Good morning, ladies and gentlemen, and welcome to Bancolombia Second Quarter 2018 Earnings Conference Call My Name is Silda, and I will be your operator for today’s call. At this time, all that 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 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, and press releases or verbally, address matters that involve risk and uncertainty. Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general, economic and business conditions; changes in currency exchange rates and interest rates; introduction of competing products by other companies; lack of acceptance of new products or services by our targeted clients; changes in business strategy; and various other factors that we describe in our reports filed with the SEC. With us today is Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Jaime Velasquez, Chief Strategy and Finance Officer; Mr. José Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mr. Jorge Humberto Hernandez, Chief Accounting Officer; Mr. Alejandro Mejia, Investor Relations Manager; and Mr. Juan Pablo Espinosa, Chief Economist. I will now turn the call over I to Mr. Juan Carlos Mora, Chief Executive Officer of Bancolombia. Mr. Juan Carlos, you may begin.

Good morning, everybody, and welcome to the conference call for the second quarter 2018. I want to start this call making reference to the main aspects that are affecting our business. We are going through a challenging credit cycle and we have experienced an additional deterioration in the loan portfolio. The level of new past due loans is mainly explained by corporate loans, including troubled clients that we have shared with you in previous calls. In the SME front, we perceive an improvement of this situation, even though we still have some way to go, which is line with the economic recovery that Colombia is going through. This trend, though, confirms our assessment regarding where we are in the credit cycle. We have elements to believe that we are reaching a turning point and we expect a normalization in the coming quarters. Over the last year, we have accelerated the pace of provisioning, acting early to reach coverage ratios that permit to protect the book. As a matter of fact, some of the loans that are becoming delinquent today have been provisioned already, and that means that we do not expect a significant increase in the cost of risk – in the future cost of risk despite potential new past due loans. This situation with the credit portfolio contrasts with a good performance on margins. Thanks to the management of the funding costs, also with a solid and improving capital position and with a good performance of costs thanks to the efforts made to lean the bank in several aspects. Having said this, let me elaborate a little bit more on the macro and some other relevant aspects that are driving our business. After the elections for Congress and President held in the first-half of the year, the political landscape…

Thank you, Juan Carlos. I will ask you to go to Slide #2 in the presentation. Let me start by saying that during the past few months global conditions have remained positive for the Colombian economy. The rise in the prices of oil and other commodities have led to a surge in the country’s terms of trade, which are now 63% above the lowest reading recorded at the start of 2016. Moreover, at the end of May, the year-on-year growth of this indicator is 14%. This performance of external prices, as well as the solid growth of Colombian main trading partners has led to a two-digit increasing of exports, which will lead to a further narrowing of the current account deficit to 3% of GDP for the full-year. Due to all these factors, year-to-date Colombian peso has been one of the best performing currencies of the region. Our base scenario is that this performance of external variables will continue to be positive through the second-half of the year. With respect to economic activity, recent indicators have shown a moderate improvement. According to our estimates, during the second quarter, GDP expanded 2.6% year-on-year, which is 0.4% higher than first quarter’s print. Meanwhile, job creation is accelerating, retail sales have recovered and after a long period of weakness industrial production is growing again. All this has been complemented by the steady increase of both consumer and business confidence. Based on this evidence, we have revised upwards our full-year growth forecast to 2.6%, slightly above market consensus. This means during the second-half of the year, the economy will expand close to 2.9%, thus confirming the pace of gradual pickup in activity that Juan Carlos mentioned that at the start of the call. In terms of prices, after accelerating just 6 basis points in…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a question from Mr. Ernesto Gabilondo from Bank of America.

Hi. Good morning, Juan Carlos, José Humberto and good morning, everyone. Three questions from my side. First one, we saw modest economic recovery and that explains the limited loan growth. However, can you share with us which are the tangible programs or projects of the new administration that are making you to become more optimistic in terms of loan growth in the second-half? We saw that almost all of the segments of the portfolio experienced a slower pace of growth on a yearly basis. So I just want to know again, which is making you to be more comfortable, not only related to the economic activity but projects or any other indicator that could help us to be expecting faster growth should be very helpful? Then my second question is in terms of asset quality. We continue to see that the large troubled corporates are the ones affecting the provision charges. And I think, that’s the reason why you increased the cost of risk guidance to 2.1%. But can you share with us how much provisions have you already created on these large corporate loams? Are they already provisioned at 100%, or how much is still pending? And finally, can you repeat how do you see the ROE for the year? Thank you.

