Nov 11, 2014
Executives
José Humberto Acosta Martin – CFO Juan Carlos Mora Uribe – COO
Analysts
Tito Labarta – Deutsche Bank Philip Finch – UBS Jose Barria – Bank of America Merrill Lynch Thiago Bovolenta Batista – Itaú BBA Boris Molina – Santander Investment Securities Cristian Hernández – Ultrabursatiles José Restrepo – Serfinco
Operator
Good day, ladies and gentlemen, and welcome to Bancolombia’s Third Quarter 2014 Earnings Conference Call. My name is Lorraine, 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 and 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 the 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.
Jaime Velasquez, Chief of Strategy and Financial Officer; Mr. José Humberto Acosta, Chief Financial Officer; Mr.
Juan Carlos Mora, Chief Operating Officer; and Alejandro Mejia, Investor Relations Officer. I would now like to turn the presentation to Mr.
Acosta, Chief Financial Officer of Bancolombia. Please proceed, sir.
José Humberto Acosta Martin
Thank you. Good morning, and welcome to our third quarter results conference call.
It is a pleasure to be with you, who follow so closely our operations and results. Let us start with a brief description of the main topics that impacted our business in this period.
You can follow the slide presentation available at our Investor Relations website. First of all, I am glad to share with you good news that we knew this past weekend.
Our operation in Panama, Banistmo, successfully integrated the core banking systems from the HSBC Mexico servers to our data center. These [Indiscernible] includes the loans, current and savings accounts, time deposits, online banking platforms, and accounting systems.
It was the most complex part of the whole transition and it is a very important milestone because now we have full control of these critical applications for serving our clients in a more efficient way. Having said this, I want to open this conference call elaborating on the most important topics that drove the bank during the quarter.
This past quarter was very rewarding for us because the bank received three important recognitions. Three independent studies recognized Bancolombia as a private corporation with best reputation in Colombia both in our commitment and best practices when doing business and helping our clients.
Bancolombia was reaffirmed in the Dow Jones Sustainability Index, which reflects our efforts to manage the business for the long run in three main areas, economic, social and environmental. As we have shared with you in the past presentations, our strategy for this year and 2015 is focused in four elements that are evident in the numbers that we present to you this quarter.
First, the focus on increasing [Indiscernible] assets, while keeping the funding cost as low as possible. This permits to increase the profitability of the lending business.
Net interest income marked an historic high record and grew 22% year-over-year as a result of higher borrowings of loans and better NIMs. Second the consistent growth in fees, 23% year-over-year as a result of more transactions and efforts to promote utilization of our [timings].
This quarter was also an historic high record for fee generation in Bancolombia. We want to continue offering products and services that are not balance sheet intensive, such as our credit and debit cards and insurance business.
Third, as we shared with some of you in the Analyst Day held in September one of our main focuses is efficiency, and the numbers of this quarter indicate so. The cumulative operating income this year has grown 25% while the Opex has grown only 9%.
We maintain our efforts in keeping cost under control and the fact that our Opex as a proportion of asset has declined consistently from 4.2% one year ago to 3.9% during the quarter. Finally the efforts to maintain a high quality of our loan portfolio and a high coverage ratio, a coverage of 90-day past due loans was 268%.
[Indiscernible] because we consider it more than enough to absorb any potential credit loss that we could have. During the third quarter, the loan portfolio grew 3.3%, slightly above our expectations, due to a stronger credit demand and the higher FX rate.
Expansion was mainly driven by commercial and mortgage loans, as well as financial leases, whereas consumer loans grew at a slower pace. The lower growth in consumer loans was due to our tighter underwriting standards, which aim to maintain a high credit quality.
Coupled with the growth of the loan portfolio, we continued seeing a positive trend in quality. The 30-day past due loans ratio ended at 3.1%, and remained stable during the quarter.
In line with these trends, the cumulative cost of credit for this year remains below 1.5% and the coverage ratio remained stable at a level of 148%. Banistmo contributed to improved credit quality during the year in a significant way.
Over the last nine months, our efforts in Banistmo permitted to reduce the stock of 90-day past due loans from 1.9% to 1.5% of gross loans, which in nominal terms represents a recovery of around $120 million. In the funding front, we continued our efforts to keep cost of deposits as low as possible.
Although the Colombian Central Bank increased 125 bps its reference rate to 4.5%, our total funding cost is 37 bps lower than one year ago. With greater liquidity in the Columbian economy and moderate growth in the loan portfolio, we have focused our efforts in reducing the volume of the most expensive funding sources.
