Grupo Cibest S.A.

Good morning, ladies and gentlemen, and welcome to Banco Columbia's fourth quarter 2023 earnings conference call. My name is Robert, and I'll be your operator for today's call. At this time, all participants are on 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 hit star 1 on your telephone keypad. 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 current 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. Julian Mora, Chief Corporate Officer. Mr. Jose Humberto Acosta, Chief Financial Officer. Mr. Rodrigo Prito, Chief Risk Officer. Mrs. Catalina Tobin, Investor Relations and Capital Markets. Director and Mrs. Laura Clefio, Chief Economist. I'd now like to 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. Please go to slide two. As anticipated, 2023 has proven to be a year of significant challenges for the Colombian financial system. The prevailing high interest rates and inflation have had a discouraging effect on credit growth. resulting in reduced net interest income generation. Furthermore, these factors have adversely impacted loan quality and led to an overall increase in operating costs. In light of the prevailing macroeconomic environment, Bancolombia's net income for the quarter reached 1.4 trillion pesos. indicating a 3% reduction compared to the preceding quarter. For the entire year, the net income amounted to 6.1 trillion pesos, representing an approximate 10% annual decline. The primary drivers contributing to this decline are, firstly, a 1.5 quarterly and 6% annual contraction in the loan book portfolio due to the reduced credit demand and diminished risk tolerance, resulting in slower growth of interest income. Secondly, a net provision charge that increased by 7% quarterly and 97% annually consistent with the current credit cycle. Thirdly, higher operating expenses, which despite stringent cost control measures, remained under pressure due to increased taxes and labor costs. In addition, it is crucial to highlight the substantial 20.5% annual and 5.7% quarterly appreciation of the peso, leading to a decrease in the volume of loans and the interest income contribution of the dollar portfolio in the consolidated financial statements. As the loan portfolio experienced continued repricing at elevated interest rates, the cost of risk was recorded 2.7% for the quarter and 2.8% for the entire year. This reflects the anticipated slowdown in the past due loan formation compared to the first half of the year, which was a result of the comprehensive measures taken. Deficiency ratio ended the quarter at 49% and 45% for the entire year, indicating that the growth in operating expenses surpassed the growth in income, as previously discussed. The aforementioned factors exerted downward pressure on the return on equity, resulting in a 15.2% ROE for the quarter. and a 16.1% for the entire year. The total solvency ratio experienced a notable increase of 57 basis points during the quarter, ending in a year-in-figure of 13.4%. This positive development was primarily attributed to a significant expansion of 105 basis points in core equity Tier 1. and Colombia's robust organic capital origination capabilities, coupled with a reduction in the risk-weighted assets, were the driving forces behind this achievement. As a positive indicator and a testament of the bank's inherent capabilities, the generation of sound net interest margin has proven sufficient to absorb increased provision in expenses and costs while maintaining meeting return on equity. of Central American banks and offshore operations made a larger contribution to the overall group results, despite the prevailing economic and political environment in each country. We maintain our conviction that the recent downward inflationary trends in Colombia will enable the central bank to pursue a sustained interest rate reduction strategy. This, in turn, is expected to stimulate credit demand and improve asset quality in the long term. We anticipate opportunities for credit growth primarily in housing, renewable energy, and agribusiness sector as the government advances public spending. For a more in-depth analysis of the macro outlook, I will pass over the presentation to our chief economist, Laura Clavijo. Laura?

Thank you, Juan Carlos. Now, please go to slide three. The global economic backdrop of tight financial conditions, declining consumer demand, and lower commodity prices combined with local challenges due to high inflation, low investment, and receiving consumer sentiment carved the path to a significant economic slowdown in Colombia. Overall, 2023 proved to be a very challenging year for the Colombian economy and resulted in GDP growth of just 0.6% year over year, the lowest level in over three decades, excluding the COVID years, and well below market expectations and our own forecast of 1.2%. Despite the lackluster results, the final quarter of 2023 signaled a slight expansion of 0.3%, rebounding from a 0.6% contraction during the third quarter, mainly driven by 6% growth in agriculture and 5% expansion in public administration. Construction, manufacturing, and retail sales continue to underperform. The biggest culprit to economic stagnation lies with public and private investment, which fell close to 25% during 2023. Total investment as a percentage of GDP has consistently declined since the pandemic, from levels of 22% to just 17% last year. This scenario weighs heavily on our GDP outlook for 2024, which stands at 0.9% annual growth. On the more positive side, inflation has continued its downward trend, closing the year at 9.3% and falling further towards the 8.3% mark in early 2024. Receding food prices help explain much of the defense, but core inflation has come down consistently towards 7.9%. The drought season coming from El Nino has pressured energy prices to some extent, but has proven to be much milder than initially expected. We maintain our 5.9% year-end inflation forecast, considering some upward pressure from potential default price hikes and the effect of stubborn prices in services such as housing. Given this macro scenario of falling inflation amidst the economic slowdown, the central bank began cutting interest rates in late 2023 and early 2024, accumulating a 50 basis point reduction thus far. Currently, the intervention rate stands at 12.75%, and we expect it may come down towards the 9% level at year end. We maintain our view that 2024 will be a year of gradual recovery, especially during the second half of the year when interest rate cuts will begin to pick up speed. Now, please let me turn the presentation back to Juan Carlos, who will present Bancolombia's quarterly performance.