Ernesto, thank you for your questions. Let me start with the recovery aspect. We have seen that the economy in Colombia is picking up already. You mentioned that the growth of our portfolio has been slow and that’s true. But I would like to highlight that we have been gaining market share. Looking forward, we see that the consumer confidence is increasing, economic activity is improving. So we will see more economic activity. And on that front, we will forecast a bigger demand. On the government side, the new government will be taking office next week, but still the infrastructure program is in place and will demand additional finance. And also we see an increased activity from the enterprises evaluating new projects, and we will see additional demand coming to finance these new projects that are going to create additional capacity for the economy. Also I would like to highlight that we are – we keep moving on the direction of pre-approving line of credits for our customers, for our retail business and this is a big improvement. So we are not reacting to the demand. We are moving ahead and evaluating the customers, defining the line of credit, and that is creating additional demand for us with a very good credit quality. So we were optimistic that the recovery is coming and the demand will improve moving forward. In terms of asset quality, we have mentioned that we have been moving on provisioning the big customers, bigger clients, corporate clients. Already we have provisioned the Electricaribe loans at around 65%, which is sufficient due to the current situation of that customer. And on the SATP front, which is the mass transportation systems, we are at around 46%, which we also consider sufficient coverage. So we will keep moving and analyzing the development of these customers. But as of today we think that the level of provisions that we have with those customers it’s enough. Regarding your third question about ROE forecast. We forecast that our ROE will be at around 12% for this year, and we are confident that ROE will improve significantly for next year.

The next question comes from Jason Mollin from Scotiabank.

Hi, thank you for the opportunity to ask questions. My first question is a follow-up on the outlook for profitability. I think, with the higher provisions, it seems like it might be hard even to reach the 12%, which I believe is down from the 13% that you were talking about after the last quarter at the beginning of the year. What do you think the upside or downside risk is for 2018 for the second-half? Is it that – is this 12% on the upside as this – as the economy recovers as you expect? Is there no more? What kind of volatility you’re expecting for the FX, et cetera? And second question is more of a detailed question on the cost of funding that’s been really an impressive trend bringing that down. What are you seeing there in terms of competition? And can that downward trend continue, or do you think as the economy grows, there’ll be more competition for funding and low-cost deposits and actually that trend could reverse? Thank you.

Thank you, Jason. Let me elaborate a little bit on the ROE forecast. We believe that, that 12% ROE for this year is something reachable. I mean, it’s not on the optimistic side. What are the factors that could affect negative or positive that 12%? Obviously, cost of credit. How the provisions behave is key. And as we mentioned, we think that we are reaching the peak of the credit cycle, and the customer clients that we mentioned before we are managing those customers. So we believe that the next semester, the second-half of the year is going to be a better performance and will allow us to grow a little bit faster our portfolios. Consumer credits are going to grow and are going to give us additional income and the pace of deterioration is going to be slower. So we think that, that forecast of 12% ROE is reachable and is reasonable due to the current situation of the economy and the bank. The other fronts, the efficiency fronts, the fees, all of them we will keep working. And there it will be, we think, in line of our expectations. Regarding the cost of fundings, let me pass that question to José Humberto. José Humberto Acosta Martin: Thank you, Juan. I want to complement just one additional point of the answer of Juan regarding the NII and how we will reach the return on equity. Just a number. We are expecting to close in terms of provisions the year at a level of COP 2.5 billion. That will help you to calculate how we are going to reach that return on equity and that increase of NII. Regarding cost of funding, yes, we made extra efforts not only this semester. We began that process a year ago, trying to moving to funding cost – achieving cost of funding. Today, we are expecting almost a flat cost during the second-half of the year. We are not expecting a reduction on the cost of funding, because interest rates right now is a kind of plateau, maintaining the same level. As you heard Juan Pablo, we don’t expect a change in the central bank interest rates. So that’s the reason why we expect that the NIM will compress at the end of the year 20 basis points, and that is because the repricing of the assets. But we will maintain the cost of funding at the same level with the same composition, 75%% from retail and 25% for other sources of funding.

