Grupo Cibest S.A.

Good morning, ladies and gentlemen, and welcome to Bancolombia's third quarter 2022 earnings conference call. My name is Ariel, 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 one 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, addresses matters that involve risks 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 Rocio, Chief Corporate Officer, Mr. Jose Humberto Acosta, Chief Financial Officer, Mr. Rodrigo Prieto, Chief Risk Officer, Mrs. Catalina Tobon, 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, everybody. Welcome to Bancolombia's third quarter conference call. In this quarter, we reported 1.6 trillion Colombian pesos of net income. We are having a responsible growth across all segments, increasing revenue and producing positive operating leverage. The asset quality metrics of the bank remain strong, confirming an effective origination strategy. The countries in which we operate present a good performance, especially Colombia, which may grow at a rate of about 7% in 2022 and has contributed to the rapid expansion of the bank's portfolio during the year. In recent months, however, we have seen a change in the trend of credit demand. particularly in retail, driven by inflationary pressures and a high interest rates environment that is impacting the customer's payment capacity. Liquidity continues to be one of our focus areas coupled with our capital structure and risk management. We hold a solid funding base that supports comfortably our needs to operate the business. We have increased the collection of deposits in the last year, and also we have broadened the access to mid- and long-term financing from multilaterals and international banks complement funding structure. It is worth mentioning that this week ends the approval process by Congress of the tax reform that will allow the government to collect an additional 20 trillion pesos to face its social expenditure program in 2023. This reform has a direct effect on financial institutions, imposing a surcharge that increased the statutory tax rate from 35 to 40 percent from 2020-30 from 2023 to 2027. In general, this reform has focused on a greater contribution from high-income taxpayers, as well as corporates from financial and energy sectors. Energy companies will have incremental tax associated with both oil and energy prices. An important subject to follow in the government agenda will be the minimum wage increase that will be key for 2023 inflation development. Currently, it is being discussed by stakeholders and is based on the projected consumer price index, CPI, growth above 12% for the end of the year. For the rest of the topics in the political agenda, we have not seen further progress, so we will be looking forward for new announcement through the end of the year. 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. Juan Pablo Espinoza Thank you, Juan Carlos. Now, please go to slide number three in the presentation. Let me start by saying that the Colombian economy has continued to perform better than initially expected. Based on the still strong performance in the third quarter of the year, we anticipate a GDP growth of 7.8% in 2022, higher than our previous estimate and above the consensus forecast. This is due to the strength in private consumption and increase in terms of trade, thanks to oil and coal prices. In contrast, for 2023, we foresee a sharp moderation of growth to a rate of 0.9% in the central scenario, as aggregate demand cools off in a context of higher interest rates, global deceleration, and continued uncertainty. We anticipate that next year the best performing sectors will be public administration, agriculture, financial services, and utilities. On the contrary, retail, manufacturing, mining, and construction are expected to contract. The main risks for economic activity next year are, first, a sharp tightening of financial conditions caused by recent distressing markets. Second, a pronounced deterioration of households' purchasing power as a result of persistent inflation. Third, a deterioration of labor markets caused by economic instability. deceleration, and higher salaries. And fourth, the spillover effects of a major moderation of the global economy. On the front of interest rates and prices, we anticipate that reference rate will peak at the first quarter of 2023 to a level between 12% and 13%. This is consistent with an inflation closer at 12.5% in 2022 and remaining well above the central bank's target range during 2023 and even in 2024. Our point forecast for December 2023 is 7.5%. The main reason behind this prospect is that core inflation will remain under pressure because of peso depreciation, the operation of indexation mechanisms, and salaries revisions. Under these circumstances, we do not see space for a quick change in the monetary policy cycle. Actually, we anticipate mild repo rate cuts by the second half of 2023 to 11.10% in December next year. This means that monetary policy will remain in contractionary mode during the foreseeable future. Regarding the exchange rate, in our basis scenario, we forecast an average USD cop rate of 49.15 for 2023, up from 42.50 in 2022. This means that dip factors supporting Colombian peso weakness, namely tight financial conditions, higher than peers' current account deficit, and uncertainty regarding the reform agenda will remain relevant. The depreciation would stimulate non-traditional experts at the cost of exerting significant pressure on tradable inflation. Finally, on the fiscal side, we expect central government's deficit to reduce from 5.6% of GDP in 2022 to 4.8% of GDP in 2023. This figure is consistent with the fiscal rule and incorporates the additional revenues from the tax reform. Moreover, if we assume that the additional tax collection coming from this reform will be split between social programs, debt service, and fiscal