Good morning, ladies and gentlemen. And welcome to Bancolombia’s Second Quarter 2016 Earnings Conference Call. My name is Sylvia and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] 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 and future filings and press releases or verbally, address matters that involve risks and uncertainties. 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. Jose Humberto Acosta, Chief Financial Officer; Mr. Jorge Humberto Hernández, Chief Accounting Officer; Mr. Alejandro Mejia, Investor Relations Manager; and Mr. Juan Pablo Espinosa, Chief Economist. I would like to turn the call presentation over to Mr. Juan Carlos Mora, CEO, Bancolombia. Please proceed, sir.

Good morning, everyone. First, I'll like to thank you for being with us in Bancolombia's second quarter conference call. Today, we are going to share with you the recent developments at Bancolombia as well as some strategic goals as we move forward in the second half of the year. First of all, I'd like to highlight that the evolution of the business during the second quarter was very positive. With strong performance of NIMs net long volumes on fee generation. The profit level for the second quarter has put us in line with our financial targets for the year. During the quarter, we generated COP 733 billion in net income which represents an annualized ROE of 15.2%. In particular, we saw good revenue performance and improved efficiency. During the quarter, we are continuing seeing a moderation in the pace of economic activity in Colombia. Nevertheless, the depreciation of the peso over the last two years has created positive conditions for exporting and for import substitution and today we see a natural adjustment of the economy structure of Colombia. Less dependence on oil and more emphasis on local production. Going to our business, we saw positive trends in particular in the following items. First, conversion of the growth of the loan portfolio towards the target of 10% for the year 2016. Corporate and mortgages are leading that growth. Construction of residential real estate remains dynamic and the first growth of the 4G projects are started to gain traction. Meanwhile the consumer book is moderating its growth to our projected pace for the year. The growth in the peso denominator portfolio was 15% year-on-year while the US dollar denominator portfolio decreased 1% when we exclude Banco Agromercantil assets. Second, as we were expecting NIMs continue to expand and that has allowed us…

Thank you, Juan. Slide 3 shows the profitability of the bank. As you can see the second quarter show so much improved bottom line thanks to the good performance of the bank revenue. In particular, net interest income coupled with a lower effective tax rate and lower tax charge off are seen in the first quarter. Profit before tax continues to demonstrate strong 23% year-over-year. Also, provision has been increasing this year due to the trepid economic environment and this understandable put a track on the net income growth. Regarding taxes, we forecast an effected tax rate of approximately 38% for the year. Assuming a year end FX rate similar to the current one, 3,000 pesos per dollar. Nevertheless, as we have previously mentioned a tax rate for the year will be subject to any variation in exchange rate. We will only know that tax payable at the very last date of the year. All included, we are very satisfied with this results because they show the strength of Bancolombia. The ability to fund a bank at the lowest cost in the market where we operate. The capacity to transfer interest rates to the asset side and the ability to generate capital in our organic manner. Moreover, we take advantage of a strong distribution network more than 7 million customers in Colombia along with our bank's strong local capital market position. Now we'll like to continue with the brief discussion about the economic environment. For this purpose we have Juan Pablo Espinosa, Bancolombia's Chief Economist who will elaborate more on this market. Go ahead Pablo.

Thank you, Humberto. Now I'll ask you to go to slide number 4 in the presentation. During the past few years Latin America has been experiencing a period of poor economic growth due to the combination of global headwinds, internal borrow mix and limited policy support. However, beyond this general trend there are significant differences across countries. While some economies will still be stuck in recession, others will grow below the overall trend and a last group will manage to expand above the average of the past decade. In Central America, several countries are benefiting from low commodity prices and a stable growth in the US. As a result, we forecast that this year Guatemala and El Salvador will expand by 3.6% and 2.3% respectively. In the case of Panama, we expect that growth will continue to converge to its potential rate with an estimate variation by 5.7% this year. Moreover, over the medium term we expect these countries to accelerate further and this would allow credit to grow at consistent pace. For Colombia, leading indicator suggest that the moderation in activity intensify during the second quarter. In fact, we've recently revised our full year 2016 growth forecast from 2.6% to 2.4%. We think that growth will be affected by contractive monetary and fiscal policy, which will coincide with a lackluster performance of private investment and a less solid internal consumption. Furthermore, due to lack of significant short-term growth catalyst and the uncertainties surrounding the discussion of that tax reform which will be possibly submitted to Congress next October, we think that risk to our baseline scenario are biased to the downside. In a less rosy scenario GDP growth would moderate to 1.8%. Due to the pro cyclical nature of credit markets, we expect that these deceleration of economic activity…