Thank you. The next question comes from Thiago Batista from ITAÚ.

Yes. Hi, guys. Good morning and thanks for the opportunity. I have basically two questions. The first one is a follow-up on the cost of risk. Can you indicating to us how much you were expecting for next year? With this big jump in the cost of risk for this year, probably we will see a material decline next year. But what is the level that you believe is feasible for the cost of risk for next year? And the second question is about the banking fees. Looking to the numbers in the press release, it seems that the banking fee declined a lot this quarter about 20% Q-over-Q and also 20% year-over-year. What exactly caused this drop? There is any accounting change in this line to explain this big drop in banking fees? José Humberto Acosta Martin: Thank you, Thiago. Regarding your first question, we are foreseeing a cost of risk next year in between 1.9% to 2.0%. we have to highlight that five or seven years ago, our cost of risk were around 1.5%. But now when we are moving more towards to have more consumer loans, the new standard for the bank of cost of risk for the long – for the medium term will be to be in the range of 1.7% to 1.8%. That means that next year will be dropping, but not at a level that we’re supposed to have as a standard, but maybe we will reach that level in 2020. Regarding bank fees, we have basically a huge level of transactions in our call centers, and also we increased the level of corresponding agents. That explains that we increased almost 17% our cost of maintaining those channels, but we don’t see immediately on the income side, that explains. But as we mentioned on the speech, you have to take in consideration that the number right now 7% an annual basis and we expect to close 7% to 8% or 8% to 10% at the end of the year. But the explanation is basically, because we had two items in which increase: again, call centers and the bank agents.

Thank you. The next question comes from Andrés Soto from Santander. Andrés Soto: Good morning, everyone. Thank you for your presentation and the opportunity to ask questions. My question is related again with cost of risk and your guidance for 2018. This, in my view, is the main difference between the guidance that you provided in the first quarter results with the one that we – you are giving now. And what I would like to understand is, what changed over the past three months that make you so much more conservative in terms of either provisioning expenses that you will need to make in 2018? Is it related to the large corporate cases? It’s something else in your structural portfolio? What are the downside risks to this number to achieve even a higher level in 2018? Thank you. José Humberto Acosta Martin: Thank you, Andrés. What happened is – and let me explain in four different buckets. In consumer, you see an improvement, so we don’t expect an increase. In SMEs, you see the numbers we thought that were below that level that we are having today. So that is the first deviation that we see in terms of provisions, but we are not foreseeing in terms of quality of the loan portfolio. So we foresee better vintages, behave of vintages, but we see the bunch or the level of provisioning will maintain on SMEs. In terms of large corporates, as Juan mentioned, we expect a slight increase of provisions. What happened is with the rest of corporates, in which we saw a slight deterioration that impacted in our terms of provisions. So short is, basically, on the corporate side, we saw a deviation in terms of the corporate of loans. And SMEs, we thought that it would improve, but nothing of that happened. So we – the process of recovering on SMEs will take more than the expected time at the beginning.

Andrés, and let me complement José Humberto’s answer with something. The loan growth has been slower than we expected. So the cost of credit or the relative cost of credit increases because of that. And since we expect a better pace during the second-half of the year, that will probably – or improve the cost of credit because of volume is going to have a better performance during the second-half.

Thank you. Our next question comes from Alonso García from Credit Suisse. Alonso García: Hello. Good morning, everyone. Thanks for taking my question. My question is regarding loan growth. As you mentioned, you have been gaining some decent market share over the past couple of years. My question is how sustainable is this loan growth outperforming the system in the coming years? And for how long do you think you can continue growing strongly within your existing client base? And my second question is regarding OpEx. How sustainable do you see the OpEx growing in the low single digits? And what is your target for the next two, three years in terms of efficiency ratio? Thank you.

