Grupo Cibest S.A.

Good morning, ladies and gentlemen. Welcome to Bancolombia's fourth quarter 2022 earnings conference call. My name is Sachi and I will be your operator for today's call. At this time, all participants are in listen-only mode. Following the prepared remarks, there will be a question and answer session. During this question and answer session, if you have a question, please press star then 1 on your touchstone 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, Mrs. Catalina Tobon, Investor Relations and Capital Markets 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 Bancolombia's four-quarter results conference call. We are very pleased to share with you our results for 2022, a year in which we delivered a strong performance and moved forward in our pursuit for sustainable development in the countries where we operate. Their income was 6.8 trillion pesos for the year, attributable to the combined effect of a positive economic background despite interest rates as per a contractionary policy stance and the good operational performance of the bank. Due to inflationary pressures, the central bank rose the reference rate 900 basis points during the year. Despite this sharp increase, the loan book grew 3.8% quarter over quarter, and 22.5% for the year. A significant expansion albeit a slowdown in demand in the fourth quarter. Long growth during the year was even amongst segments aligned with the overall improvement in economic activity. Meanwhile, deposits grew 5.6% during the quarter and 19.3% year over year, reaching an 85% share of the total funding mix as a reflection of the bank's capacity to attract competitive low-cost resources to fulfill its growing funding needs, even under more challenging market conditions. As a result, the NIM expanded to 6.8% for the year end as interest income generation outpaced interest expenses driven by loan growth, higher interest rates, and our asset sensitive condition. This, without any doubt, is one of the key competitive advantages of the bank and one of the drivers for ROE expansion last year. On the other hand, provisions for credit losses for the last 12 months were 3.7 trillion pesos, equivalent to a cost of risk of 1.6%, an increase of 56%. percent and is basically explained by a long growth and the low base of comparison versus 2021. Furthermore, provision for credit losses for the quarter were 1.7 trillion pesos equivalent to a cost of risk of 2.6 percent. This represents an increase of 49 percent quarter over quarter driven by combination of loan deterioration during the period, mainly in consumer segment. Expected credit losses as the economy slows down and rates remain elevated, and consumer related parameters and less favorable macro inputs. As per year end, allowances represents 5.5% of total loans, a coverage of 254 for 90 days past due, while Basel III core equity tier one ratio stood at 10% and the total capital at 12.5%, well above the minimum regulatory capital. Higher income generation and our efforts in cost control initiatives contributed to offset the overall increase in expenses, posting an ROE of 19.8% However, less favorable macroeconomic conditions globally and locally, coupled with political uncertainty in the countries where we operate, make us more cautious with regards to this year's performance. Factors such as persistent inflation, interest rates, and unemployment, so as the potential economic and social impacts of raising from government's ambitious reform agenda may impair economic activity. For further detail on the macro outlook, I will turn the presentation to Juan Pablo Espinosa, our chief economist. Juan Pablo.

Thank you, Juan Carlos. Now, please go to slide number three in the presentation. Latest data indicate that the moderation in economic activity that we anticipated a few months ago has already begun. GDP for the last quarter of 2022 surprised on the downside, with a year-on-year growth rate of 2.8%, so that full-year 2022 print was 7.5%, lower than our 7.8% estimation. This performance was mainly driven by a slowdown in consumption, which had expanded at double digits by six consecutive quarters and grew just 2.2% year-on-year in the fourth quarter of 2022. On the other hand, investment was the most dynamic component of demand with a growth rate of 10.3%, but in absolute terms, it is still below pre-COVID levels. For 2023, we keep our view that the Colombian economy will land to a growth rate close to 1% as internal demand cools off in a context of high inflation and interest rates, stringent financial conditions, and continued uncertainty. Factors that recover sharply after the pandemic, including retail, manufacturing, construction, and services, will decelerate more than the rest of the economy. This scenario will lead to a deterioration in the labor market, in which average unemployment rate will increase from 11.4% in 2022 to 12.1% in 2023. With respect to interest rates and prices, we anticipate that the central bank will finish soon the current hiking cycle with a terminal rate of $13.25. This is consistent with an inflation that will reach its peak this quarter at 14.3% and then will moderate gradually to close the year at 9.3%. Given that this number would be well above Barnweb's target, We foresee that the monetary policy stance will remain contractionary for a long time. Therefore, we forecast that the reference rate by the end of this year will be at 12.5%. Regarding the exchange rate, we forecast an average USD cop rate of 49.30 for 2023, up from 48.08 in 2022. This means that factors supporting Colombian peso weakness, including tight financial conditions, a large current account deficit, and uncertainty regarding the reform agenda will remain relevant. Moreover, this depreciation would exert significant pressure on core inflation. Finally, on the fiscal side, we expect central government deficit to reduce from 5.6% of GDP in 2022 to 4.2% of GDP in 2023, a number that incorporates the additional collection from the latest tax reform as well as higher revenues by the oil sector. Actually, this will allow the government to meet with the fiscal rule targets and at the same time increase spending as is contemplated by the amendment of the public budget that was submitted to Congress a few days ago. After this economic overview, let me turn the presentation back to Juan Carlos. Juan?