consolidation, we anticipate that the net impact of the reform on overall economic activity will be negligible. After this economic overview, let me turn the presentation back to Juan Carlos. Juan? Thank you, Juan Pablo. Moving to slide number four, I want to present the loans and deposits performance. In the last two quarters, growth in the loan portfolio has been mainly driven by commercial loans, which entails lower risk and provides better coverage structure. In retail, the most dynamic segment has been personal loans. we are experiencing a slower growth explained by high inflation and high interest rates. This changing trend is reflected more sharply in products such as credit cards. In terms of our liability structure, and given the environment of raising rates after the first quarter, time deposits have grown at a faster pace than demand deposits. thus supporting our increasing funding needs. Access to mid-term funding from international banks was also key during the quarter to complement our overall funding structure. For the fourth quarter, And surely throughout a good part of the first half of next year, time deposits will be relevant to maintain a stable funding structure and comply with the liquidity requirements. A couple of weeks ago, we carried out a sustainable bond issuance for 640 billion pesos throughout the International Development Bank. This is a mechanism used for the first time by a Colombian bank. On slide five, we see the growth breakdown. When we analyze the evolution of the loan portfolio and the deposit base, it is important to note that depreciation of the peso had a significant impact, not only in an annual basis, but also in the quarter. The local currency depreciated almost 11% from the end of June to the end of September. So after excluding the FX effect, the actual loan and deposit growth was 3%. Year over year, the depreciation of the Colombian peso was 20%. So the real expansion in loans and deposits was 16%. On slide six, I want to provide some details on our pre-approved origination strategy. The credit portfolio growth when excluding inflation has been around 15% year over year. Such performance is the result of a process that we began five years ago based on the analysis of the cash flow and expenses of our clients. We have been able to calculate the payment capacity and offer pre-approved lines of credit with significant outcomes for the bank. Leveraged on analytics, we have been able to implement this strategy broad-based across all segments in the case of retail. Out of our customer base, 1.5 million have received an automatic customized offer in 2022. This process has led to a positive origination approach reflected in the 30-day past due loan ratio of 4.7%, lower when compared to 5.6% of the whole consumer portfolio. On SMEs and corporate clients, we have also developed the capacity to pre-approve loans based not only on the financial statements, but also on the actual cash flows, allowing us to be more accurate on our offers. This explains why we are having a better risk profile than the pre-pandemic figures, bearing in mind that in 2023, we could experience a higher deterioration caused by inflationary pressures, higher interest rates, and lower economic growth. On slide seven and eight, We present the transactional performance of the bank as one of the key developments to highlight in the last few years, powered by the investments we made in technology, the modernization of the distribution network, and the implementation of digital solutions. We continue experiencing an accelerated shift to digital channels coupled with an important demand for services in physical channels, increasing our footprint in banking agents that have partially absorbed the increased volume of transactions. We would like to share some of the figures that show our competitive advantage in the use of the different channels offered by the bank. First, a share of more than 70% in the Columbia Mobile transaction market confirms our strong presence on the client's everyday activities. Second, an upward trend in digital engagement has led 76% of our customers to adopt at least one digital channel to execute their transactions. And third, banking agents account for 67 of the total in-person monetary transaction in Colombia. and branches represents 30% of the total in-person monetary operations. This gives a sense of the size of our customer base and the impact in the economy as well as our widespread presence across regions. Moving to slide nine, you can see an update on the technology transformation of the bank. First, we have made an important progress in the journey to cloud, allowing us to speed up our time to market, having more secure applications, accelerating innovation, and reducing costs. We have now 63% of the technological components of the bank already in the cloud. Second, Bancolombia has a 9.680% personal turnover compared to the industry average of 20%. Today, 51% of IT is in-house and 49% is outsourced. Third, we have implemented the API strategy aimed to enable new business models, such as banking as a service and open finance, connecting to new ecosystems and improving the customer experience. On the slide 10, we present our ESG update. We remain focused on reaching our 2030 goal of 500 trillion pesos disbursed under ESG criteria. We are getting closer to the goal of financing 103 trillion in 2022, reaching as of September already 91 Colombian trillion pesos. This quarter, we were able to issue the first bond in Latin America tied to sustainable indicators for an amount of 640 billion pesos. And we received a credit line from Citibank for $100 million tied to sustainable goals. general update of the current situation of Bancolombia. Now, I want to turn the presentation to José Humberto Acosta, who will give additional details of our performance during the third quarter of 2022. José Humberto.

