Good morning, ladies and gentlemen, and welcome to Bancolombia's Third Quarter 2016 Earnings Conference Call. My name is Hilda 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, in future filings, in press releases or verbally address matters that involve risk and uncertainty. Consequently, they 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. Jaime Velasquez, Chief Strategy and Finance Officer; Mr. Jose Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mr. Humberto Hernandez, Chief Accounting Officer; Mr. Alejandro Mejia, Investor Relations Manager; and Mr. Juan Pablo Espinosa, Chief Economist. I would now like to turn the presentation over to Mr. Mora, Chief Executive Officer of Bancolombia. Please proceed, sir.

Good morning, everyone. It's a pleasure to be here with you today to share Bancolombia's results during the third quarter. During the quarter, we generated COP 604 billion in net income, which represents an annualized ROE of 12.4%. The evolution of the business during this quarter was positive and in line with our expectations. The figures for the quarter confirm our forecast and the trends observed in previous quarters. Operational metrics such as loan growth, net interest margin and income, fee, revenue and efficiency continue evolving very well. Despite an increase in provision charges due to individuals and SMEs, the net interest income after provisions grows in a very positive way compared to one year ago. As a matter of fact, if we analyze our revenues, net of provisions, that is net interest income plus fee income minus provision charges, you can see a 29% year-on-year growth as compared to the third quarter of 2015. For the first nine months of 2016 the figure is 25%, higher than one year ago. This shows the excellent performance of our operations and shows the Bank's competitive advantages. Our operation in Central America continues evolving according to our plan. Today, they represent a challenge due to the complex political and economic situation, in particular, in El Salvador. Nevertheless, we see opportunities for increasing the profitability and efficiency and as a result, a bigger contribution to Bancolombia's consolidated returns. In particular, we are focused in improving the process in Banistmo, in Panama, integrating the operations in Banco Agromercantil de Guatemala and maintaining the profitability in Banco Agricola in El Salvador. On the other hand, Bancolombia Colombia is making extraordinary progress in achieving efficiency levels not seen in the last five years. As we have seen during the first half of the year, a moderation…

Thank you, Juan Carlos. Slider number 3 shows the profitability of the Bank. As you can see, the third quarter shows a 66% growth in profit before taxes as compared to the third quarter of last year, which is this positive evolution of the business, which has been possible, thanks to better performance of NII, NIMs, cost control, and fee generation. The quarter saw – shows a reduction in profit before tax and in the bottom line as compared with the previous quarter, caused mainly by higher provision charges that we did during the quarter in order to protect the balance sheet. Operational metrics, in particular, net interest income continued to perform very well as a result of the stability in the lending NIM and higher volumes. As Juan Carlos mentioned at the beginning of his presentation, the expansion of NII has permitted to offset the higher provision charges and for the first nine months of this year to grow income before taxes by 29%. We want to highlight this number because it reflects the good performance of the Bank. Additionally, net fees continue growing at a very good pace, driven by higher utilization of our products and channels. Regarding taxes, we had an effective tax rate of 38%, in-line with our expectations. We forecast an effective tax rate of approximately 39% for the whole year, assuming at year-end FX rate similar to the current one, COP 3,000 per dollar. Nevertheless, as we have previously mentioned, the tax rate for the year will be subject to any variation in exchange rate. We will only know the tax payable at the very last date of this year. All included, we are very satisfied with these results because they show the strength of Bancolombia. The ability to fund a bank at the lowest cost in the markets where we operate, the capacity to transfer interest rate to the asset side, and the ability to generate capital in an organic manner. Moreover, we take advantage of our strong distribution network, more than 7 million customers in Colombia and 4 million in Central America, along with our Bank's strong local capital market position. We keep paying special attention to the credit quality in order to prevent further deterioration on higher provision charges. Now we would like to continue with a brief discussion about the economic environment. For this purposes, we have Juan Pablo Espinosa Bancolombia's Chief Economist who will elaborate more on these matters. Go ahead Juan Pablo.