Thank you, Laura. Before discussing the quarter's results, I would like to provide an overview of the advancements made in several initiatives that are aligned with our four value driving pillars. These pillars significantly contribute to our market leadership, operational soundness, and the scalability of our business model. Please go to slide four. Under our first pillar, which embraces our client-centric approach, we would like to share the developments we have made as a part of our capabilities as a service model. This model is based on the open banking regulations approved in Colombia, making it the third country in Latin America to achieve the significant milestone following Brazil and Chile. The regulation establishes the foundation for financial and non-financial entities to disclose, coordinate, and utilize data. It complements the central bank's immediate payments system framework, introduced in October and anticipated to be fully operational by 2025. While there are some potential risks to our strong position in the transactional space, we anticipate numerous opportunities and avenues for growth. Our multi-channel platform is well established. We have made significant progress in developing our ecosystem model, and we have already made a range of APAs available. The two primary sources of growth originate firstly from the immediate payment system framework which will streamline all types of payments processing through a low-value payment system managed by the central bank with real-time clearing, thereby reducing operational costs and improving user experience. Secondly, it will enable us to further integrate our financial capabilities into new marketplaces, promoting financial inclusion and enhancing the value proposition for our clients. Notably, we pioneered the launch of a new feature on our app for account aggregation, allowing our clients to manage all their financial data in a centralized location and interact seamlessly through a single app. Furthermore, we are delighted with the positive development and performance of our banking as a platform, as a service models. as they have enabled us to innovate and explore novel business models. As of the end of 2023, we had processed close to 50 million transactions, resulting in deposits and fees of 7.7 billion pesos. Notably, these models have demonstrated remarkable growth, with compelling compounded annual growth rates of 16% and 14%, respectively. over the past five quarters. This indicates the substantial potential for forward expansion under our ecosystem approach. In slide five, under our second value driving pillar that focuses on our digital capabilities and multi-channel platform, I would like to elaborate on what we believe is the most compelling evidence of the robust competitive advantage we have built in this area. For over a decade, we have strategically invested in the development of our comprehensive, resilient, multi-channel, and interoperable platform. We recognize the critical role of each channel in our business strategy. As illustrated in the accompanying graphs, the platform has emerged as a powerful instrument for acquiring new customers, particularly those who are unbanked. or underbanked and seek affordable money transfers and cash withdrawal solutions. Consequently, we have achieved exponential growth in transactional volume, increased fee revenue, and significantly enhanced our ability to attract and retain deposits. In response, there has been a substantial raise in highly diversified, low-value, and low-cost sticky deposits. These deposits have primarily come in through savings accounts and, more recently, through digital time deposits. Notably, digital time deposits have experienced a remarkable compounded annual growth rate of 125% over the past five years, aligning with our digital markets. Certainly, this well-structured strategy serves as a reliable foundation for maintaining a competitive founding cost, thereby enhancing mean performance and overall profitability. On slide six, under our fair value driving pillar of structural capabilities that provide distinct market advantage, I would like to highlight the credit risk model we have developed for corporates, midsize companies, and most SMEs. We consider this model as a key differentiator in assessing credit risk, which significantly contributes to superior performance of our commercial loan portfolio compared to that of major Colombian banks. This is evident in the latest report released by the Colombian Financial Superintendents which measures performance based on the 90-day past due loan ratio. Our model employs an end-to-end credit cycle approach supported by a comprehensive suite of tools for assessment, writing, follow-up, and collection. Underpinned by extensive research and well-articulated sectoral risk assessments, our model provides an in-depth understanding of each industry and its cycles. This enables us to effectively diversify our portfolio, identify early warning signals, anticipate potential challenges, and support our customers with tailored solutions. The most notable and valuable feature is the advanced analytical model. It draws upon the client's transactional and cash flows insights captured on our multi-channel platform. This provides a unique risk perspective, freeing us from the sole reliance on financial statements. By leveraging our own parallel insights, we have meticulously crafted a robust risk assessment framework. This framework has been instrumental in evaluating other 600,000 SMEs, and 15,000 corporate clients in Colombia. Currently, we manage approximately 120 trillion pesos in commercial loans under this model. Notably, our portfolio has consistently outperformed industry peers. Lastly, on slide seven, regarding our fourth value-driving pillar, which is the culture of efficiency and productivity, we would like to present the evolution of our digitalization strategy. In addition to the benefits of attracting more clients and transactional flows discussed earlier, it has also provided substantial efficiency gains and flexibility, enabling us to allocate resources more effectively. Over the past decade, There has been a significant shift in the way monetary and non-monetary transactions are processed. In the early 2010s, nearly 30% of these transactions were conducted through physical channels such as branches. However, by the end of 2023, this figure had plummeted to just 8.3%, with branches accounting for a mere 0.3% of all transactions. This strategic shift has involved the closure or transformation of branches into sales points with the aim of routing transactions through less expensive channels. Consequently, we have successfully reduced our overall fixed costs by replacing physical channels, primarily branches, with digital channels and variable cost-based channels, such as banking agents. This strategic move has enabled us to expand our reach and enhance user experience while maintaining operational efficiency. Furthermore, we are pleased to report continued advancements in the scalability of our business model, which will enable us to capture additional gains in efficiency and productivity.

Now,

I would like to invite Jose Humberto Acosta to provide further elaboration on our four-quarter 2023 results. Jose Humberto?