Thank you, Juan Carlos. Now, turning to slide 11, we provide a snapshot of provisions and asset quality. our commitment to responsible growth remains under control. MPOs are still reflecting healthy balance sheets, both 30 and 90 days, as a result of the positive client's performance and, as Juan Carlos explained, based on the execution of a structured process of pre-approved loans. Provision for credit losses were 1.2 trillion Colombian pesos or 1.9% cost of risk for the quarter and 0.9% for the last 12 months. It is important to mention and one-off effect related to a real estate builder in client in Banismo that represented an important provision expenses for the quarter. The coverage for this client is close to 60% and the bank has a real estate warranties in place. to secure the rest of the obligation. When discounting this one-off in the quarter, the estimation for cost of risk would result in 1.5% or 902 Colombian Billion pesos in provision charges. We must remark the charge office increase in this quarter at the hand of the credit reliefs granted during the pandemic that have deteriorated gradually and cost the above-mentioned value. We should converge to a normalized level of provisions in the upcoming quarters by credit deterioration under the current economic cycle. We estimate that the cost of risk for 2022 could be at around 1.6%. On slide 12, we present the breakdown of provisions during the quarter. A moderate sequential increase in provision expenses experience since the second quarter is primarily driven by the consumer portfolio expansion in the last year. Additionally, a lower level of provisions releases associated to macroeconomic viables and overlays of credit under financial reliefs. Our allowances as a percentage of loans continues to be strong to face eventual deterioration. The coverage on 30-day past due loans is 154%. For the upcoming quarters, we expect to see an increase in credit deterioration and provision expenses, for the most part in retail, due to the challenging macroeconomic environment of inflation and high interest rates. On slide 13, we present the consolidated and standalone capital adequacy. Consolidated total service ratio stands at a level of 12.5%, while CET1 at a level of 10% under full Basel III for the third quarter. The reduction in the solvency ratios is explained in the first place by the depreciation of the local currency when converting the assets to a higher US dollar rate. On the other hand, the organic growth of the loan portfolio in Colombia during the last 12 months contributed to higher risk-weighted assets as denominators for capital ratios. For year end, our estimation for core equity 2.1 is 10% area considering for the fourth quarter, the credit demand, the forecasted earnings, and the FX rate. Slide number 14 shows the asset sensitivity to interest rates. The monetary policy has continued its contractionary cycle in Colombia throughout the third quarter, generating an extended expansion on margins. On the deposit side, it is very relevant to highlight the 62% weight on fixed asset rates in an environment of volatility, helping to protect the margin of the bank in a rate cycle. On the asset side, the combination of two elements, the credit originations at higher rates in all loan categories. And on the commercial portfolio, a large share index to floating rates quickly runs into repricing. On slide 15, we present the liquidity position of the bank. The impact of the rate hike cycle in Colombia is evident in the funding cost. The central bank took its revenue rates from 3% in January to 10% at the end of September. triggering a sustained deposit repricing throughout 2022. We have been seeing an important growth of 25% in both consumer and wholesale deposits during the last 12 months that have balanced the expansion in the loan book at the same pace. Here, I will highlight the composition of our funding structure as a competitive advantage. as 56% is represented by demand deposits, which make our overall cost very competitive. Out of this share, 44% are represented by saving accounts at a very low interest. These volumes are possible thanks to our leadership position in the system from a transactional point of view. Time deposits have increased more rapidly in the last quarter to help us compensate for longer-term needs. Finally, we have gradually increased our midterm funding with loans from international banks and multilateral institutions, contributing to the consolidation of a more stable funding structure. On slide 16, we see the