Thank you, Jose Humberto. Now I'll ask you to go to Slide number 4 in the presentation. During the past year, some of the major Latin American economies have been affected by a combination of the international headwinds and internal difficulties. As a result, the region's GDP is expected to contract by 0.6% this year. However, we expect economic growth in Latin America to pick up to 1.6% in 2017. Despite these, it is important to bear in mind that risks are biased to the downside. For instance, the results of the US Presidential elections raise doubts about the future path of the American economy and the way in which the new administration will refine its relationship with Latin America. Regarding a specific country, we anticipate that next year Colombia will start a recovery cycle that will gain full traction in 2018. Some drivers for a more dynamic internal demand would include this stabilization of terms of trade, the moderation of inflation, and an acceleration of private investment. Therefore, in our baseline scenario, growth will accelerate from 2% this year to 2.6% in 2017, and 3.4% in 2018. In terms of prices and interest rates, we foresee that the deceleration in inflation that has taken place during the past few months will persist, thanks to our normalization of goods supply and products in the economy. As a result, we expect that inflation at the end of this year will be 5.9%, and by December 2017, will be around 3.9%. Eventually, this will lead to an easing cycle in the monetary policy. However, the Central Bank's recent communications have been marked by the hawkish tone. This can imply that start of the rate cuts could take longer than initially expected. Based on our growth and inflation expectations, we forecast that growth in Colombia will start to recover by the second half of next year. In the case of Panama, latest activity indicators conforms our moderation in growth this year to approximately 5%. This reflects the sensitivity of the Panamanian economy to global growth and great conditions. Nevertheless, activity will strengthen in 2017% to a 5.6% EBITDA growth, due to investments in mining, logistic and infrastructure, and an expansionary fiscal policy. In El Salvador, our perspective is going through a steady expansion of economic activity. Private consumption has been performing well, and this will lead to a 2.3% growth this and next year. Finally, in Guatemala, we expect activity to expand in 2016 close to the country's potential rate, which is around 3.5%, and to pick up in 2017 to 3.8%, due to higher investment and a stable interest rate. After this overview of the economic environment, let me turn the presentation back to Jose Humberto Acosta, who will discuss the Bank's results.

Thank you, Juan Pablo. On slide five, we see the evolution of assets and their composition, some important facts about Bancolombia's assets and loan portfolio. Today, peso-denominated loans represent 63% of the total loan portfolio of Bancolombia, while dollar denominated represents 37%. Also the Colombian peso appreciated 1.3% against the US dollar during the second quarter and 7% over the last 12 months. Loans, outside Colombia, represents 28% of the total loan book. Our loan portfolio in US dollars expressed in dollars decreased 15% over the last year due to a lower demand of US dollar financing in Colombia. And finally, all the products are growing in line with our expectations and forecasts. Total assets grew 9.3% year-over-year, in line with our organic target of 10% growth for this year. Loan portfolio growth is primarily driven by consumer and commercial loans, which continue to exhibit the sustained growth at around 10% for this year. Nevertheless, we start to see the positive impact of seasonal effects on consumer credit demand and towards the end of September. We experienced acceleration in this product with 13% year-over-year growth. This is basically because we are using new tools of analytics and we are able to increase the level of pre-approvals from retail clients and we are able, right now, to increase the loan portfolio at around 13%. In consumer loans, we focus our strategy in targeting high-income individuals and segments with low indebtedness levels as a way to grow with lower risk in these clients. The main input for our scoring models is a track record of the client along with the payment capacity. The average yield-to-maturity for the investment portfolio is 6.7% and we continue to maintain a structural debt portfolio primarily for liquidity management. Also, the duration of the securities portfolio continues…

Thank you. [Operating Instructions] We have a question from Thiago Batista from Itau BBA.

Yeah, hi guys, thanks for the opportunity and thanks for a very complete presentation. I have two follow-up questions. The first one about margins, you already mentioned that the interest rate in Colombia will probably decline in 2017. In this scenario and after a very positive performance of margin in 2016, do you believe, it is possible to see margins relatively flattish next year or is more likely to see some decline in the margins? And the second question is about tax, I know that you already mentioned that the tax probably would be around 39% this year, but do you have any guess for the level of tax in 2017? I know that there is a lot of moving parts but do you have any view on the tax in 2017?

Thank you, Thiago. Regarding your first question, yes we see a challenge for the next year regarding how to sustain the NIM. Our focus right now will be to maintain the funding costs under control. Our sensitivity is, for every 100 basis points that are retained, the interest rate will be reduce or increase our NIM, 9 bps. Based on that assumption and assuming that the interest rate goes down, maybe the compression of the NIM at around 10 basis points. But again, next year also, you'd see a huge potential of maintain the funding cost under control, if you double check and compare us with the other institutions, we today are able to have the lowest level of funding cost. So the answer is, yes, we'll try to maintain at the same level, but we will see a slightest reduction in the second half of 2017 in 10 basis points. Regarding your second question with the taxation and our statutory tax, we are modeling the next year with a tax at around 38% to 40%.

Thank you. Our next question comes from Nicolas Riva from Citi.

Yeah. Thanks Jose Humberto for taking my question. The first one on asset quality, if you can explain what happened really this quarter, because we saw an increase of 20 basis points overall in the NPL ratio for the whole Bank and we saw increases in all three segments; commercial 20 basis points, consumer 30 basis points, mortgages 10 basis points. If you can explain what happened in the third quarter on NPLs? And also, what's the outlook for the NPL ratio fourth quarter and next year? And the second question on capital, which I believe was one of the main positive highlights on the quarter. The improvement in capital, Tier 1 ratio increased 60 basis points quarter-on-quarter 9.1% now. Now I understand that Colombian banks capitalize return earnings only once a year and that happens in the first quarter, which is going to be first quarter next year. So then, what really explain the improvement in capital, and if it was mainly really just the fact that the risk-weighted assets were about flat quarter-on-quarter? Thanks.