Thank you, Juan Pablo. On Slide 5, we see the evolution of assets and their composition. Some important facts about Bancolombia's assets and loan portfolio. Today peso denominated assets represents 59% of the total assets of Bancolombia. And is organically growing at a pace of 12% while dollar denominated represents 41%. Also the Colombia peso appreciates 2.7% against the US dollar during the second quarter. Loans outside Colombia represent 38% of the total loan book. Our loan portfolio in US dollar decreased 1% during the year-over-year. All the products are growing in line with our expectations. Total assets grew 19% year-over-year in line with our organic target rate of 10% growth for the year. The incarnation of Banco Agromercantil assets six months ago along with the peso the depreciation of 12% explains this growth momentum. Loan portfolio growth is primarily driven by commercial loans which continue to exhibit sustainable growth around 10% for the year. The average yield to maturity for the revenue portfolio 7.3% and we continue to maintain a total debt portfolio primarily for liquidity management. Also, the duration of the securities portfolio continues to remain low at a level of 18.5 months which minimizes risk in a very volatile environment. We continue originating loans with a straight underwriting standard in order to maintain the high credit quality of the loan portfolio especially in the consumer and SME segments. The loan portfolio in US dollars decreased during the quarter affected by the FX rate we just mentioned and by the moderation in credit demand. The loan portfolios growing list that we saw last year in 2015 which is perfectly fine and in line with our risk and credit standards. Since the Colombian economy will be growing around 2.4% for this year and 2.7% for next year. Nevertheless, we…

[Operator Instructions] And our first question comes from Ernesto Gabilondo from Bank of America/ Merrill Lynch

Hi, good morning, and thanks for taking my call. After the recent increase in interest rates, the re-pricing on loans, and that the economic growth is slowing, how do you perceive to create demand in the coming quarters and next year? And just another question about the asset quality. We saw an improvement in NPLs but some deterioration in the cost of risk. I think mainly that was due to the consumer segment. So I just want to know to what extent should we expect this ratio to continue trending up. Or what are the reasons behind to expect stable behavior?

Okay. Thank you, Ernesto. Regarding your question the asset quality. We at the beginning of the year we talked about that our cost of credit will be at around 1.7%, today is currently 1.7%. We saw as you mentioned deterioration in the loan portfolio but we don't expect a huge deterioration. We believe that at the end of this year our cost of credit will be between 10.7% -- 1.7%, 1.8% cost of credit. Obviously because of the economic cycle we foresee any specific deterioration basically in consumer loans. What happens in our operation was deterioration in the Panama operation that we have right now under control. So just to give an answer, we don't expect a major deterioration in the loan portfolio in the second quarter. And we believe that we will be at around 8.8% of the cost of credit. Regarding your first question, we took advantage of the high interest rate, high shelter of Central Bank, we that we will be able to sustain it in the second quarter, the challenge will be focused basically on the cost of funding. So the NIM we are expecting to sustain the NIM in the second quarter and we will be focused our effort on the funding cost. That's the idea. As a credit demand, yes, regarding the credit demand, yes, we believe that the credit demand we aligning at a level of 10%. We saw an increase in the first quarter and then we see a reducing pace of growth in the second quarter and that third and fourth quarter will be -- we see exactly a same trend. So we don't expect a major increase in loan portfolio, neither we don't expect a drop in the number. We are expecting as you probably hear from our chief economist meanwhile the economic is growing at a level of pace of 2.4, we are growing at a different pace of time because of typically growth in those countries are different level. So meanwhile the loan growth in Colombia would be 8% to 10%. We see for example in Panamanian operation growing at pace of 10%. Guatemala growing at a pace of 8% to 9%. So as a combination of that we will see ups and downs but at the end of day 10% would be the number at the end of this year.

Our next question comes from Thiago Batista from ITAÚ BBA.

