Good morning, ladies and gentlemen, and welcome to Bancolombia's Second Quarter 2020 Earnings Conference Call. My name is Tanya. I'll be your operator for today's call. [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 and press releases or verbally, address matters that involve risks and uncertainties. Consequently, these 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 substance of new products or services by our targeted clients, changes in business strategy and various other factors that we describe in our reports filed with the SEC. With us today is Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Mauricio Rosillo, Chief Corporate Officer; Mr. José Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mr. Jorge Humberto Hernandez, Chief Accounting Officer; Mr. Carlos Baene, Investor Relations Director; and Mr. Juan Pablo Espinosa, Chief Economist. I will now turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer of Bancolombia. Mr. Juan Carlos, you may begin.

Good morning and welcome to our conference call for the second quarter of 2020. I hope all of you and your families are safe and healthy. The second quarter of the year absorbed a significant -- in a significant way the impact of the pandemic, not only in Colombia, but also on a global scale. We are living under a new challenging environment, which has led us to quickly adapt as a bank and as individuals to face this new reality. In Bancolombia, we are fully committed to support our clients and take care of our employees. The net income for the first half of 2020 was COP263 billion. This mainly because of a net loss of COP73 billion for the second quarter. I want to start by giving you an overview of 4 key points. The first is about our solid liquidity position and the robust capitalization levels. We have diversified funding sources with our resilient deposit base. Since the first quarter, we have experienced a material increase in our deposits that have remained throughout this quarter, and this has allowed us to sustain high-quality liquid assets. On the capital front, our Tier 1 ratio reported for the first quarter is 9.3% and will increase after the extraordinary shareholders' meeting approval by which we reclassified COP4.12 trillion from occasional reserve to legal reserve in a consolidated basis. The second point is that we have increased our provisions by 76% compared to the first quarter of this year as a reflection of weaker economic outlook related with the pandemic. This provisioning level results in a coverage ratio of 208% for the quarter. The third point is regarding our digital strategy. We have been a leading bank in Colombia supporting the government with the distribution of subsidies. We rapidly implemented an operating model that allowed us to distribute more than COP442 billion throughout our digital platforms, Bancolombia a la mano and Nequi, successfully adding over 2 million new clients. And finally, the last point is about the macroeconomic environment. Since the gradual reopening of the economic activity in April, we have seen a slow recovery, but the uncertainty around the impact of COVID-19 and the overall performance of the economy in the second half remains significant. At this point, I want to turn the presentation to Juan Pablo Espinosa who will further elaborate on the performance of the Colombian economy. Juan?

Thank you, Juan Carlos. Let me start by saying that following a trend seen in many countries as a result of the lockdown measures taken to contain the advance of the pandemic during the second quarter of 2020, the Colombian economy experienced the largest contraction in several decades. According to our estimates, year-on-year variation of GDP in this period was around 16%, which is close to the upper bound of our forecast range. The decision of Colombian authorities to gradually restart activities in key sectors, such as manufacturing, construction and retail, has led to a correction in the pace of contraction. As a result, monthly figures of economic activity moved from 20.5% in April to 16.6% in May and 11.3% in June. Despite this small improvement, we think that for the second half of 2020, the risks to growth are biased to the downside. In fact, as containment measures keep limiting the operation of several industries and uncertainty regarding the advance of COVID-19 remains, activity will be affected. This perspective is incorporated in our view of GDP contracting between 6% and 7% -- 6% and 9% for full year 2020. It is also important to mention that the negative effects of the pandemic have also translated to the labor market as unemployment rate has soared to the highest levels seen since the recession of 1999. We foresee that in the short term, urban unemployment rate will continue to increase, albeit at a lower pace than that seen in April and May. Regarding prices. During the past few months, consumer inflation has moderated markedly, thanks to several actions taken by the government aimed at reducing the burden of utility payments to households as well as a better performance of food prices and low pass-through of depreciation. Going forward, we anticipate that inflation will further correct due to lower pressures on the main components of the CPI. Hence, year-on-year variation will likely close the year below the floor of the Central Bank target range we see, which is 12.2%. In terms of monetary policy, Colombian Central Bank has reacted proactively to the challenges arising from the pandemic and the reduction in oil prices. In addition to the increase in liquidity provision and asset purchases, it has cut its benchmark rate to 2.25%, the minimum level since the introduction of the inflation targeting regime. Due to the risk to growth, employment and the deceleration of prices, further cuts are likely. However, future decisions will be contingent on new data, and we think that BanRep will continue to act cautiously. Finally, it is worth mentioning that over the past few months, condition in global financial markets have improved. As a consequence, oil prices have recovered faster than initially expected, and the Colombian peso has gained some ground beyond our previous expectations. Moreover, given that we expect an additional inflow of dollars due to foreign debt disbursements, the local currency can sustain its recent gains. I want to turn the presentation back to Juan Carlos.