Thank you, Nicolas. Regarding the asset quality, there are several factors that affect the deterioration of the loan portfolio. First, the vintage of the consumer loan book that we generate last year behaving in a different way, and right now, we are adjusting those scoring models, but that was the first reaction. We saw an increase of deterioration, because of that; the vintages of consumer credits originated the last year. Second, there are some corporate loans that impacted the deterioration of the loan portfolio and the Panamian operation also has an increase in credit cards operation and consumer loans, that was impacted, and that's the reason why you see an increase of deterioration of the loan portfolio. Our guidance in cost of credit, as I mentioned at the beginning is today, we believe that this year-end, we'll close with a cost of credit at 1.8%, and next year we will be at the stabilization of this cost of credit and the range will be 1.7% to 1.9% and this is basically because interest rates will go down, the GDP, as you hear from Juan Pablo will increase to 2.6%. So we see a better environment for loan portfolio next year. Regarding your second question on quality, we are allocating in a best way our securities portfolio. That's the reason why our solvency ratio is increasing and we are trying to increase the capital level. That's the main reason why it is explaining that increase in the BIS ratio. Yes, in March, there will benefit of the retained earnings and you'll see on the legal reserves and the number again will be at around 9.5% at the end of this year.

Thank you. [Operator Instructions] Our next question comes from Tito Labarta from Deutsche Bank.

Hi, good morning. Thanks for the call. Actually, my question is on the tax rate, again, just more on the fiscal reform that some has been mentioned. Just could you give us the latest update on that? And what would that mean for your corporate tax rate beyond 2017, if that's approved? I think there's a big reduction in the corporate tax rate. Could you give us any update where that stands and how that would impact you? Thank you.

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Thank you. Our next question comes from Jason Mollin from Scotia Bank. Please go ahead.

Hi, everyone. I have a follow-up on the asset quality evolution. We did see deterioration in the segments that you talked about, but one thing is, when we look at the sector numbers or the banking system numbers in general for Colombia, it appears on certain metrics that Bancolombia's numbers deteriorated more. Are you seeing that? And what do you think drove that, if that is in fact the case? Thank you.

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The key message here is, this is not taking by surprise for us the provisions that we are having right now. If you remember in our previous conference calls, we announce that in the first quarter, for example, cost of credit were very low and we have the number and we expected to get that number, I mean the 1.8% and the message that we are sending is, this is maybe the peak that we are getting in terms of party loans and the number would be at least flattering for the next coming quarters or even reduce, depends on the behaving of the economy.

Thank you. Our next question comes from Ernesto Gabilondo from Bank of America.

Hi, good morning to everybody, and thanks for taking my call. So only one question, I believe the Colombian banking regulator will follow Basel III. As such, I'd like to know to what extent Bancolombia will be aligned with the new capital standards and if you're considering to incorporate a systemic buffer as other banks or systemic banks should have aligned with Basel III in 2018? Thank you.

Thank you, Ernesto. Yes, we have an internal team here analyzing the implications of the Basel III. We are also in early discussions with the regulator. Yes, we have two or three different fronts. The first one is the buffer for provisions. If you see, we have also 200%, almost 200% of provisions of 90 days past due. That will be a kind of buffer that you're having on the asset side, instead of having on the equity side. So we believe that with the regulators we will have conversation regarding that, how to transfer from the asset side to the equity side regarding issues on both propositions. Regarding the systemic buffer, we know that the numbers could range from 0.5% to 2%, if you compare with the Chilean model. So we are running some models to realize what will be the number for 2018 regarding Basel III? And no matter what the number we'll get that today meaning levels is 4.5% assuming that they will increase 150 basis points or 200 basis points for systemic buffers, we are still complying with the level of Q1. So we don't have any specific concern, but again, we are also defining how it will be implemented these Basel III term, for sure will be implemented in tranches. So we will have time to maintain and to grab some new capital.

Thank you. Our next question comes from Andres Duarte from Corficolombiana.

My question is about Bancolombia's US dollar proprietary position. So Columbia Central Bank gave us a deadline, July 5 to correct the existing proprietary position corresponding to goodwill and the application of IFRS. This excess is about, or adds up to about a $1.3 billion and the goodwill part is related to the acquisitions made by the major Colombian banks in Central America. So I would like to know what's your opinion on that and what's the portion of these excess, in position that corresponds to Bancolombia and how do you plan to correct it as the deadline is July 5? Thank you very much.