Thank you, Juan Pablo. Moving to slide four, I would like to highlight three key elements that have contributed significantly to our positive performance. In the first place, an extraordinary growth in clients. We have seen a consistent growth uptrend in the last years in all segments, and in 2022, we reached more than 29 million clients. We deem this progress as a result of a well-articulated strategy in channels, products, and investments in technology that has become a competitive advantage leveraged on the bank's network's footprint and product offer. NECI, Bancolombia La Mano, And banking agents are just a few good examples of this broad strategy. As you may see in the slide, in the case of Colombia, we have compounded annual growth rate for the last four years of around 9% in retail and SMEs and around 5% in corporates. Nowadays, we are adding around 300,000 new clients per month. This significant growth in terms of new clients has been a catalyst for further growth in deposits and asset origination, as we will discuss in the following slides. Moving to slide number five, you see the strong growth in terms of loans and deposits on a group level, posting at 22.5% for loans and 90% for deposits. 15.3% for deposits for the year. Peso denominated loans grew 18% whilst U.S. dollar denominated loans grew 8%. Nominal growth net of FX was 15% for loans and 11% for deposits. Such difference is explained by the sharp peso depreciation amounting to 20%. 0.8% during the year. There was uneven growth among segments during the year. In the case of commercial loans, we must highlight the growth in corporate loans which benefits the overall portfolio quality as it entails lower credit risk. In the case of consumer loans, annual growth was driven by personal loans. However, in the fourth quarter, This segment grew less than in previous quarters, consistent with higher interest rates. The current 24% share of consumer loans as the total loan portfolio is the result of a deliberate strategy implemented in 2014 to capture higher risk adjusted returns that contribute to broader income generation, as we will discuss later. Regarding deposits, The growth in time deposits stands out with 46.5% increase for the year, with a two-fold drivers. Large funding needs to meet loan growth coupled with clients' preferences for these types of instruments, given the higher rates environment. Savings accounts also grew, albeit more modestly, up 11%. 0.3% and reflecting the bank's strength to attract low-cost funding as we referred to previously. In slide 6, I will elaborate on the second key element consisting on the pre-approved and automated loan strategy that has been another of the catalysts of growth in loans and risk-adjusted returns, while it also provides management flexibility to adjust originations according to performance and risk appetite. The strategy started in Colombia in 2014 on the consumer segment, leverage on the richness of transactional information and investments on data analytics and automation. It has reached interesting effectiveness ratios in terms of disbursements and clients. More recently, it was extended to SMEs, corporates, and subsidiaries in Central America as it certainly provides value as to preserving asset quality with enriched and more precise risk model based on transactional flows data. Moving on to slide number seven, I will touch upon the third and last key element to highlight for this period. which is the evolution and leadership in terms of digitalization. This result is leveraged as well on the channel product and technology strategy that we already referred and allows the bank to adjust to our clients' needs and preferences for an enhanced experience. Bancolombia currently process around 71% of the market's digital transaction and around 43% of of online transactions and the growth in customers' volume of transactions and activity per user has been exponential. As an example, Neki today has more than 1.4 million active users per day, close to 10 million active users per month, and 1.3 million off-card users. In addition to being a driver for growth and efficiency, it's also a tool for financial inclusion. The total number of NECI users represents 29% of the Colombian population, and out of these, 1.7 million are NECI exclusive, meaning they do not use other entities. In slide eight, you can see how digital channels reshaped the transactional space in terms of volume amount and exhibit an upward trend in terms of digital adoption, reaching more than 77%. This in turn has increased digital sales, certainly boosted by the pandemic. It is important to highlight as well that in Colombia, cash is still important and close to 37% of transactions on a value basis are still processed through physical channels. for which the bank has an important advantage given its network and complementary with other cost-efficient channels as banking agencies. This interoperability has been certainly one of the drivers of Neki's transactional success as users can easily cash out through the physical channels. Going forward, we will keep investing in digital transformation for our customers' convenience and further efficiency. And last, in slide number nine, I want to refer to progress on our ESG strategy in which we continue delivering on our goal of reaching 103 trillion pesos of sustainable loans originated in the last three years related to agribusiness, SMEs, housing, climate change, and financial inclusion, amongst others. We also launched the first sustainable derivative in local market, providing great coverage to companies that comply with sustainable indicators. And last, I want to highlight the most recent Dow Jones Sustainability Index assessment in which Bancolombia was ranked as part of the best 5% banks in the world at the global ESG score. the only Colombian bank within the top 5%, standing out in dimensions such as sustainability finance, labor practices, and climate change strategy. We celebrate this achievement and stand to our commitment to deliver on our purpose. After this general business update, I want to turn now the presentation to Jose Acosta, who will further elaborate on our fourth quarter and 22 year-end results. Jose? Thank you, Juan Carlos.