Thank you, Juan Carlos. Please go to slide eight to discuss results of our Central American operation. Despite the lower share of the Central American loan book on a consolidated basis, explained to a large extent by the peso appreciation, almost all banks increase its contribution to net income. When broken down by each bank, their performance in the quarter is fixed. Banismo sustained its name despite a long contraction, an accurate lower provision charge, but delivered a lower return on equity quarter over quarter on the back of higher costs. Likewise, Banco Agricola also posted lower interest income due to a higher income expenses and below average provision charges as the loan portfolio performed better than expected, contributing to a higher return equity versus the previous quarter that reached 24.1%. On the other hand, Banco Agromercantil had low loan book growth after a large commercial loan prepayment and subdued growth in consumers that impact interest income. Provision charges increase on the back of all indexes, consumer loans, and a corporate loan, dragging net income to a loss. It is also worth mentioning that despite higher loan deterioration, all three banks run with comfortable level of 90-day past due loans coverage, providing balance sheet protection. We remain positive on El Salvador's micro performance, but not cautious about Guatemala given the most recent political and social unrest, and with Panama due to the more challenging fiscal outlook as per the lower tax collection. Please go to slide nine. Consistent with the trends seen in the previous quarter, the consolidated loan book contracted 1.5% quarter over quarter and almost 6% year over year. Not surprisingly, This reduction reaffirms the impact of the persistent high interest rates as it has discouraged credit demand and has provided incentives for prepayments and shorter-dated loans that limits the loan book growth. Furthermore, a 20.5% year-over-year peso appreciation reduced the contribution of the loans denominated in U.S. dollars. Net of effects, the loan portfolio will have increased 1.5% on a yearly basis. From a segment perspective, consumer portfolio keep driving the largest contraction with a 2.6% reduction quarter-over-quarter and 8.4% year-over-year as expected. Let's go to slide 10. Total deposits increased 1.5% quarter-over-quarter, explaining most by a seasonal effect as the government-related entities in Colombia tend to increase its deposits on year-end. Year-over-year, deposits dropped 1.2% consistent with a weaker credit demand. Nevertheless, there was an interesting change in the funding mix dynamics during the quarter as time deposits dropped 3% whereas savings, current accounts, and other deposits increased. Year over year, however, time deposits increased its share in the total funding mix to 35% up from 30% after the strong growth on the first half of the year. Consistently, on a yearly basis, the patient growth of time deposits dropped to 13.3%, laying grounds for lower interest expenses ahead. Consequently, the cost of funding fell slightly to 5.8%, an early signal of interest expenses reduction as a rate subsides, a situation for which we continue adjusting our liability structure to provide margin protection. As a matter of fact, as of year end, the share of fixed-rate time deposits maturing in less than a year was 70%, up from 68% as of September. Please go to slide 11. Total interest income and valuation of financial instruments increased 4% quarter-over-quarter, supported by first a 67% growth on interest and valuations on financial instruments, as per higher valuation on any large securities portfolio held during the period coupled with a fall in rates, and second, by a 1% growth on interest income on loans and financial leases mainly attributable to the loan portfolio pricing dynamic. On a yearly basis, total interest income and valuation of financial instruments increased 38% albeit at a slower pace than the previous year and driven mainly by a 42% growth on interest on loans and financial leases. On the other hand, Interest expenses was flat quarter over quarter as interest on deposits remained unchanged and coupled with a slight reduction on interest on bonds and interbanks borrowing. On an annual basis, however, interest expenses grew 97%, driven mainly by a 170% increase on interest expense on deposits after the larger stake of time deposits and higher interest rates. Nevertheless, the pace of annual growth is subsiding, consistent with the annual drop of deposits. Despite the loan book contraction, NII grew 8% quarter-over-quarter and 11% year-over-year due to an increase in interest income, while interest expense remained flat and is mainly attributable to the Colombian operation as 67% of the loan portfolio is floating in contrast to a 34% of deposits. Thus, the NIM in Colombia was receding to subsidizing inflation and short-term reference interest rate as shown on the bottom-hand side graph. Consistently with the above, NIM expanded 47 basis points quarter-over-quarter to 7.28% driven by the remarkable 354 basis points expansion in the investment mean after the securities portfolio's strong performance this year has evolved, coupled with the 11 basis points growth on the lending mean. First, mean for the full year was 7% at 20 basis points expansion year-over-year on the back of a strong 8% annual mean in Colombia. reaffirming the competitive advantage in funding and its asset-sensitive condition. Please go to slide 12. Net income increased 7% quarter-over-quarter, mainly attributable to a higher volume of transactions associated to a year-end seasonality. Payment and collections, banking service, and bank assurance related fees grew the most on a percentage basis on a quarterly and a yearly basis. However, year-over-year, it grew close to 5%, admittedly below expectations as fee expenses grow outpaced the fee income growth coupled with a higher third-party provider cost and processing charges. The income ratio for the full year reached almost 19%. Please go to slide 13. As shown in the upper left-hand side chart, The slowdown in the volume of past year loan formation continued during the quarter, consistent with the trend seen since the second quarter of 2023, although, admittedly, at a slower pace than expected. This, coupled with an uplift in charge of quarter over quarter, proved our efforts and commitment to preserve a healthy balance sheet. Despite these positives, our rate is still mild, New past-due loan evolution. Asset quality metrics exceeded quarterly and annually deteriorations at the 90-day past-due loan ratio, which 3.3%. Implying 110 bps year-over-year increment explained by the loan portfolio contraction during the last 12 months rather than via escalation in the pace of past-due loans. On the other hand, given the higher charge-offs in the quarter and the fact that some loans of which provisions had already been charged became due during that period. The 90-day past-due loans coverage ratio fell to 184%, although still probing strong coverage to the balance sheet. Moreover, net provision expenses for credit losses for the quarter was 1.7 trillion pesos. at 7% increase quarter-over-quarter and equivalent to a cost of risk of 2.7% for the period. When breaking down the provision charge for the quarter into its components, the results were mixed. First, on the SME segment, there was a 22 Colombian billion pesos decrease quarter-over-quarter driven by releases related to loans repayments. On the consumer segment, provision expenses was almost flat, quarter over quarter, as partial loan formation is being contained as we will further elaborate. Third, on the large exposure segment, there was a Colombian pesos 168 billion pesos charge explained by additional provisions on a handful of loans related to construction and retained sectors. In the case of midsize companies and corporates, there was a 93 billion Colombian pesos released to provide several prepayments and settlements with clients. Year over year, net provision charge increased 97%, attributable mainly to deterioration in the consumer segment in Colombia. As we will further elaborate, and to a lesser extent, on SMEs and certain corporate loans, consistent with the current economic and credit cycle. From an expected loss perspective, Stage 1 remained flat year-over-year as deterioration is being contained, whereas Stage 2 decreased and Stage 3 increased after non-performing loans crawled over. However, the combined coverage for Stage 2 and 3 loans increased 17 basis points to almost 40%. Going forward, we remain confident that the pace of past year loan formation will keep its slowdown trend due to all measures taken and, as a lower rate, release some pressures on vector cash flows. However, we remain cautious and expect higher delinquencies in S&Es on the back of the weaker economic performance. Moving to the slide number 14, I will further discuss on credit quality in Colombia. In line with the past quarters, personal loans that hold a 52% share of consumer loans accounted for most of the deterioration during the period, increasing its 90-day pass-through loan ratio to 7.4%, reaching a cost of risk of 16.7%, with a 20% of loans in stage 2 and 3. On the flip side, credit cards, auto loans, and payroll loans all perform better, reducing their cost of risk and their share of loans in stage two and three, signaling better asset quality conditions ahead. Moreover, when it comes to evolution of past due loan formation as shown on the upper right-hand side graph, despite the low new past due loan level in the quarter, the ratio of deterioration increased due to a high level of charge-offs. Now, withstanding the above, policy loan formation in the second half of the year certainly grown below the average of the first half. And most importantly, new ventures in Colombia continue performing well, and thus, we foresee an improvement in our metrics going forward. As a matter of fact, after falling for three consecutive quarters, the volume of new consumer loans slightly increased during the four-quarter leverage on the new origination standards and the portfolio better performance. As the sector-wide metrics, we continue performing with the lowest 90-day past due loan ratio for the Colombian financial system as of October of 2023, driven by our superior risk framework and capabilities that allow us to better assess credit behavior and mitigate deterioration. Please go to slide number 15. The cost to income ratio for the period was 48.6% as operating expenses grew 6.6% quarter over quarter attributable to IT investments and general expenses. On the other hand, personal related expenses were flat quarter over quarter. On a yearly basis, operating expenses grew almost 19% driven by the high annual wage increase. Other taxes introduced to the tax reform of 2022 in IT related investments devoted mainly to the journey to the cloud and business transformation. However, it is worth mentioning that the pace of OPEX growth We see it during the second half of the year, given the reforming of cost control measures. Moreover, if we were to deduct taxes, actuarial valuations on certain employees' benefits, and FX variations, the annual growth of actuarial expenses would have been 14% in tandem with inflation. The efficiency ratio for the full year was 45.3%, a slight increase compared to 2022, given the overall higher cost and taxes environment. Please go to slide 16. The income for the quarter was 1.4 trillion pesos, equivalent to a 3% drop quarter over quarter, and 6.1 trillion pesos for the full year, equivalent to a 10% drop year over year. by lower income generation after the loan book contraction and the FX appreciation in tandem with higher credit and operating expenses. In turn, return on equity receded to 15.2% on the quarter and 16.1% in the full year, which adjusted for goodwill results in a return of tangible equity of 21% that shows the profitability of the creation isolated of goodwill-related costs. And finally, on slide 17, I will present the evolution of capital generation. Shareholder's equity grew 1.5% quarter-over-quarter and contracted 2.6% year-over-year in tandem with assets, reflecting the bank's capital generation capacity that preserves Assam's balance sheet structure. Basel III total capital adequacy ratio reached 13.4%, increasing 57 basis points over the quarter and six basis points year-over-year on the back of a strong Tier 1 expansion, with 105 basis points year-over-year increase, attaining 11.4% for year-end. This positive expansion is the result of net income generation, lower risk-rated assets, and effects appreciation during the year. With this, I will hand over the presentation back to Juan Carlos for some final remarks.