Thank you, Juan Pablo. I want to continue this presentation by sharing with you what has been Bancolombia's response to the COVID-19 pandemic. Regarding our employees, we have focused on 3 main tasks: First, deploying resources to assist our employees in terms of mental and physical health; second, establishing remote work schemes to the majority of our workforce for safeguarding purposes; and third, adopting the opening model so that we can run the business without significant disruptions, designing specific return plans to the corporate buildings under strict protocols supported on analytics to optimize schedules and the use of workplaces. As of today, 58% of the group of employees are working from home. On the other hand, Bancolombia has adopted the support of communities as a priority during the pandemic. We have assisted the government in delivering subsidies under its different support programs, benefiting more than 857,000 people and more than 55,000 businesses. Over 1.7 million employees benefited from the subsidies distributed by the bank. Now turning to Slide 5. I want to walk you through the details of the impacts of the relief program in our loan book. We have taken several actions to help our customers over the last months in different fronts. First, we granted a 3-month grace period to the personal loans and up to 6 months grace period to the mortgages loans. Whereas for SMEs and corporate loans, we granted this on a case-by-case basis based on the situation of each client. You may see in the slide, in average, the total relief program has represented around 50% of the total loan book, except in Banco Agromercantil de Guatemala, in which it represents 31%. In the case of Bancolombia, 50% of the total relief is related to retail, 20% to SMEs and 30% for corporate loans.…

Thank you, José Humberto. As a summary, I would like to highlight 3 main elements of the second quarter results. The balance sheet structure remains solid. The loan portfolio will not grow as expected. It could be around minus 2% for the end of the year. The funding composition shows high liquidity levels, diversification and cost reduction, and solvency levels are more than enough to face this economic cycle. The digital development of the bank has allowed us to connect the government support and the most vulnerable population to provide banking services to our clients without leaving their homes and to expand the client base through Nequi and Bancolombia a la Mano. This year definitely has high levels of uncertainty. We think that the fourth quarter of the year will reflect more accurately the behavior of our clients in terms of their payment capacity. And therefore, we could know what will happen in terms of risk. After elaborating on these key topics, I want to open the line for questions.

[Operator Instructions]. And our first question comes from Andres Soto from Santander.

I would like to zoom in, in the process of provisioning in this quarter. I understand half of the provisions are related to general COVID-19 update. I would like to understand how do you break that down between a general, let's say, a general model update versus the exercise that you presented in Slide 9, where you classify that risk level for every of your segments? And to that point, I would like to understand a little bit better. I was kind of surprised that you considered that only 13% of your retail portfolio as high risk, I would like to understand what assumption is behind that, why are you confident in this number? Or we may see this number deteriorate once this loan rescheduling plan phases out and you start asking your customers to pay back?