In slide 10, you can see an overview of Colombia and Central America's operations. In 2022, Central America represented 29% of the total loan portfolio, increasing due to effects. These graphs reflect how all the banks have had similar trends in the last years, contributing to the overall good performance in terms of growth and pickup in margins post-COVID, where Colombia stands out due to a higher growth rate, market rate, and its asset-sensitive condition. Second, asset quality, all posting ample 90-day coverage. And third, progress in efficiency with falling cost-to-income ratios. It's work to highlight Banco Agrícola and Banco Agromecantil's positive performance as source of growth and profitability, ambanismo with potential to further capture efficiency. Now, moving to slide 11, you can see how liquidity encompassed loan growth during the year, closing at a loan-to-deposit ratio above 101%. During the fourth quarter, time deposits grew the most, reaching 30% in the deposit mix. just above pre-COVID levels. This growth was mainly driven by the net stable funding ratio requirements and larger demand as clients seek for higher returns. Despite savings accounts yielded to time deposits in the mix, its share is significantly higher compared to pre-COVID levels, reflecting the bank's strength to attract flows and keep deposits, all of which accounted for 85% for the year ending 2022. It is worth highlighting as well the capacity that Bancolombia and Banismo had to access credit loans to pay for the respective bonds maturity for a total amount of $1.5 billion in a moment in which capital markets were closed. This explains why there is a shift between long-term debt and loans with banks within the funding mix, which, by the way, contributed to reduced interest expenses. Also important was the issuance of the first sustainable living bond for a financial institution in the region, fully subscribed by the IDB and LA Green under a private placement with competitive terms and conditions. Moving into slide 12, we will talk you through NII and NIM performance. In the upper part, you will find Colombian NIMS evolution correlated to the market rates. During 2022, the reference rate increased 900 basis points, closing at a level of 12%. The steepest curve displayed by the NIMS since the third quarter of 2021 reflects the bank's capability to capture a higher margin even as interest expenses go up. This is explained by its asset-sensitive condition given that 66% of the loan portfolio is floating, whereas 38% of deposits are floating. Also, it's worth highlighting that 55% of term deposits mature in less than one year, providing some margin protection where rates are going down. This structure certainly represents a competitive advantage as it allows the bank to capture higher margins when rates are going up, whilst adjusting relatively fast to cuts in interest rates. In the lower part of the slide, you can see the significant increase in NII at the group level growing at the pace of 7.4 percent quarter-over-quarter and 55 percent year-over-year due to higher market rates, long road and interest and valuation income from investment securities and overnight funds held on the portfolio. As a result, NIM increased to 6.8%, expanding more than 170 basis points from the recorded in 2021. It's worth mentioning the contribution of investment portfolio as well that reach a NIM of 4.1% for the period, well above the past performance. In the short term, we expect NIM to remain stable as the average rate of the central bank that determines reference rate IVR will be higher versus 2022. In the long term, NIM should be at around 5.5% area. Moving to slide 13, we provide a snapshot of fees. Fees grew 10% during the year, exhibiting increases of around 20% in almost all categories. Colombia provided the largest contribution to the fee income, given