Thank you, Alonso. We think that the loan growth it’s sustainable in the future. As we mentioned already several times, the economic activity is going to be favorable and that helps a lot. But also we believe that we are in the condition of taking advantage of that economic activity. The – on the commercial side, we have improved our origination process. Growing on our customers, as you mentioned, has been a strategy, a very successful strategy and we will keep moving in that direction since we have the largest customer base in Colombia, which is around close to 9 million customers and in the other countries for 2 million. So we believe that we have target a small amount of those customer base and we are improving the products. We are understanding better the behavior of our customers. So on the retail side, we think it’s achievable and we will keep moving on that direction. The commercial – on the commercial side, even though this could seem counterintuitive, SMEs for us is going to be a very good source of future growth. Our customer base on that – on SMEs is big. Having reached the peak and taking into account that the cycle is going to be better, SMEs again will be a source of growth for us. In terms of OpEx, your second question, we believe that we are able to grow expenses around inflation in the coming years. So we believe that we will be able to improve our efficiency ratios to reach our target of 46% in around 2020 to 2021. And we believe that the programs and the structural gains that we are having on costs will allow us to reach that level. José Humberto Acosta Martin: And complementing the answer of Juan, the rationale for reducing the efficiency ratio in the last five years were reducing cost. Today, we feel comfortable with that achievement. And the rationale for the next three years to increase the efficiency or to have a better efficiency, that would be on the income side with a combination of better margins, better loan growth portfolio that will be achievable. And that’s the reason why we believe that we will get the level of 47% as or 46%, as Juan mentioned.

Hello?

[Foreign Language]

No we finished with that answer. We could – we can move to the next question. Thank you.

Thank you. The next question comes with – from Sebastián Gallego from CrediCorp Capital. Sebastián Gallego Betancur: Hi. Good morning, everyone. Thanks for the presentation. I have actually three questions. The first one is just a follow-up on OpEx. I know you talk about your targets, but can you provide a bit more color on the – on any targets regarding optimizing branches, headcount, what’s your expectation on that front? The second question is regarding Panama. Can you provide a bit more color on the outlook on the operation of Panama? How are you dealing with the slower pace of growth? And how do you expect to achieve better figures going forward? And my final question is just a follow-up also on asset quality. You mentioned in the previous call that the effect on NII coming from the adoption of IFRS 9 was somewhat mitigated with lower provisions, and also IFRS with expected new – with provision expected model is supposed to take into account a better macro outlook. Why is the provision expenses continue to go up? Thank you. José Humberto Acosta Martin: Sebastián, regarding OpEx, we expect to – again, as we answered in the last question, the efficiency that will be a function of much better performance of the income. We are expecting to maintain again under inflation, the OpEx increase for the next coming years with a combination of different factors, not only labor costs, also operating expenses. So we don’t have a specific view about that, only the expenses growth. Regarding your second question, in Panama, yes, we see right now a lower loan growth in Panama. But the positive news there is they are doing big efforts to achieve a better efficiency level than actually they are getting with the cost controls, that helps. And the second front that Banistmo is helping us is with the fee income ratio. It is a very good performance that they are reflecting. And obviously, we are replicating the same experience in Colombia with retail in Panama. So that will be a matter of time. We expect that 2019, we will be able to reach that loan growth. Regarding your third question, yes, IFRS 9, you saw impact through all the banks in Colombia. It was one-time impact on the balance sheet. So we don’t foresee any particular deterioration because of IFRS 9. Right now it’s comparable. We – again, the 2.2% is based on the assumption that IFRS 9 is contemplated at expected losses.