Thank you, Andres, for your question. Let me take the second one, and I will pass the third one to José Humberto. We started doing a very deep analysis of the behavior of our clients in April. So we are running models in order to assess the -- how they are in the economic development. And we are confident that, that assessment is giving us enough information to classify the clients in different -- in the exactly different categories that I mentioned. So the numbers that we are showing are based on that analysis, as I mentioned, deep analysis. And we are confident. It's possible that the situation of the customers during the second half of the year change. And so we will continue assessing that situation. So with the information that we have today, that is a very good estimate of the situation of our customers, but that situation could develop in the future. José, could you take the first, Andres' question, please? José Humberto Acosta: Okay. Thank you, Juan Carlos. Yes, half of the provisions, as you mentioned in this because of debt all have parameters update and COVID. And basically, what we did is to create an expert model based on historical data of the customers than they received the grace period and also including the different sectors in which they operate more on an additional capacity payment. Based on that assumption, I would say that out of the 50% of that provisions, 70% is because of the expert models and 30%, it is because of the obtaining of the different parameters that we use under expected losses model. Just to -- as we mentioned on the script, we have to change, for example, the GDP growth that was minus 0.8% in March, and that would be minus 6% in June. So the proportion is 70% because of the expert models that we have to create for those clients an environment assuming the risk profile, and the 30% for the updated models. The other 50% that you are seeing is because business as usual, mostly of them is because of consumer deterioration, the other ones are SMEs and corporate deterioration.

And our next question comes from Ernesto Gabilondo from Bank of America.

The first question is on the political side. We have seen the former President Alvaro Uribe was placed under house arrest. So given that he is well-known in Colombia and an important member of the right center and the one that chose President Duque, in your opinion, do you think this political noise can give some empowerment to petro? And when do you have presidential elections? Then my second question is a follow-up in the NPLs and the provision charges. I believe the low NPLs were explained by the relief programs, and that they represented roughly COP60 trillion or 30% of your consolidated loan book. And I believe you have created COP1.2 trillion from your expected losses models due to this COVID-19 impacts. However, I believe there is a second round of relief programs taking place. So I would like to know how much of your portfolio is in the second phase? And when should we think NPLs showing up, will be the first one in -- by year-end and the second phase at the beginning of next year? And how should we think about the level of provisions that you have created in the second quarter and the cost of risk of this quarter? Should we think it will maintain the same levels during the next quarters? And you will wait depending on the evolution after the relief programs? Any color on this will be appreciated.

Thank you, Ernesto, for your questions. Let me take the first question, and I will give a comment on the second one, and José Humberto will give you more color on that second one. Regarding the situation around Alvaro Uribe, i.e., Colombia has very strong institutions and a tradition of respecting those institutions. So I am confident that this situation is going to be strong on those institutions, and it's not going to have an effect on the economic front. Regarding elections, election -- presidential elections in Colombia will be in 2022. So President Duque government in the half of their term. So still there are more -- 2 more years of this -- of Duque's presidency. Regarding your second question, as you mentioned, we have deferred in the first four months after the pandemic started, we give some reliefs to our customers. Now we are starting the phase 2. Because of those reliefs, NPLs are lower than those we have at the beginning of the year. So we expect that those NPLs are going to deteriorate. Definitely, what we are taking now is that we are going to work client by client, assessing the risk level and working with them with a solution or position that they need according to their particular situation. So NPLs with deteriorate, definitely. Cost of risk, we -- it's difficult to know at this point how is the cost of risk is going to be at the end of the year and at the beginning of next year. We were [indiscernible] at the beginning of the year, cost of risk of around 1.7%, 1.8%. For the quarter, it was more than 4%. The cost of risk is going to remain high, definitely. How high, it depends on how the lockdown evolves, how the economic situation evolves and how long the [indiscernible] with the customers go. With this, I will pass the question to José Humberto for more details. Okay. I think Jose Humberto is not on the line. Let me wait for him to reconnect. On that sense, we are estimating the provisions. And since we are doing an accounting base on expected losses, the remaining of the year will have a high cost of risk. Other than that, I don't think I will -- I think that next year, we'll start improving the cost of risk for the peak is going to be this year, and then it will improve next, next year.

And our next question comes from Tito Labarta from Goldman Sachs.