the increase in volume of transactions as per higher retail activity, as well as an important growth in the number of clients. The incremental demand in consumer loans and credit cards outstanding also added to the positive performance in fees related to these products. Bank assurance performance was noticeable during the year, growing 27% explained by a continued growth on distributed products, largely associated to disbursement of retail loans. Banking services, in turn, grew as a result of the growth in transactional products and use of digital channels. The income ratio slightly dropped as a result of higher net income growth relative to net fee income growth. Moving into slide 14, we present the evolution of provisions and asset quality. Provision for credit losses for the quarter were 1.7 trillion Colombian pesos equivalent to a cost of risk of 2.6%. These represent an increase of 49% quarter-over-quarter, out of which 450 billion Colombian pesos are due to updates on consumer-related parameters and macro inputs, whilst the remaining balance is due to loan origination and deterioration. As opposed to the third quarter, there were no overlying releases during the fourth quarter. Furthermore, provisions for credit losses for the last 12 months were 3.7 Colombian trillion pesos, equivalent to a cost of risk of 1.6%. An increase of 56% year-over-year is basically explained by the loan growth and the low base of comparison versus 2021. The 90-day past year long ratio for the year end in 2022 was 2.2% down from 3% in 2021, reflecting a healthier balance and driven by a better payment behavior and improvement in the collection process. Charge-offs increased 65% year over year, associated mainly with reliefs granted during the COVID-19 crisis. We continue committed to responsible growth. Our allowances as a percentage of loans remains strong and represents a coverage 90-day past due loans of 254%. Going forward, we forecast a cost of risk of around 1.8% for the 2023. Moving to slide 15, we present our operating expenses and efficiency ratio. Operating expenses grew 18.8% in 2022 driven by a combination of FX depreciation and inflation, as well as higher taxes and investment in technology. As a result of the positive overall income performance delivered during the year, and coupled with several cost-control initiatives, the cost-to-income ratio of Bancolombia for 2022 was 44.6%. Notwithstanding this good result, going forward, we expect a more sustainable ratio at a level of 45%, aligned with the normalized income generation. Moving into slide 16, we present the profitability metrics. As mentioned before, there was a strong income generation during 2022 that drove margin expansion and diluted cost. As a result, net income for the year was 6.8 trillion Colombian pesos and delivered a return on equity of 19.8%. However, going forward, As global and local economic conditions deteriorate, we forecast a sharp moderation in loan growth, fee income, and higher expenses related to provisions and operations. The effective tax rate for the year end in 2022 was 28%, and as a result of the recent tax reform, we forecast a tax rate of 32% area for 2023. And finally, On slide 17, we present a snapshot of the bank's capital. The bank's capital adequacy ratio on a consolidated basis stood at a level of 12.79% by year end under full Basel III. Strong profitability boosted core equity to one generation in 284 bps during the year. Conversely, there was a total of 439 bps reduction mainly associated with the strong organic growth, coupled with a significant cup depreciation that increased the value of Colombian pesos of dollar denominated loans and the goodwill. Going forward, we expect a long road of 5% and core equity to run up at around 11% at the end of 2023. Now, I will hand over the presentation back to Juan Carlos for some final remarks.