Yes, hi, guys. Thanks for the opportunity. I have two questions. The first one on fees. You posted a material expansion in the bancassurance fee. Could you give us a little more color on your strategy on the bancassurance business? And the second one, just a follow-up on your answer about loan growth. You just said that you were expecting a loan growth of 8% to 10%. If I'm not wrong, in the first half of the year your loan book expanded by almost 1% or around 0%. Is it feasible to see this big improvement in the loan portfolio expansion during the second half of the year?

Okay. Regarding your second question the loan growth, the situation is as follows. Remember, that we have almost 65% of our loan portfolio is in local peso. The local peso is behaving at pace of 10% to 11% growth in the last 12 months. In the US dollar track we are not growing. We are growing only 1%. And that situation is explained mainly by the loan book in US dollars in Colombia. What happens in Colombia is a corporate trade demand for US dollar shift from US dollar to local currency. So we are experiencing a decrease in the US dollar loan book in Colombia. Meanwhile the order loan books in the offshore, in the international operation is growing at a good pace but with the combination of factors it lead only growing 1%. What we expect for the rest of the year. We are expecting same in both currencies, maintaining the growth in local currency in peso to align 10% and to maintain the loan growth in US dollar outside in between 5% to 10%. Regarding your first question, fees, what's going on with bank insurance is we are the number one dealer of insurance for Suramericana for example. So we are penetrated in our consumer segment with those bank assurance and the numbers are growing at a pace CAGR in the last three years at around 20%. What we expect the next coming months? We are expecting same level of growth because we are promoting the use of insurance in our branches. Remember, that we have more than 6 million clients here in Colombia. Although, it is a very successful business in our operation in Agricola and in Salvador, we are growing also at a pace of 20% to 25%. Obviously, the number is still very low but we are promoting the use of insurance and it is reflected because our new composition of the society, people are beginning to realize that the buying insurance it is a very good business. So it's sustainable fee income at least for the next two years in the same numbers our growth of 20%.

Our following question comes from Tito Labarta from Deutsche Bank.

Hi, good morning and thanks for the call. My question is on net interest margin, following up a little bit more. I understand you said you expect it to remain kind of stable for the rest of the year. But -- so that means you don't see any more increase in spreads? We saw some good performance this quarter. So I just want to make sure you're thinking that, that you can increase the spreads more. But also on the funding side, I understand you feel comfortable with your loan-to-deposit ratio but we have seen deposits fall now for two quarters. Do you think that could add some more pressure on the funding side that maybe then could negatively impact the margin? And then also I understand you expect rates to remain stable for the rest of the year. But if rates were to rise some more, where do you think you would feel more pressure, on the asset side, where you can increase spreads again or would that at more pressure to your funding costs, particularly with the loan-to-deposit ratio where it is? I just want to get a little bit more color on your outlook for margins.

Thank you, Tito. Yes, what we expect the second half of the year is we took advantage of the momentum of first half increase the interest rate and DTF will increase as well. The second half of the year we expecting a flat interest rate in terms of DTF and we expect that minimum increase of the Central Bank interest rate so for that reason we are not expecting on the asset side up an indicator of NII. We are expecting to maintain steady indicator of NII. As you said what is the challenge. The challenge is to maintain the funding cost under control and that will be very challenging again because obviously the cost of funding is increasing. So what we did is try to pre fund and re opt back of our funding. Remember, one third of our funding structure is timed to CDs, so we already locked part of them. We will take advantage of that. So we believe that the third and fourth quarter we would try to maintain funding cost under control. And this is basically because as we mentioned in the speech, half of our deposit is now price sensitive because it's retail business. So again the guidance here is to sustain the NIM at the same level. The challenge will be 2017 because priority if inflation change and the interest rate goes down and because we are asset sensitive we will be feel pressure on the NIM but that will be the second -- the first half of next year. Regarding your second question that interest rate will remain stable, again, the structure of funding, we are funding basically from what happen with loan to deposit ratio is in the operation in Panama we are growing at a pace of 10%. But on the liability side we are not growing at the same space. We are growing at a pace of 7% to 8%. So we are covering that gap with medium term loans from international bank. That is why the number of loan to deposit ratio changed. But again in our Colombian operation we have a ratio of loan to proceed at around 100%. The situation is in our international operation because it's mainly driven in US dollars and we have to use the international facilities. That's the reason why we went to the market with BCM and we raised money for Banagricola last year ago and raised money for Banco Agromercantil two years ago.

Following question comes from Nicolas Riva from Citigroup.