I'm going to shift to your expenses. We did see some good cost control there, down like 8% year-over-year on operating expenses. Just -- and you mentioned, I think, 2% to 4% growth is what you expect for the year. But just to think about, where else can you control costs? Is the shift to digital helping? Like how much can that help? How should we think about your branch network? And if you could maybe just give some more color on the cost control and what are the efforts going there to keep costs under control and maybe reduce expenses, if you can?

Thank you, Tito. Thank you for your question. Expenses is a focus of our job now. So we are working hard on -- very hard on how to control or be very productive as well. [indiscernible] we were working up on the physical side. We are optimizing our buildings, new [indiscernible], the office space we so we will optimize and it comes to tell you something that is going to last with new ways of working. And so there is a sort of optimization. Then on the on the labor cost, we keep optimizing the cost. So we are optimistic that we can do a good job on contract expenses during the year, and efficiency is going to improve. Let me pass the -- this question to José Humberto and also Jose if you can, if you want to add something to the answer, like I do to Ernesto, please go ahead. José Humberto Acosta: Okay. Thank you, Juan Carlos. Yes, regarding expenses, there is one-off reduction of expenses in the second quarter. As Juan mentioned, we reduced the bonus plan because of the performance of the bank at the end of the year will be different as we forecast at the beginning of the year. That explains the main reason. And you have to take in consideration also the FX. If you remove the FX factor during this year, the cost expenses increased minus 2.5%. I would say that we have a structure of cost around 85% is fixed cost. So it is very complex to reduce. So our number at the end of the year, that would be in between 2% to 4%. But as Juan mentioned, we are asking ourselves in medium term what would be the new way and the new structure of branches, the new…

And let me add, regarding Tito's question, we are seeing room for branch optimization. It's something that we will do on a midterm period. The increase in digital construction is showing us that we can move a lot of activities from the branches to digital. So definitely, we see room for improvement on the -- of improvements on the branch network. So you will see there a room for improving our spend.

And our next question comes from Gabriel Nóbrega from Citigroup. Gabriel Nóbrega: My first question is with relation to asset quality. Are you seeing any specific sector that is being more affected than you expected from the pandemic? And if you could also elaborate on how is your exposure to this sector and how you are managing risk. And then my other question is actually a follow-up on this question from expenses. During the quarter, we did, in fact, see a rationalization in other administrative expenses. But at the same time, we saw you adding 1 million clients in Nequi and 1 million clients in Bancolombia a la Mano. So my question here is, do you believe that you would have to continue on increasing your IT investments? Or are you already being able to collect fruits from your digital banking initiatives, especially that we have almost more than 6 million clients in both of these platforms? And also, as I believe, during COVID, people are using more and more digital channels.

Thank you, Gabriel. I have some difficulty hearing you. So I'm going only to try to answer what I catch of your questions. Regarding the digital channels, we don't -- now we are benefiting from the investments we have done. We have investing in digital in, I don't know, 3, 4 years ago, we were creating basically 2 platforms, Bancolombia a la Mano and Nequi. And now we are benefiting from those platforms. The numbers are impressive. As we mentioned, the growth in new customers...

We lost our speaker. Someone else can take over the question, please. José Humberto Acosta: Okay. Yes. Yes, as Juan mentioned, we were -- allocated around $100 million to $150 million on an annual basis for digital projects. So no matter if we are trying to reduce the expenses, the allocation of expenses in terms of investing of IT, it is key for us. You know that one of the pillars during this second quarter is the growth in the customers of digital banking. So we are now planning to change the other way around. We want to invest more to get more potential in order to operate because the level of transactionality, is, it's growing. And regarding your first question regarding sectors, you know that we have a well-diversified loan structure in terms of sector. Our huge exposure today could be commerce. Well, we have at around 15%. We have consumer services at 35%. So we have well diversified. Obviously, we have concerns about construction, for example, in which we have 11%. Just to give you an idea. In terms of airlines , we don't have exposure. In terms of Ecopetrol, we have a small portion of Bioenergy, that is also almost 82%, 83% fully provisioning. So again, concerns regarding all the macroeconomic outlook. But in particular, we don't have any specific sector, in which we believe that will have a huge impact.