Juan. Thank you, José Humberto.

2023 will be a challenging year. We acknowledge that the world has changed in many ways, and it's having an impact in the countries in where we operate, such as economic slowdown, persistent high inflation, high interest rates, higher unemployment, among others. However, we are confident that our strategy and our competitive advantages will allow us to better handle the tougher conditions whilst we continue to pursue on our long-term strategy. We will continue supporting our clients with a special focus in asset quality, proactively assisting them to find solutions to avoid loan deterioration and leveraging more on data analytics to monitor their payment capacity to preserve a health balance sheet. Meanwhile, based on our estimations, our loan growth will be around 5%, cost of risk around 1.8% area, and NIM around 6.5%. We forecast our core equity Tier 1 ratio for the year end 2023 will be around 11%. Thus, yesterday we announced the dividend proposal to be discussed in the annual shareholders meeting in March, consisting of a 50% dividend paid out, equivalent to 3.4 trillion pesos payable in four quarterly installments of 884 pesos per share during the year. And finally, our long-term ROE should stand around 15% area. With this, I will invite you to ask any questions you may have.

We will now begin the question and answer session. We ask that you please limit yourselves to one question each. If you have a question, please press star then 1 on your touch-tone phone. If you wish to be removed from the queue, please press star 2. If you're using a speakerphone, you may need to pick up your handset before pressing the numbers. Once again, if you have a question, please press star then one on your touchstone phone. The first question is from Ernesto Gabilondo from Bank of America. Please go ahead.

Hi, good morning, Juan Carlos, Jose Humberto, Catalina, and good morning to all your team. Thank you for your presentation and for the opportunity. My first question is on memes. Just wondering where do you see memes for this year? I was looking to your chief economist comments and he's actually expecting a higher rate in 2023. So just wondering how do you see the meme evolution this year? And then my second question is on asset quality. During the quarter, we saw higher provisions and write-offs. considering a weaker macro outlook in Colombia and some of the subsidiaries. So I also wanted to hear your thoughts on the cost to risk for this year. Thank you.

Thank you, Ernesto.

Regarding NIM, as you know, inflation remains high in Colombia and still there will be inflation pressures. With that, we foresee that the central bank, the Colombian central bank, it's probably going to increase the reference rate in the next session. Could be 50 basis points, could be even 75. With that, interest rates will continue increasing And as you know, that has an effect on our NIM. So what we see is that the NIM will remain and probably will expand a little during this year. We mentioned that the NIM should be around 6.7, 6.5, between 6.5 and 6.7 because interest rates will remain high. We don't expect that the inflationary pressures will cease soon and because of that probably the central bank will remain interest rates high for the remaining of the year or will start decreasing interest rates by the end of the year. So what we expect, as I said already, is that with that condition our name should be around the one that we have today, even a little bit high. Regarding asset quality, for me that's the variable to watch during this year. It's going to be key how the loan book is going to perform, particularly the consumer book. What we see is that The curve risk is going to normalize and we will have some additional pressures. What we are seeing now is that the cost of risk should return during this year to 1.8 area, could be a little bit more, depending on the pressure, as I mentioned, particularly on the retail side. But definitely that's the variable that we need to watch. What we are doing is we are anticipating that situation and we are working with our customers, with our clients, understanding the current cash flow situation and working with them and not waiting to have issues with their loans. So we are anticipating and Other thing that we are doing is this year we are not going to push for growth. We will be concentrated on asset quality, Ernesto.

Perfect. Super helpful, Juan Carlos. Thank you very much.

Thank you.

The next question is from Yuri Hernandez from JPMorgan. Please go ahead.

Hi, guys. Thank you for the potential for asking questions. One regarding GNA outlook, how do we see, you know, non-interest expenses growing? This year, it was, you know, a high growth growing closer to 20% over a year, but I think effects, you know, explain part of it. But even Colombia, that should be more normalized, like had a higher, you know, GNA year. I know you have a lot of, you know, IT investments, inflation is high. So any guidance for 2023 is welcome here. And I have a second question regarding our equity pollution. This was a very good quarter for your, your, your capital, right? Your shareholders actually quiz almost two times your, your net income generation. And I'd like to understand the moving parts here. Looking to your balance sheet, it seems to be more OCI driven. Like, um, and I would like to understand these, like what is driving, you know, like your equity to move up. Um, so we can expect, expect like volatility here. So is this effect we even in these rates, like what is driving, you know, these good behavior, for capital for you. Thank you.

Thank you, Yui. I am going to give you some comments around your two points and then I will pass your question to José Humberto and he will give you more details. Expenses, that's As you mentioned, there are pressures from effects, also from inflation and investments. We foresee or we are forecasting that expenses will grow a little bit above inflation, Colombian inflation. We are as I said, investing on technology. Those investments we plan to continue, but we need to work on other expenses and find space for those investments on technology. So that's the focus. What we are seeing and how are we handling this is we are targeting a 45% efficiency ratio. With that, we will be managing expenses. We think that with a 45 efficiency ratio target, we can deliver the ROE that we are expecting. So with that, as I said, expenses will grow a little above inflation. And with this, I will pass your questions to Jose Humberto.