evolution of margins and net interest income. Rising interest rates have led to a sustained higher net interest margin after the second half of 2021. Net interest margin closed at a 7.2% level, expanding quarterly by 50 basis points following the hiking rate cycle in Colombia. Net interest income increased by 72% over the last 12 months, mainly due to the repricing on assets and a lower extent, a larger increase a larger credit portfolio. In the case of investments, the analyzed net interest margin had an outstanding result, closing at a 6.6% in the third Q, extending a positive trend during 2022. This expansion is largely explained by the valuation of debt securities following interest rate hikes and exchange rate fluctuations in the Treasury's portfolios. We expect the reference rate in Colombia to close at a level of 11.75% by year end. Margins will not grow at the same pace going forward since we now face a higher increase in interest expenses as the repricing of deposits will offset growth in interest income faster. Given the results of September, we expect to close the year with a NIM at around 6.8%. On slide 17, we present an overview of Colombia and Central America. In general terms, the trend in the lending business throughout the different geographies operated by Bancolombia was similar. A continued growth in the loan book, an increasing interest income, and a solid position in terms of capital and liquidity. In terms of asset quality, we see good trends, except from Banismo that had some particular provision expenses impacting the bottom line. Banco Agricola in El Salvador shows good loan and deposit dynamics growing in each at the faster pace than the market in an annual basis, highlighting a positive performance of the commercial segment. From the deposit side, the bank has experienced an important growth in saving accounts to balance short-term loan growth at a very low cost. In the same way, Banismo presents a loan book growing at a level of 7% in an annual basis, driven by commercial outpacing the market average. Asset quality was impacted by a corporate case, as well as some deterioration in retail demanding higher provisions expenses. Finally, BAM in Guatemala has shown a resilient loan originations throughout the year with increasing margins. We are expecting to close the year with a growth around 9% in U.S. dollars, where consumer portfolio will continue to lead the pace. We are managing liquidity in an effective way, increasing our credit lines with corresponding banks to balance our funding needs. Slide 18 shows the evolution of expenses and efficiency. Operating expenses increased 14% in an annual basis. Recently, the faster pace of the local currency depreciation has implied a recalculation of our OPEX growth expectations, considering an important portion of our cost indexed to U.S. dollar, especially associated to technology components. In addition, there are two main factors explaining the growth experienced during the year. First, inflation rates in 2022 have pushed forward the increases in expenses to operate the business. And second, the performance-related compensation expenses provisions are higher in a year of growing earnings. We see good trends in the efficiency ratio, so we anticipate closing at a ratio of 44% to 45% for the full year as a result of revenues outpacing expenses growth on a yearly basis. This slide 19 shows the evolution of fees. As of September of 22, net fees have increased 11% when compared to the same period of 2021. I would like to explain the main reasons that have contributed to such growth. First, fees from banking services, debit, credit cards, and retail activities sustained a positive trend during the year. A higher volume of transactions and a strong client engagement show a dynamic activity in the quarter. And second, bank assurance has improved as originations remain at high levels in 2022 and insurance claims have decreased contributing to the net result. We maintain our growth guidance for the full year at a 10% area. Slide 20 shows the profitability metrics. Net income for the quarter was 1.6 trillion pesos and delivered a return on equity of 19% and 20% for the last 12 months. The effective tax rate as of September is 31.4%. Our guidance for 2022 full year will be 31% area. We remain confident in our revenue expectations for 2022 as we experience a consolidation of positive trends in the third quarter driving growth and higher earnings when compared to last year. Now, I want to turn the presentation to Juan Carlos for the closing remarks.