Our next question comes from Sebastián Gallego from CreditCorp Capital. Sebastián Gallego: I have three questions. The first one, if you could provide a bit more color on the specific cases you have provisioned during the second quarter and the evolution of those. Second question, if you could comment on the trends that you have been observing in the Central American operation in terms of potential provisions and the need for extraordinary provisions in Central America going forward. And the last question, probably, if you could comment on a potential -- or the potential worst-case scenario that you are considering today in terms of provisions and the impact that, that will have on the bank's capital position. José Humberto Acosta: Okay. Thank you, Sebastian. Regarding special cases, as we mentioned, there was one specific special cases, which is Bioenergy, and in which we have an exposure of around $120 million to $130 million we have right now, fully provisioning. We have an 84% provision, and it is more than enough. Regarding your second question, the trend that we observe in the other geographies is the same trend that we are having in Colombia. In terms of provisioning, the impact will be also in Banistmo because the economy is fully impacted because of COVID-19. In El Salvador, I would say, based on average, the same is that, that is happening in Colombia. And the lowest level that we are seeing is in BAM in Guatemala, and the main reason -- there are 2 reasons why. It is because of the country. It is an agricultural industry there. So the economy is not as impacted as the rest of the countries. And the second, the level of remittances still maintain certain level of liquidity in the clients. So just to give you an example. In terms of reliefs, the only country in which they have -- we have 31% of the total loan portfolio under grace periods. It's in Guatemala, which is -- it's very good. So this is in terms of geography, same trend as Colombia. In terms of potential worst-case scenario, that's one of the reason why we decided to have a general assembly in order to increase the solvency ratio, in order to move some accounts from the occasional reserves to legal reserves. In our calculations, assuming the worst-case scenario could be 3x more of the provisions that we had last year, we will have more than double the minimum level of Tier 1 ratio at the end of December. So we don't have, again, any specific concern, assuming -- and you have to take in consideration that in July, we will have a Tier 1 ratio of around 11.2%.

And our next question from... José Humberto Acosta: I don't know if Juan Carlos -- I'm sorry, Juan Carlos, if you want to add something to the question of Sebastian.

Thank you, José. No, no. Just to emphasize that the trends in Central America are similar, as José Humberto said that the ones are in Colombia. And we are going in the same path. We are working with our customers. We are assessing their economic situation and providing solutions for that situation. So I don't have any more to add, José.

Our next question comes from Jason Mollin from Scotiabank.

My question is related to the asset quality of the portfolio as well, specifically to the chart that you talk about the customer subdivision by risk level, and you're showing 13% of the retail as high risk, 37% at the SME and 16% at corporate. Can you talk about what that means, high risk? Do they have collateral? And maybe you could talk about the collateral and guarantees you have by segment. The mortgage book, I believe, is around 13% of total. And I think there were a higher percentage of deferrals there. And if you can tell us what you're seeing there. Are any of the clients that -- are clients making payments even though there was the ability to defer? And how -- my -- the second part of my question, I found it pretty interesting to comment that in the second wave of, let's call it, deferrals, 60% is your estimate that we'll likely pay as usual. What are you using to determine that? Is that their cash flows, their bill payments? If you can provide some information, that would be helpful.