Thank you, Juan. Yes, Yuri. Remember that part of our expenses are highly correlated with the level of transactionality that the bank has in a different chance. So that also explains, this is the fourth element that explains why we are expecting CAPEX and OPEX increasing a little bit above inflation for the 2023. Regarding your second question, the equity evolution, yes, there is one element that will impact the services ratio at the end of the year. That would be FX. But our forecast for FX 2023 will be less volatile than the FX that we had in 2022. So we are assuming to reach the level of 11% of year one based on loan growth of 5%, cost of risk of 1.8%, and an FX rate on average of 4,900 pesos. That explains why our rationale to maintain on average during the year, the 10.5, but at the end of the year, the 11%.

Thank you, guys. Thank you, Judy. Thank you, Judy.

The next question is from Andre Soto from Santander. Please go ahead.

Good morning to all of you and thank you for the presentation. I have a few questions. The first one related to margins. I'm curious to see that you are forecasting stable margins for 2023 even as you expect higher interest rates from the central bank and you have had such a great performance in terms of the funding structure. So what will be the risk for margins not to continue to move in tandem with higher Columbia rates? That will be my first question.

Thank you. Thank you, Andrés.

With margins, I think we will keep moving, as you said, in tandem with the rates, with the reference rates. As you know, we have a very diversified cost of funds, and we will have some additional pressure from the cost side of cost of funds, but we are able to manage, I think, the price in a way that we maintain the market. You could notice that we are not forecasting a big increase, additional increases on margin. That allows us to manage what is coming. So we are confident that the forecast or the guidance that we are giving around NIMS, it's accurate. I don't know, José Humberto, if you want to add something.

Yes, Juan, thank you. We have addressed two elements. On the loan portfolio, we are not expecting to grow in consumer loans that you know that this is a source of net income of NII. So we are potentially maintaining the same volumes of consumer loans during the whole year for the group. This is the first element of the asset side. On the funding side, we are having a very big portion of our deposits in savings accounts. But because of the interest rate is quite high, people will shift from savings accounts and checking accounts to time deposits. So the product for the Colombian banking industry during 2023 will be time deposits. So you are going to see an increase in our funding costs because of that. Because when the interest rates are high, there is not a point of indifference in between having the money on savings or time deposits. So time deposits will be the main driver for the liquidity. Those are the two elements that give us the explanation why we are able to sustain the mean during the year.

Thank you, Juan Carlos San Jose. My second question is regarding cost of risk. You say that you expect that to be at 1.8%. To me, that sounds a little bit optimistic. I remember in the past you mentioned that the structural cost of risk for Bancolombia should be around 1.9%, so 1.8% in a year, which we see so many uncertainties. All the banks were growing at such a fast pace in 2022, particularly in consumer lending as those loans come due, we may see some pressures there, right? So what will be sort of a range that you may expect in a more challenging environment, to what level you see cost of risk going, not surely the 2.6% that you posted this quarter, it should be the reference of what would be the stress scenario that we can use in our projections.

Andres, as we mentioned, cost of risk is the variable to watch during this year. We, as Today we are seeing a 1.8 area, but you are right, that could be a little bit higher. It depends how the economic conditions in Colombia evolve. You asked how high it could go. It could be around 1.9 if the deterioration is higher than we are expecting. So if you want to do some sensibility, it could be 1.8 as a mid scenario and could go up to 1.9. It depends on, as I said, how things evolve in Colombia. And that's the variable, again, to watch. And that variable will be the driver of Bancolombia results during 2023.

Thank you, Juan Carlos. The next question is from Carlos Gomez from HSBC.

Please go ahead.

Hello, good morning and congratulations on the results. Going back to questions that have already been asked, but I was wondering, you have a very conservative view of 2023. You expect less than 1% growth and you don't want to lend too much. So I contrast that with the fact that at the same time you are increasing the dividend. You are going for a 50% payout when traditionally the company has had around 30-35%. Why is that? Wouldn't this be the right moment to accumulate capital just in case? Since at other points you may not be able to have that luxury. And would you want to stay with that 11% or would you want perhaps to go a bit further in terms of accumulating capital again at this time when you have high profitability? Thank you so much.