Juan? Thank you, José Humberto. Please proceed to slide 18 for some remarks concerning our sustainability strategy. As of the conclusion of the year 2023, we have successfully exceeded the 140 trillion pesos milestone in the total disbursements under our business with purpose strategy, which was initiated in 2020. Notably, approximately 38 trillion pesos worth of new loans were granted during the preceding year. These loans have been instrumental in providing financial support for various initiatives, including small-scale agribusiness ventures, green building projects, and gender-related endeavors, among others. With regard to environmental matters, we are pleased to inform you that we successfully completed our first set of disclosure information accordance with FASB standards for the commercial mortgage investment banking and asset management units last year. Additionally, for the third consecutive year, we have released our TCFD report as mandated by local regulations, thereby enhancing the understanding of our commitments and accomplishments. In terms of economics, the Dow Jones Global Sustainability Index recently evaluated us one more, and we received a score of 78 out of 100 points. This accomplishment is a testament of the strength, influence, and openness of our ESG framework. Finally, on the social front, 12 of the financial education programs we designed to provide financial well-being to our customers were certified by the superintendency under its standards, making us the leaders in this important area in Colombia. Lastly, on slide 19, I will share our guidance for the end of 2024 based on the current data and our macroeconomic forecast. By the end of 2024, we anticipate a long growth of approximately 3% in peso-denominated loans, and 5.1% in dollar-denominated loans. We project a net interest margin of around 6.8% based on the expected lower average reference rate saved by the central bank. The cost of risk is anticipated to decline to 2.6%, driven by lower interest rates and inflation. The efficiency ratio is expected to be approximately 49% influenced by reduced interest income and ongoing investments in business transformation. Consequently, we forecast a return on equity in the range of 14% and a common equity tier one ratio of around 11%. In closing, I would like to inform you that we recently announced the proposed dividend, which will be discussed at the annual shareholders meeting on March 15th. The dividend paid out will be 62%, equivalent to 3.4 trillion pesos, and will be paid in four corporate installments of 3,535 pesos per share throughout the year. With that, we conclude our remarks on the fourth quarter 2023 results. We are now ready to address any questions you may have.