Thank you, Jason. Let me give you a general information, and then José Humberto could give you more details. What we are doing is -- and it's related with -- to your first question and the last part of your question. We are assessing the situation of our customers based on how they are moving their money, what money is flowing through their accounts, how we see the sectors. So with all of that, we are assessing the situation of the customers. And the numbers are showing what we mentioned, how the higher risk we are seeing on SMEs, in which we see that a higher number of companies are on high risk. And then, yes, we are seeing payments and people in Spain. And we see -- even we are estimating how the customers are going to behave. And the behavior of -- the actual behavior is -- it's better than the one we estimate. So we keep assessing the situation of our clients. We keep adding more information to see what is the situation of the customers. With this, I will pass your question to José Humberto for more details. José Humberto Acosta: Thank you, Juan. I think it's a very clear answer, and I want to summarize your second question. The 60% is -- because the data that we collect, we know that they have capacity of payment because they have on checking and savings accounts liquidity or maybe time deposits, and we compare with the level of debt. That's the reason why we believe that these 60%, they have capacity of payment. And regarding your first question, as Juan mentioned, it's a different -- it's in 3 phases. First, because of the historical behave. We analyzed what happened in the previous months with every single client. Second, because of the sector that they belong. No matter if you are very good behaved, but you work in a hotel, for example, we know that because of the sector, we will need to put in risk. And third, again, because of the cash flow.

Our next question comes from Yuri Fernandes from JPMorgan.

I will have just one question regarding NII. It's -- I guess it's no secret that Colombian banks are asset sensitive, and it should suffer because of lower rates. But my question is regarding the stage 3 loans. We have all those questions on the risk loans, on the 50% of our loans being on forbearance. So when we look to the stage 3, the nonaccrual book, it has not increased that much. It's about 7.6% of your total loans. And my concern here is that stage 3 loans, they may increase a lot and maybe a perfect storm, right, because you have the asset safety, your loan book are not growing, as you said. You expect loan volumes to decelerate in the second half. So my question -- and I think maybe this is more a 2021 topic. What to expect for NII? What to expect for margins? Because we may have an outlook that provisions may be higher in 2020, as you said, and maybe the provisions decrease in 2021. But maybe NII will be much weaker going ahead. So what's your thoughts on stage 3 loans, how you are thinking NII, that would be nice.

Thank you, Yuri. Yes, you are right. I mean we will see that the margins are going to decrease. Interest rates are going to be low, lower than the ones that we have now. We are working on the cost of funds, and we have some room there, but we are foreseeing some margin compressions. If that's clear. Regarding your question about how we are seeing the behavior of the portfolio regarding stage 3 loans, we are seeing that the stage 3 is, it's around 7% of our loan portfolio, and it will increase, but we are incorporating all of that on our provisions. So we will have some pressure from margins and will increase provisions regarding stage 3, but we are taking into consideration both aspects in our projections and on -- we are incorporating those issues now. I don't know, José Humberto, if you have something to add to Yuri's question. José Humberto Acosta: No, Juan. That is very clear.

And our next question comes from Thiago Batista from UBS.

Yes. I have two small follow-ups. Follow-up 1, on the expenses side, you mentioned a 2% to 4% of expenses this year. This is increasing or a decline of 2% to 4%? This is the first one. The second follow-up, if you can release the first -- the size of the [indiscernible] relief program? Specifically on mortgage, probably, this is a big part. But if you can share with us the size of the mortgage in the relief program.

Thank you, Thiago. Related expenses, we are seeing -- when you mentioned -- when we mentioned 2% to 4% is an increase, but we are working very hard to do better than that, and I think we can achieve that. This year, as we mentioned, we are -- the variable part of the salaries is not going to be there. So that could account for something like 20 or maybe more of the total labor expenses. And the other measures that we are taking related to the office space, we are not growing, as you could imagine, in the number of -- in the headcount. So with the measures, I am optimistic that we can do better than that. Let me pass your second question to José Humberto. José Humberto Acosta: Okay. Regarding your second question, Thiago, the size -- the mortgage composition in the loan portfolio, it's at around 11%. And at around 70% to 75% of those mortgage were on the relief program, and we offer them 6 months. So we will see the second round beginning of September, of reliefs.

Thank you, ladies and gentlemen. I'll now turn back the presentation to Mr. Mora, Chief Executive Officer of Bancolombia, for final remarks.

I want to thank you, all of you, for joining us on this call. I hope this situation in the world improves soon. Please take care, and stay healthy. And we hope to see you on our conference for the third quarter of 2020. Thank you very much.

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