Thank you, Carlos. As you said, the payout that the board is proposing to the shareholders meeting, it's 50%. Our average has been around 47% with some viability during the years. We feel comfortable that with 50% payout we can manage a healthy level of equity that we forecast to be at the end of the year around 11%, since growth is not going to be present during this year. There is not going to be pressure from long growth. We will be, as I said, around 11%. We feel that that's a level in which it's comfortable, it's enough. Accumulated too much capital, I think. We need to find the right level, and the right level for us is that 11% cut.

Okay, if I can push back a little. Historically, excess capital has not been a problem for Bancolombia. And again, since you are conservative at this point in time and you have a high profitability, I wonder why this would not be the right time to accumulate more. But of course, it is the decision of the management and you have to do what you think is best.

Thank you, Carlos. The next question is from Nicholas Walker from Goldman Sachs.

Please go ahead.

Hi Juan Carlos and everyone. Thank you for the time and for taking my question. First on the political environment in Colombia, how are you monitoring that situation and maybe what are you watching there and maybe specifically more on the tax rate or any other worries in terms of political environment in Colombia. And second, just on the expectations for fee and for fee growth next year in 2023.

Thank you. Thank you, Nicolas.

The political environment this year is focused on three big reforms that the government is submitting to Congress. The health system reform that was already presented and it started to be discussed. And they announced that we'll be presenting soon the labor reform and also the pension system reform. Last year, as you know, the tax reform increased the statutory rates for financial institutions to 40% or so. Now it's incorporated on our forecast and on our guidance. And as of today, we don't see any particular regulation regarding financial institutions. The discussions in Congress will be around these three big reforms, and that's what we are expecting now. So we need to be watching the evolution of any other variables or any other issues that the government is raising. But with our conversations with the government, they are not looking to introduce big reforms. What is going to happen and they are working on that is they are going to work on having more strong public banks. government banks, which they are saying are going to complement what private banks or commercial banks are doing. That's something that they announced and they are working on that. Regarding fees, we think that the fee level or fee growth should be also around 8% this year. The introduction of new services, transactionality, it's important for us since we are growing in the number of clients in a very healthy way, will help us to maintain a growth on fees, Nicolas.

Great, thank you. Thank you.

The next question is from Daniel Mora from Credit Corp Capital. Please go ahead.

Hi, good morning, everyone, and thank you for the presentation. I have just one question regarding the NIEM. You already mentioned that the guidance for this year is between 6.5% and 6.7%. But I would like to understand what is your base case scenario of the path of the NIM during the year? Because if we see the last couple of quarters, we saw a NIM above 7%.

So it means that you believe that this could be maintained at least in the first half of the year, as we are now expecting a decrease in interest rates.

I would like to understand what will be the need in the second half of the year considering the scenario and that you are maintaining an interest rate above 12%. I think that it will help also to understand what will be the outlook of the cost of deposits to better know or to better incorporate the guidance of the 6.5, 6.7 rates of the need.

Thank you so much. Thank you, Daniel.

I'm going to give you some general comments and Jose Humberto will give you some more details. It is important to take into account that the interest income will continue to be healthy because of volume that we built during 2022 and because rates are going to continue to be high. But there is volatility on the Treasury business margin. The Treasury business during last quarter, particularly during December, had a very good performance. But that's not going to be the case, we think, during the year. But that margin has more volatility. So you have to take into account what part is related to loans and what part is related to the treasury business. As I said, the interest rate income will continue being in a level that is the current level or even an increasing level. Regarding the cost of funds, let me pass that to Jose Humberto and he will give you more details on that.

Thank you, Juan. Yes, again, the structure of funding costs for the bank will shift during this year from checking and savings accounts to time deposits. That explains why you are going to see an increase in our funding cost. No matter if we're only growing 5%, as Juan mentioned, and it's not growing on consumers. So that would be the key element that supports our thesis of the need to be stable. And going back to the treasury business, also you have to take into consideration that our portfolio is less than 8% of the total assets. If you compare both elements, we are talking about 79% of our asset size are loan portfolio and 8% securities portfolio. So if you do the math, if you combine both effects, you are going to see a stable NIM for the whole year.