Thanks, Jose Humberto, for taking my questions. My first question is on capital. Your Tier 1 increased 30 basis points quarter-on-quarter; now it's 8.5%, which is the midpoint of your guidance of 8% to 9%. And the increase seemed to be driven by a reduction in the risk-weighted assets, which were around 2% quarter-on-quarter. Now I know that loan growth was quite low quarter-on-quarter only 1%, however I wanted to know what was the reason really for the reduction in the risk weighted assets on a quarter-on-quarter basis. And then my second question on taxes. The structured income tax has been quite well in recent quarters, 49% in the first quarter, 32% in the second quarter. And overall this year has been a quite substantially from last year which was 20%. So I wanted to ask what's driving the volatility in the structured income tax rate and also what's the guidance for the tax rate for the second half of this year? Thanks.

Thank you, Nicolas. Yes, the reason why the risk weighted asset reduce is because the VIR, remember that we are locate -- our liquidity -- 7% of our assets are located in the investment portfolio of mostly in sovereign treasury so we are using less VIR and that's the reason why the number increases in terms of Tier 1, which implies that we are using our capital in the best possible way and try to allocate in the best possible way. And you will see that try to maintain that number again 8% to 9%. The second question regarding taxes, remember, in the first quarter we were impacted because of appreciation the FX rate came from 3,150 pesos to 3,000 peso that was appreciation of currency, very important that affect in terms of taxes. So for the year the guidance as we are expecting tax rate base of 38% assuming that the FX will be a kind of stable, which means we believe us - our chief economist say that the interest tax rate will be at the end of the year at a level of 3,000 pesos. If it is what it is 3,000 pesos the tax rate base will be 37%. But if something happens in terms of appreciation of depreciation that will change tax interest rate.

Following question comes from Catalina Araya from JPMorgan.

Hi, yes. Thank you. Just my quick question is following up on consumer lending. I was surprised by the increase in the acceleration of consumer loans, which this quarter grew around 19% year-on-year versus only 8% year-on-year in the first quarter. You said at the beginning of the call that in terms of risk you're being conservative, especially in the consumer segment; but we see this huge -- or accelerating in growth and NPLs increasing 20 basis points. So I want to know, understand, where this growth is coming from. And then my second question, just following up on bancassurance, you talked about 6 million clients in Colombia. How many of these clients have insurance products? Thank you.

Thank you, Catalina. Regarding your first question, what happen with consumer loan is we decided to go to the high income individuals. And we use new tools inside a bank which is analytics and we were right now very efficient in the pre approval process with those population. So as a result of that we increased the level of loan portfolio for those individuals. And also we are offering them more tenure instead of lending for one year we are lending for two or three years but as you mentioned Catalina mostly focused on high income individuals in order to avoid deterioration of the loan portfolio. And remember that the deterioration of the loan portfolio part of is seasonal, the other part is because of the Panamanian operation and other part is because some corporate clients, is not related mostly to the consumer business. It is related for the whole range of business that we are operating. So the answer is we are very focused with high income individuals and we try to take advantage of that and to lend them more money.

Jose Humberto Let me, Catalina, let me precise a little bit what are our expectations around a loan growth. As we said we expect our book to grow around 10%. How do you divide that growth? Mortgages are going to grow 12% so that's going to be the leading part of portfolio. Commercial loans will grow around 8% to 10% and as we mentioned they are from corporate projects, infrastructure in Colombia and other corporates in country so that part of the book will grow between 8% and 10%. On retail is going to grow around 5% to 6%. So we are expecting that retail part of the business is going to grow at a pace that is going to be lower for the next year.

And also remember, Catalina, that 58% of our loan book is basically commercial loans. So we are talking about that loan growth will be basically of that segment. Regarding your second question of bancassurance, out of the 6 millions clients we have right now 800,000 are clients using bancassurance, so you see a huge potential in growth and that's the reason why we believe that the number of growing at a pace of 20% will be sustainable at least for the next two years.

And let explain little bit on that. We have been building a strategy of around insurance for the last three to four years and it's a business that is growing at a very good pace. Insurance penetration in our country is very low. But we have customers and we have a very -- a distribution network that is very powerful. So we are taking that product on our distribution network and the results had been very good. And we expect that pace to continue since we see a very good demand for this kind of product not just in Colombia but as we mentioned before in the other countries that we are present.