Thank you. The next question comes from Carlos Gómez from HSBC. As a reminder, so that we may take as many questions as possible, we ask that you limit yourself to one question. Carlos Gómez López: Hello, good morning. One question is about what a good cycle looks like. So you are entering a period in which you think that things are going to improve. We’re going to see more loan growth. How much is that? How much do you expect to grow over the next, let’s say, three to five years? How good can this cycle be? And I ask because when one looks at asset quality, one gets the perception that perhaps there was a model average in the previous cycle than we anticipated, and therefore, perhaps the prospect for growth is now lower than it was in the past. What do you expect for the next three to five years? Thank you. José Humberto Acosta Martin: Thank you, Carlos. Regarding your first question, we believe on CAGR the next three, four years that the loan growth will be double-digit in the lowest end. We are maybe thinking about 10% to 13% in the next coming years. Obviously, the base of this year is low, so you would see a very good performance on 2019, and you will be a more normalized performance on loan growth 2020. But again, that double-digit loan growth and you know that we have capital and we have the source of funding to maintain that loan growth. And as Juan mentioned, that will dilute the cost of risk, because the level of provisioning will be different. Regarding the second question, Carlos, can you repeat please your second question that one? Carlos Gómez López: It is [indiscernible] to one, but actually since you offer me one, what’s the impact of Basel III? José Humberto Acosta Martin: Okay. Regarding Basel III, the government is not releasing the final decree. We are just assuming that, that will put in place the new II offers and they will put in place again a different calculation of the risk-weighted assets. So at the end of the day when we have the decree with the exact information, maybe we will go back with you. But our perception is it’s not material the change in terms of the solvency ratio for Bancolombia, assuming part of the things that the regulator is saying regarding Basel III.

Carlos, with the drafts that we have been discussing with the regulators, we don’t see any material impact on Bancolombia. We will need to wait for the final or the final regulation to come out. But with the drafts that we have been discussing, no material effect.

Thank you. The next question comes from Yuri Fernandes from JPMorgan. As a reminder, please limit yourself to one question.

Thank you very much for asking questions. I had a question on the effective tax rate for the quarter. it was very below like previous quarters, and you mentioned a big proportion of Central America operations. But still when we look to Colombia standalone, we see like the effective tax rate in Colombia at 17%. Can you provide more details on what has happened here, if there was any kind of tax credit? And what should be the tax rate for the rest of the year for you? Thank you. José Humberto Acosta Martin: Thank you, Yuri. What happened is remember, that we have a deferred taxes. And at the beginning of the year we made all the calculations for 2019, our deferred taxes, based on the assumption that the 37% statutory taxes, which is the current statutory taxes in Colombia. But remember then a year ago was released a tax reform in which the statutory tax for 2019 will be 32%. What we did in the second quarter was the recalculation and adjustment of all the deferred taxes with the new tax base, which is 33%. That was, you see, a big impact of 17%. But the statutory tax or the tax for the 2018 as a whole would ne at around 30% to 32%. It is just an adjustment and where basically because of the provisioning that we had on the first quarter.

Thank you. The next question comes from Natalia Corfield from JPMorgan.

Hey, good morning, all. So my question is with regards to your capitalization. We saw that there was a decline this quarter. It was most explained by higher risk-weighted assets. And your risk-weighted assets actually increased much more than the growth of your loan portfolio. So I’m wondering what’s behind the growth of risk-weighted assets? That’s one. And within the same topic, there was also an increase in your regulatory capital and you did not capitalize earnings in this quarter. So I’m wondering what drove the growth in regulatory capital, which was offset by the higher RWAs? Thank you. José Humberto Acosta Martin: Regarding, Natalia, your first question, what happened with the risk-weighted assets is a combination of two factors. First, the loan the loan growth in consumer, which is higher. You saw the numbers that was 17%. And the second, regarding our securities portfolio, the volatility increased. So the DV01 increased, and that was the reason the risk-weighted increase. The VaR increased because of the volatility. So that consumes more capital that is the explanation. Regarding the return on – your second question was focused on…

Retained earnings. José Humberto Acosta Martin: We – as you mentioned, the big impact was in the first quarter basically, because of IFRS 9. Our expectation is again to maintain the same capital level based on the assumption that one-third of our net income annual basis that will be a dividend and we will retain two-thirds. That’s the reason why our guidance is to maintain that Tier 1 10% to 11% for the whole year.

The next question comes from German Cristancho from Davivienda Corredores.

Good morning. Thank you. My question was related to OpEx. So it has been answered. Thank you.

Thank you. The next question comes from Jorge Umana from BNP Paribas.

It was already answered. Thank you.

Okay. We will like to thank you for your participation on this conference call. We are confident that the economic improvement in Colombia and the developments that are happening in Central America will improve the results of the bank during the second-half of the year. We expect that, that on average creates results in line with we just explained to you today. So we will hope to see you on our conference call for the third quarter of 2018. Thank you, and have a good day.

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