Thank you. We will now begin the question and answer session. If you have a question, please press star 1 on your touchtone 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 the handset first before pressing the numbers. Once again, if you have a question, please press star, then 1 on your touchtone phone. One moment while we poll for questions. Our first question comes from Tito Labarta with Goldman Sachs. Please proceed with your question.

Hi, good morning. Thank you for the call and taking my question. My question on the efficiency guidance that you gave, I understand there's some pressure on margins from lower rates, but what kind of expectations do you have there for expense growth and fee income growth? And how long do you think you'll continue to invest sort of from a digital perspective? When could you see some benefits from that and where should we think of the efficiency ratio sort of longer term as things normalize a bit?

Thank you. Thank you, Tito. Our guidance regarding efficiency for 2024, it's 49%. And let me explain why. We ended 2023 in around 45%. percent figure on efficiency. What we think will happen during 2024 is that we will have some decrease on margins. Volume, even though we expect some long growth, and we expect to be that long growth of around 8 percent, but the combination of not big growth on volume, and slight pressure on margins will affect the income. And on the expenses side, we expect the total expenses to grow of around 9%. If you do the math, that implies that the result is that 49% efficiency ratio that I'm mentioning. So it's from the income side and also we are moving to control expenses and to be close to inflation, to grow expenses closer to inflation. Regarding fees, we expect fees to grow at around 10% based on our the services that we are providing, back insurance, cards, and the different services that we are providing. And that's for 2024. Regarding the years 2025 and 2026, we think that efficiency should move should be around that figure of 50, moving probably between 48 and 52%.

Okay, thanks Juan Carlos, that's helpful. So do you think by 2025 and 26, the expense growth will be closer to inflation or when do you expect the expense growth to be closer to inflation?

Yeah, we will move closer to inflation, but I want to address one part of your first question, and it's when are we going to stop investing on digital? And I think, Tito, with the dynamics of the sector, competition, new technologies, it's very, very difficult on the banking sector to stop investing in technology. We will be moving towards, or will be on cloud probably full in 2026. And that will help vary a lot on expenses. We can be more agile. But expenses on technology will be important in the coming years, too.

Great. That's helpful, Juan Carlos. Sorry, if I can, just one follow-up, I guess, from that perspective. How do you see just sort of the competition from, you know, fintechs, other competitors becoming more digital? Do you see that as a significant threat? Do you think you're well positioned for that? Do you see long-term benefits from better efficiency?

Yeah, the competition is increasing. There are new players in the market, and that's good because that forces us to be also better. We keep growing on number of customers, on number of transactions, on our relevance on the Colombian market. So we compete with peers, banks like us, but also newcomers. As you know, Nubank announced that they now have the authorization of the finance superintendency to be a bank or a commercial, financial commercial entity, as we call it in Colombia. So they will now, will offer savings accounts and that they will be definitely a player. But we think we are very well positioned, the number of clients that we have, the scale, and mainly, our main advantage is our network of channels and how they are integrated and the coverage that we have around the country. It's worth to remember that still in Colombia and in many other Latin American countries, cash is important. So how cash in and cash out on the digital environment is very important. It's as important as the digital environment that you have. And we have both. We have the channels and the digital environment. So Competition, of course, always you have to take into account what they do, and they are good, definitely. But I think at the end, we will benefit all the market and us as players in this environment.

Okay, that's great. Thank you, Juan Carlos. Thank you.

Our next question is from Yuri Fernandez with J.P. Morgan. Please proceed with your question.

Hey, guys. Thank you. I have two quick ones. One is regarding your tax rate. I know it really depends on ex-Colombia operations and also your security in the country. Usually, you have some taxes and instruments, but 2025 has been a bit on the low end, I would say. Just a guidance on effective tax rate, how much you believe the tax rate should evolve in 2024, 2025. If you see the 25% effective tax rate level as sustainable or if this should be higher, that's the first one. A second one regarding Tuya, we saw an impairment this quarter. I think this, you know, was a headwind for your results, about 100 billion pesos. So just checking if you can explain a little bit what happened, if we should see this, you know, on a yearly basis or no, it's more now recurrent. And that would be my second one, and a third one, if I may, regarding FITS. If you have an estimate on the potential outflow impact from the removal from FITS, that would be my final one. Thank you very much.