Perfect. Thank you so much. Thank you, Daniel.

The next question is from Juliana Alsique from Da Vivienda Corredores. Please go ahead.

Hi, everyone, and thank you for having my question. I would like to ask about the net stable funding ratio. As you mentioned, you are expecting that you will have to change your funding sources from saving accounts to time deposits. So I would like to know if you are now having the requirements that the regulation for the net stable funding ratio, or you are having some pressure on that, and what are your expectations for this year about this ratio? Thank you.

Thank you, Julian. Fortunately, our net stable funding ratio is under control. Currently, we are talking about around 105%. There is one reason why we have a very strong funding structure. because of the level of transactionality, because of the time deposits, and because of the savings accounts that we receive from our clients. So for the whole year, this year, we have enough space, enough room to move into the corporate deposits and institutional deposits. So we don't feel particular pressure. And the other part is we are not having pressure because we are not seeing a long road that we saw last year.

Okay. And my second question I would like to ask you about the loan portfolio. You mentioned that you are expecting a 5% of loan growth. Can you give us more color about it? Which segments are you expecting the best growth for the 2023? And if you can remind me the expectation of ROE for the year. Thank you.

Okay. Regarding your first question, On the low side of the long road will be consumer, as we mentioned previously, 0% to 2% long road consumer. On the upper side will be commercial, correlated with the GDP growth. And in the middle, you are going to see the mortgage business. So the combination will be the 5% that we mentioned. Our return on equity for 2023, we are expecting a return on equity clearly at around 16% to 17%. And the main driver will be the NII generation because interest rates will remain high, assuming, as Juan mentioned, the cost of risk of 1.8.

Thank you.

The next question is from Juan de Calde from Scotiabank. Please go ahead.

Hi, good morning, and thank you for taking my question. So my question is, In this context of high rates and slowing economic growth, we have seen some peers in the region make material changes to their digital initiatives. And you have delivered so far strong growth in user and strong engagement in your digital platforms. So in this context, can you talk about how the higher rates and slower economic growth impact Bancolombia's digital initiatives, particularly NECI and Bancolombia La Mano?

Thank you. Thank you, Juan.

Yes, that's very important. And we continue seeing a very, very healthy growth on our digital platforms. NECI continues its path growing around 300,000 new clients a month. We are at this point reaching 15.5 million clients. The usage continues to be very good, around 67%, so that's more than or close to 10 million active users a month. And that And also we see that same trend or similar trend on Bancolombia, on Bancolombia La Manu. Particularly Colombians now are using the digital tools, the financial digital tools for their everyday life. That is creating a base, a very important base of clients that is are giving us a lot of information of how they behave, how they use money. And that information will allow us to increase our presentation with different products, not just financial products, but other products. And it's given also information for loans, for how to originate loans to this group. We currently are... doing pilots or moving on the direction of leveraging that information for long-term growth. That will take some time. It's something that is not going to materially affect positively the results of Bancolombia, but for the future will be very, very important. of clients of Bancolombia, it's around 28 million, including all countries, but particularly in Colombia, we reach close to half of the population of Colombia already, or half of the population of Colombia has a product or a relationship with Bancolombia, and that's very important in terms of how we can engage them with different strategies and different platforms and that's an important base for growth.

Thank you for the comments. That's helpful.

This concludes the question and answer session. I would now like to turn the call back over to Mr. Juan Carlos Mora for closing comments.

Thank you, everybody, for participating in this conference call. I want to apologize for the technical difficulties that we had at the beginning of this call. We know that 2023 will be a challenging year. It's a different year. The conditions are going to be more challenging, as I said. Credit risk will be key, but we are confident that with the tools that we have, the origination that we have in place will help us to manage that situation or what we are going to face in 2023. Additionally, we are moving in a direction to be more proactive or to be proactive with our clients, trying to anticipate any situation that they may have and be able or be willing to restructure or to work with them in a way that we can handle any issue they may have. And that is what is allowing us to be optimistic about how we can handle that great risk. Great risk could go higher than we expect, but as of today and with the information that we have, that will be very important. So with this, again, I would like to thank you and we expect to be with you again when we report the first quarter of 2023. Thank you very much and have a good day.

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