be close to that double-digit ROE that you mentioned, Alonso.

Great. Thank you very much.

You're very welcome.

Mr. Mora, I'll turn the conference back to you for any closing remarks.

Thank you. Thank you. All of you who are attending this conference call, we are happy of the 2021 results. An ROE of 14% is in line with our mid-term target of return on equity. And we are positive that 2022 will continue that line to giving those returns to our investors between 14% and 15%. We are confident that we are very well positioned to take advantage of the digital transformation that we are undertaking and that the results of Bancolombia during 2022 will be positive. Again, thank you very much for attending this call, and we hope to see you on the conference call results for the first quarter 2022. Thank you very much.

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