Thank you, Yuri. I am going to address your first two questions, and I'm going to ask José Humberto to help me with your third one regarding the FTSE situation. Tax rate. I want to be clear regarding the tax rate. We have statutory tax rate in Colombia and also in the different countries. But when we combine the tax rates, the statutory and the effective tax rates in the different geographies and in Colombia, and our situation, our fiscal situation in Colombia regarding taxes. That 25% effective tax rate that we had in 2023, we think that is sustainable around 26% effective tax rate for the coming two and three or three years. So regarding your question and our guidance, our effective tax rate for the coming years should be around 26% with the current rules that we have, Yuri. So it is because we have, as I mentioned, a corporate structure that allow us to be efficient regarding taxes in the coming three years. Your second question, Tuya. Tuya is a financial commercial institution. They take deposits or mainly the way they fund is through time deposits. And during 2023, there were periods in which the liquidity in the Colombian market was difficult, was tight. And in that situation, small institutions had to go to a market and they had to pay high interest rates for their funds. Not just Tuya, many others. And on the other side, the income was affected because the maximum rate that institutions could charge in Colombia went down because of the change the way the formula to calculate it. They were at a maximum closer to 45%. That's the cap rate that we had in 2022 at some point and came down to 35%, even 33%. So that squeezed the margins. If you have the liquidity issue and you have to pay more for funds and the income was going down because of what happened with the maximum rate. So the margin was lower. And on top of that, there were more risks. So at the end, what happened is a smaller margin to cover higher risk. That explains, and that happened to other institutions that, other entities, financial entities that are focused on cards, mainly on credit cards. So it's not something that happened just to Tuya. It was a general issue in the market. We are taking the measures to reverse that situation. moving to different products, taking less risk. Our risk appetite now is lower. So we expect that that situation, even though we could have still some pressures in 2024, 2025 will be different, and Tuya will be profitable again. Yuri, and I'm going to pass your third question to José Humberto.

Yuri, good morning. Yes, the consequences of being removed from the index, it would have three different moments. Yesterday, Monday and Tuesday, as you probably checked, the price of the ordinary shares dropped at around 5%. We believe that the next coming two weeks, there will be an stabilization of the price of the shares But then on March 15, the date in which the new calculation will take effect, we are going to see another drop in the price of the ordinary shares. The second element that I have to highlight is the level of floating of the ordinary shares is very low, at around 10% of the ordinary shares. So the numbers will change in this floating. The third element is, remember that the ATR plus the preferred shares Those are the shares with a high level of liquidity, and we don't foresee any particular concern regarding those shares. Summarizing the sell-off based on some calculations that we received from some analysts, there will be a potential sell-off of around $70 million in the next coming days.

No, that's super clear, Rosamberto, super clear. And regarding Tuya, I totally get it. My point is that if not for Tuya, your results, they would be, you know, even better this quarter. So I get it's a tough situation in Colombia, but try to see the glass half full, you know, maybe the underlying results of the bank per se were better. But thank you for the clarification, everyone. Thank you and good luck in 2024.

Thank you very much, Yuri, for your comment.

Our next question comes from Andres Soto with Santander Bank, Mexico. Please proceed with your question.

Good morning to all, and thank you for the presentation and the opportunity to ask questions. My first question is related to your outlook for NIMH, but not in 2024, but rather, once interest rates normalize in Colombia, what is the level for normalized interest rates? That will be the first question. And based on that, what is your expectation for NIM? My question basically is, in the past when Colombia used to operate at the NIM of 5.5%, something like that, so you are still 130 basis points above that level in 2024. I'm curious about the ROE guidance of 14% and what will be the outlook once interest rates fully normalized?

Thank you, Andrés. NIN, as you mentioned, improved because of what happened with the interest rates in the markets where we operate, but also because we change the mix in our balance sheet between commercial and consumer loans. So there are two effects. The normalization of the interest rates, we will have pressure on the NIM, of course. What we expect, and you mentioned 2024, what we expect for 2024 is that the NIM to be around And that normalization process should keep happening. And we expect that margin to be around 6.3, 6.5 moving in the coming years. And that's explained mainly for the mix that we have in our balance sheet. we have more SMEs and medium enterprises, and we could charge higher interest rates to those entities, but also we have a bigger mix of consumer loans. So that's why we expect that our NIM should be It's not going to what was our NIMA around 5.8 that we had in the past. And with that, I could have affirmed that our ROE in the midterm should be around 14%. I don't know if Rosenberg wants to complement me with something in this answer.

Yes, Juan Carlos, thank you. On the funding side, Andres, we have an structural change, which is you see that CASA represents 50% of the funding, and the correlation with the interest rate is lower than the correlation that we are having with time deposits. So for the next cycle, as Juan mentioned, that the interest rate will come down, we have a, if I may say, natural protection because of the CASA funding. And remember that most of our time deposits are short term, more than 60%. So that is why our guidance or our forecasting for NIM is to remain at the level that Juan mentioned, which is around 6.5.

And based on this, can you please provide a sensitivity in terms of points versus the policy rate?

Yes, we have been managing our sensitivity because our floating is around on the asset side. On the loan side, it's 60%, 70% of the portfolio. But on the other side, the floating on the liability side is around 40% plus savings accounts, which accounts also as a floating as well. So the number is 30 basis points for every 100 in change of interest rate of the central bank.