[Operator Instructions] Our next question comes from Neha Agarwala from HSBC.

Hi, congratulations on the results, and thank you for taking my question. I would like to go back to the tax rate for the year. You started the year with tax guidance for the year of 26% to 28% so now that has changed to 38%. I just want to clarify that. And given that the statutory rate for this year is 40% and next year it's going to increase to 42%, would we expect a similar increase in the effective tax rate for the years going forward as well? Thank you so much.

Thank you. The reason why are moving from 26%, 27% of tax rate to 37% is because of combination of factors. First, the number of operation is growing in Colombia. We are obtaining gains because of the operations. So that we imply more taxes. Second because remember then we have our tax reforms two years ago in which we are assuming tax is growing 9% margin, this year will be growing 11% margin, so that's the reason why the number jumps through 37%. And your second question would you please repeat? Remember the second question was --

Yes, the incentive statutory rate for this year is 40%, and your effective tax rate you are guiding for the year is around 38%. Next year the statutory rate would increase to 42% under the tax reform. So what should we increase -- a similar increase in the effective tax rate as well? And what is the expectation for the years going forward?

Yes. I am sorry about. Probably next year we will talk about that from 37% to 39%. Obviously all of that depends of FX condition because the variation affects us in terms of tax but the answer is we would go from 37% this year to 39% in 2017.

Our following question comes from Sebastian Gallego from Credicorp Capital.

Hi. Good morning, everyone. Thanks for the question. Just following up on the NIM side, but going to 2017. First, what's Bancolombia's view on any potential hike rate by the Fed? And how is this going to affect also the cost of funding and the NIM potentially, seeing also lower interest rates in Colombia by the Central Bank? Thanks.

Yes. We talked about the local situation, we talk about what happen with inflation and what will happen again with inflation next year that will depended the interest rate of the Central Bank. Again, if the interest of the Central Bank goes down, the re-pricing of the assets will be faster than the re-pricing of our liability and we will feel like kind of compression of any for at least the whole year of 2017. But as always happen also we will be benefit because of the marginal funding cost also would be reduced. So at the end of the day in terms of local currency, we are expecting to sustain the NIM at a level of 6% to 6.1% at the current level. We are not expecting neither goes up because interest rate hike is done but we are not expecting to go down because we will do the best effort to maintain funding under control. On the US dollar universe, obviously if interest rate goes up again will happen exactly as saying the LIBOR will be up, the spreads will be maintained and we will do exactly as same on liability side. So it is not a function what happen in terms of the rate in the US, it is a function that the way we will structure the funding to attend the business in both currencies in local and US dollars.

Jose, if I can add something about that is that actually we expect that the tightening cycle in Colombia is going to be ending soon. And we actually believe that there is going to be pace in timing which monetary policy will remain stable because basically we have still very high inflation reading so we don't foresee that a change in cycling, the monetary policy will occur any time soon. So I mean that downward trend in rates in our opinion will take a while to occur.

We have time for one more question. Natalia Casas from Ultraserfinco.

Hi; thank you for the call. I would like to know a little bit more about the efficiency ratio. And what do you expect about the rest of the year? It will be under 50% again?

Okay, Natalia, regarding efficiency ratio, well, obviously it is a function of not only expenses also the income ratio. And this behaving very well. You see the expenses growth were 20%, out of the 20%, 7% were Banco Agromercantil, a new operation that we started in Guatemala. And if you do the math the other expenses 40% are US dollar, with valuation of 12% during the last year, we are talking about 5% because of FX variation that means that we are in the growing of expenses at a level of 8% to 9%. And this is our guidance and we are doing our effort internally to maintain the number 8% under control. How we are doing that? Basically try to for example in terms of business using in a more efficient way the distribution channels, different branches as Juan mentioned at the beginning of the speech. Maintaining and the control the number of projects we are not growing the branches. We are trying to move forward using different channels with the lower cost. And because of that I'd say that we will be able to sustain that number 8% expenses growth this year.

At this time, we have no further question. I'd like to turn the call back to Juan Carlos Mora for closing remarks.

I'd like to thank you for take the time to hear our conference call and to be with us. We reaffirm that we are very happy with the quarter results and that we keep working on maintaining the profitability and the results of the bank. If you have further questions, don't hesitate to contact our IR team. And hope you see in our third quarter conference call results. Thank you very much. And have a good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.