Andres thank you for your question. Yes, this is a very technical question regarding proprietary position. Do you know that the regulation in Colombia is contemplated some adjustments, because the banks in Colombia is acquiring international operations and we are funding them in a different way. So if you want to give you a very detailed answer, we can call you during the morning because, again, this is a very technical, basically it is because of the accounting system which is, which accounts or which lines of the accounting system you have to take into consideration to calculate the property position. But we are, again, working and talking with the regulators and with the Minister of Finance and with the Central Bank regarding how to adapt this number to the new environment and the new structure of the banking industry. We will call you, for sure, during the morning, Andres.

Thank you. Our next question comes from Maria Barriga from Davivienda Corredores.

Hello? Thank you very much for taking my call. I was wondering about your operations in Central America, specifically in El Salvador, where recently a rating agency downgraded its BCA. So I was wondering if you could expect any impairment on these operations. Thank you.

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Thank you .Our next question comes from Catalina Araya from JP Morgan.

Yeah good morning, I was just wondering, I think in terms of expenses, you guys are delivering good growth, only less than 5% by higher inflation in the country. Was the expectations for next year and what's the long-term goal in terms of efficiency? Thank you.

Thank you, Catalina. Yes, as you can see, this is the numbers that we feel proud, because the last five years we are doing our job regarding reduction in expenses in the local operation and international operation. Our guidance and you know that this is very, very key for us, if we want to recover our return on equity, the level of efficiency, it has to be below 50% and we will expect for the next two years to get a level of 48% of efficiency ratio. How we will do that? If you double check the numbers, in our Colombian operations our efficiency level is at around 44%, 45%. So as Juan Carlos explained at the beginning, that would be key to become more efficient in international operations. We have to do a lot of things there in the three operations, so it will be balancing every stages, we have to implement a lot of systems, we have to implement a lot of procedures but the way to get the 48% the next few years will be doing through our international operation. So we have to do a lot of things there, increasing the income, the fees, increase in the NII but also maintain under control, the expenses.

Thank you. Our next question comes from Sebastian Gallego from Credicorp.

Hi, good morning everyone. Thanks for the call. Just a follow-up on the last question, you mentioned the room for improving efficiency within Central America, but can you expand more on the specific strategy that you want to implement in those countries, particularly in Panama and Guatemala on the expense side? Thank you.

Okay, thank you Sebastian. Efficiency is a combination of the both sides of the equation. What we are planning to do in Panama, for example, we are experiencing a growth of NII, because we are growing our loan portfolio, we are increasing the fees. So that would help the efficiency level of the income side. Also, we would try to replicate the same in Guatemala. On the cost side, remember, that we have spent a lot of money on Banistmo operation the first two years, implementing the software. Right now, we are seeing a kind of plateau in terms of expenses. So we expect to see a reduction of expenses the next two or three years. Same, we are happy with the Banco Agromercantil operation in Guatemala. So we will expect to reduce the level of efficiency from 65% at least to 60% in Bank Agromercantil. But again, the efficiency level in those operations will be focusing the two sides of the story, increasing the income and trying to maintain cost control.

Thank you. Our next question comes from Natalia Casas from Ultraserfinco

Hi, thank you for the call. I am kind of worry about the asset quality of the bank, because this is like the worst number that you have shown under IFRS. And so, I like to know if you have any guidance about the PDL ratio for this and the next year and how are you going to reduce this indicator or the PDL ratio? Thank you.

Thank you, Natalia. Yes, the level, as I mentioned, is quite high this quarter. If you compare for the whole year, the number it's under control which is this 1.8% of cost upgrade. But regarding the guidance, we will expect the level of past due loan will be at around 3.2% to 3.3% this year and we will expect same level for next year, assuming a GDP growth of 2.6% because we don't see clearly, the impact of the tax reform. So that's the reason why our guidance is to maintain the same level of past-due loans of 30 days.

Thank you. That is all the time that we have for questions. I would like to turn the call over to Mr. Mora for final remarks.

We would like to thank everybody who are attending this conference call. I'll end with some final remarks. I know that you are concerned about asset quality we are following very closely the development of our loan portfolio. We are assured that our development in the rest of the year is going to improve. During the quarter, there had been some specific issues related basically to the upgrade of our credit card platform that didn't allow us to have enough information to do collections on the right way. That had an impact, that's a situation that is solved already. So we are expecting that by the end of the year, the asset quality is going to be in line with our expectation. And our second the focus is taxation. We need to work on how to improve the taxation because it's impacting the net income of the Bank because the operational results are very good, taxation is impacting. And also, we expect that the third quarter is going to be positive for the results of the Bank. Again, thank you very much for attending this conference call and we expect you to be with us on the conference call that we will have to present the results of the year 2016. Thank you very much and have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you for participating. You may now disconnect.