Thank you, José Humberto. My second question is related to cost of risk. I was checking my notes from the previous call. In the previous call, you mentioned your expectation for 2024 was for the cost of risk to be in between 2.3 to 2.5, so around 2.4, let's say. And now you are saying 2.6. So I would like to understand what happened, what changed over the past three months for you to have a more cautious view on cost of risk.

Yes, Andres, we changed or we increased a little bit our view on cost of risk because we had the results of the GDP growth of 2023 that was disappointed. It was 0.6%. The market was expected with something around 1.2. There were even some analysis expecting 1.5. the most pessimist analysts were expecting one, and the figure ended being 0.6%. So that made us more cautious regarding 2024. But even though we feel that in terms of how are we handling, how are we originating consumer loans, how are we... doing or working with our, on the commercial side of the portfolio, still we think that we will have an improvement on the cost of risk, but we are more cautious and we will be updating this figure as the year moves on. And I think we will have a clear view around mid-year of how things are evolving. I think first quarter will be key to determine or to see the evolution of the Colombian economy. We expect the government to start implementing some contra-cyclical measures regarding housing infrastructure, so that we think will have a positive effect. Even though our view for the year, as you know, is that the GDP growth for 2024 should be around 0.9%, which is low for Colombia, better than 2023, but that's why, Andres, we are cautious regarding the cost of risk. Jose Humberto wants to complement something here.

Thank you, Juan Carlos. The other element is the change in our view of inflation and interest rates. Three months ago, six months ago, we believed that the interest rate and inflation will drop beginning February and March, but you see that we are on a higher in terms of inflation and interest rate. So that's the other reason why we believe the first half of the year we have also an increase in the cost of risk.

That's very clear. You guys mentioned at the beginning of the presentation that one of the areas where you need to do monitoring is the SME segment, right? So far, most of the deterioration in your loan book has come from the consumer. Now you're looking into the SME. Looking at your corporate book, is there any factor in the economy that you think may be suffering with this environment in 2024 with high interest rates and still high inflation?

Andres, we are monitoring very closely, as you mentioned, but we haven't seen so far a deterioration outside our forecast. Sectors in particular, construction, particularly housing construction, is something that we are monitoring and working with our We know our clients in restructuring some of their loans. So particularly construction, housing construction, and another sector that even though our position is very, very low, or is low, it's the health sector. Health sector concern us, and we think that there could be some deterioration on health. on the health sector, or the participants on the health sector, Andres.

Thank you very much, Juan Carlos Alfonso Humberto. No, thank you.

Our next question is from Carlos Gomez with HSBC. Please proceed with your question.

Thank you for taking my question. It is about your foreign subsidies. What we see is that you have reported a very high number in El Salvador, but we understand it has to do with reversals of provisions. Can you tell us what you expect your normal profitability to be in each of the markets in which you operate and in Panama? Second, going back to expenses, I mean, you mentioned earlier that without taxes, the growth would be 40%. But inflation, I believe, is 9%. So that is still significantly above inflation. Could you explain that a bit further? Thank you.

Carlos, we had some difficulties with the line. I just want to be sure that we understood your question. Your first question is regarding inflation. the profitability of our operations in Central America. Is that correct?

That's correct. And apologies for that.

And the second one is regarding expenses and the explanation we gave around the operating expenses growing 9% and that compares with the 40% tax rate.

No, no, no. You mentioned that without extraordinary items. Your growth was about 14% last year, but again, inflation was lower than that. So we wonder if you will continue to have high expense growth.

Understood. Thank you, Carlos.

Carlos, yes. Regarding Salvador, historically, Salvador has, it is one of our operations with the lowest cost of risk. In this case, What happened is we change and update the models with new data. And that's the reason why the level of provision is coming down. And this is one of our most profitable operation with more than 20% return on equity and a very stable cost of risk. If you double check the last three years, we have been on the area of 1%. Regarding operating expenses, what happened this year, the 9% that we are forecasting Remember that beginning of the year, we have been with a high inflation that came from 2023. So most of the prices are adjusted because of CPI. And the other element is the minimum wage in Colombia was 12%. So both elements imply that we began with a high level of expenses, but 9% is a number doable for the year. And we believe that at the end of the year, as Juan mentioned at the beginning, we are going to reach an efficiency level below 50%. That would be at around 49%. But the main reason why it's 9% is because of the CPI of 2023. And basically this is the main reason.

On the foreign subsidiaries, I wondered what your normal ROE would be for each of them. And in the case of El Salvador, maybe it was over 20% because of this reversal. Do you expect more than 20%?

Carlos, we are expecting to maintain that level, assuming this cost of risk that I mentioned before, assuming that we will be able to sustain the NIM of around 6.5% to 7%, and the operation there, the efficiency also is below 50%. So we are forecasting for Salvador that level at around 20% area at least for the next two years. They have a very positive structure of funding as well as Bancolombia based on CASA deposits. In the case of Banismo, we are expecting to maintain a level of around 10% in the next coming, at least for 2024, and increase to 12% next year. In the case of Guatemala, Banco Agro Mercantil in Guatemala, you see that the numbers this year are very low because of high level of provisions, but we expect to sustain a return on equity in between 10% to 12%, 24% and 25%.

Thank you so much. Very clear.

Thank you, Carlos.

Our next question comes from Alonzo Arambrudo with BTG. Please proceed with your question.

Yes. Hi. Good morning. Thank you for the call. I wanted to ask about Neki. Can you give us an update on when the spin-off is going to happen? And just some color about the path to profitability and the monetization drivers of Neki. How do you see the platform evolving over the next few quarters? Thank you. Thank you.

We ended 2023 with more than 18 million customers, users in our platform of which around 13% are active users. So definitely we have the network effect happening in Neki and transactions are going on there. We expect that the growth will continue and probably we will reach around 21 million customers, which if we put in perspective, Colombia has around 50 million inhabitants. So it's a very significant number. And that allow us to, with that network effect and platform effect also, move forward on our profitability strategy that will be based on offering those customers different services, including insurance, some investment opportunities, but mainly credit, loans. We have to be careful and we need to be aware of where are we on the economic cycle We think that this is not a year in which we can push very hard on offering credit in a platform like Nike. This is to say that we have the elements, we have the clients, we have the products, we will continue evolving on the products, but our path to profitability will depend on Where are we on the economic cycle and how much we can push credit? With this, with our current situation and our expectations on how the economy is going to behave in the coming two years, we expect that we could be profitable in 2026. That's regarding how we see the evolution of our path to profitability. Regarding the spin-off, we are ready to spin off NECI. Now, what is happening in the coming weeks is that the superintendency should evaluate our readiness. They will give us some recommendations, and after we implement them, we will spin off NECI. That will come and depends on the recommendations that we will receive from the supervisor. We will be ready to spin off NECI in the coming months, maybe two months, but it depends on, as I said, on what they see and how they or the results of the assessment in which we are ready. And as a matter of fact, we'll start that assessment, the superintendency will start that assessment next week. Great, thank you very much.

Thank you. Our next question comes from Julian Osik with Devenda Corrales. Please proceed with your question.

Hi, everyone, and thank you for having my question. My first question is regarding the ordinary shares. I know you already mentioned something about that, but I didn't get it. But my question is related to the plans that the company has related to liquidity of the share due to the recently elimination of the share from the FTSE index. And in my calculation, I saw that Bancolombia Ordinary Share is not meeting the liquidity requirements that the MSSA LATAM is required for some shares to maintain in the index. And my second question is something related to something you already mentioned about the spin-off on NECI. Are you expecting some inflows in terms of cash to Bancolombia? And if there is some inflows, what will be the uses of that cash? And just to catch up in terms of a cost of risk, I heard that you are expecting some deterioration of the housing and construction sectors. Like, I don't know if you have like a down scenario in terms of cost of risk, if you saw a really big deterioration in those sectors. Thank you.

Thank you, Julian. I have some comments on your first question. I will answer your second question regarding the spin-off of MECI and a comment on the cost of Frisk. And I am going to start with your second question, then your third. I will do the comment on the FTSE index and MSEI, and then I will ask Jose Humberto to complement me. Regarding the spinoff, it's not going to generate any cash for Bancolombia. What we are doing is a spinoff in which we move assets and liability to a different entity, which is NECI in this case. So NECI will be a fully owned entity, Bancolombia's fully owned entity. And we just spin off assets and liabilities and NECI will operate as a separate entity, legal entity, but 100% owned by Bancolombia. So what happened on a consolidated basis is that NECI is going to consolidate on the numbers that we present for Grupo Bancolombia. Regarding the cost of risk, 2024 is a year that it has complexities in how you read it. But we are, with the 2.6, we are more on the conservative side. It could be some upside potential if we manage, as we are, how are we managing so far the risk that we are, or our risk appetite. So to be concrete, The 2.6 is our expectation. It's more on the conservative side, and it depends on how the year evolved, as I mentioned. But it could have some potential of upside if the year evolves better than expected. And moving to your first question, I want to highlight that what happened is is more because of the size and the liquidity of the Colombian market. It's not something that is particularly regarding or related to Pancolombia. At the end, Pancolombia is the most liquid share in the Colombian market. But it's a very, very small market. And that's why when the different index companies like FTSE evaluates liquidity, the market is very low. But Bancolombia is the most liquid and a very liquid market. Josh, I want to make that comment. And Jose, could you compliment me on that?

Yes, thank you, Juan Carlos. Julian, on practical terms, the change of FTSE means a sell-off of $70 million in the next coming weeks on ordinary shares. probably the consequence will be the price will come down. And again, as Juan mentioned, we have the preferred at the eight years with the high level of liquidity. The second element is, there is a very important element here right now for the old players that we are listed in the local stock market, which is to have a market maker. This is relevant in our case, we hired a market maker two months ago and the consequences was very clear in both, in ordinary and preferred. In terms of the ordinary, the bid offer spread reduces more than 50% and in preferred, more than 45%. And this is very important because at the end of the day, it's a way of democratization of the shares on individuals. So we are using platforms as a tree, for example, trying to offer them the opportunity to have possibility to buy. So the market maker today is relevant because of that, because it helps the individuals to have an opportunity to buy our shares, no matter if it is ordinary or preferred.

Okay. Thank you, Julián.

We have reached the end of the question and answer session. I would now like to turn the call back over to Mr. Juan Carlos Moro for closing comments.

Thank you all for your interest on these conference call results. This first quarter of 2024, I think it will be key to understand how will evolve the year. when we report the results of the first quarter, we will see how things are going. And I also want to mention again that we will have our shareholders meeting, general shareholders meeting March 15th, which is where we will present our, or the Board of Directors proposed dividend. So we are very thankful for your interest, and we expect to have you in our conference call for the first quarter of 2024. Thank you very much, and have a good day.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.