In this front, Bancolombia presents one of its main competitive advantage, the ability to [grab its strict] and diversified deposit at the lowest rate in Columbia. In September, we closed the 2016 dollar-denominated senior bond in an effort to reduce the funding cost.
During the quarter we experienced an increase of 9 bps in the [yield] of loans, but it was partially offset by temporary 12 bps increase in funding cost due basically to the premium that we pay in the anticipated redemption of the 2016 bond. In the next quarter, the NIM should continue its expansion trend on the US dollar business.
In the capital front we ended September with a Tier 1 of 8.5%, which is within the range defined to operate the bank in an optimal level. Let me remind you that under Colombian capital regulation, ongoing earnings of the period are not accounted as Tier 1 until they are [Indiscernible] by the shareholders, which in Bancolombia case will happen in March of next year.
During the quarter, we continued allocating a greater proportion of assets in our core business, which is lending. As a result, we maintain a reduced size and duration of the securities portfolio, and therefore the market value at-risk, which contributed to an increase in the Tier 1 ratio.
Last but not least, I would like to present the results for the third quarter of this year. During the quarter, Bancolombia generated COP 415 billion.
Having said this, we would like to continue with a brief discussion about the economic environment. Let me turn the presentation to Juan Carlos Mora, who will share our views on this matter.
After that, we will elaborate more on the bank’s results. Juan Carlos?
Juan Carlos Mora Uribe
Thank you, José Humberto. For those of you that are following the slide presentation, please go to Slide number 3.
Growth of the Colombian economy remains dynamic. In the first half of the year, it grew 5.4% compared to the first half of 2013.
Construction and services were the sectors that lead the growth. On the other hand consumption remains dynamic.
We estimate that Columbia’s GDP should grow close to 5% in 2014, in line with the expectation of the Colombian Central Bank. On the other hand, unemployment rate continued dropping and ended September at 8.4%, down from 9% one-year ago.
This is good news because of the high correlation between loan, employment and credit quality, which remains healthy, not only for Bancolombia but across the financial system. Inflation for the 12 months ended in October was 3.29% and has been increasing in the recent months.
The Colombian Central Bank set an inflation target between 2% and 4% for 2014. These trends in inflation, plus stronger economic activity, led the Colombian Central Bank to increase the repo rate in the last four meetings ending in August at 4.
5%. Since then and after two meetings the rate has been stable.
We forecast the repo rate to end 2014 at 4.5%. Regarding the FX market, the Colombian peso experienced a depreciation of 7.5% during the third quarter of 2014, and 6% over the last 12 months.
The depreciation of the Colombian peso against the US dollar contributes to the faster growth of Bancolombia’s balance sheet because of the dollar denominated loans representing more pesos when converted. Let us remember that Bancolombia’s balance sheet is matched in terms of currency, which reduces impact of FX variations in shareholders equity.
On the other hand, we have not seen any abnormal performances on vintages, and credit quality across the financial system remains stable. That trend reduces the risk of higher loan deterioration and provision charges.
After this quick review of the economic environment, let me turn the presentation again to José Humberto, who will discuss the bank results in detail. José Humberto?
José Humberto Acosta Martin
Thank you, Juan Carlos. On the Slide 4, we see the evolution of assets and its composition.
During the quarter, the proportion of loans as a percentage of the total assets was 68%, as we continue focusing in our lending business. The securities proportion was 10%.
In nominal terms, the size of the securities portfolios is 9% lower than one year ago, and the duration remains low at a level at 20 months. We continue originated loans with strict underwriting standards in order to maintain the high credit quality of the loan portfolio, especially on the consumer segment.
The loan growth in Colombian pesos reached 0.8% during the quarter, driven by financial leases and mortgages. Commercial and consumer loans in Colombian pesos remained flat during the quarter.
On the other hand, US dollar-denominated loans grew 1.9% during the quarter, driven by mortgages and commercial loans in our operation in Panama. The 7.5% depreciation of the Colombian peso versus US dollar during the quarter caused the growth of US dollar loans to be higher when measured in local currency, in Colombian pesos.
Let us remember the Bancolombia balance sheet is fully matched in terms of currency, which reduce impacts of FX variations in the shareholders equity. Today, loans denominated in US dollars represents 33% of the total loan book.
During the last year, the loan portfolio, excluding Banistmo, decreased by 1.2%, but when we include Banistmo, it grew 66.8%. At the right hand side column, we show the contribution of Banistmo to the overall growth of the loan portfolio in dollars over the last 12 months.
When we analyze the year-on-year overall growth of the gross loan portfolio, the 23.8% growth is partially explained by the incorporation of Banistmo assets, which contributed to 16.4% and today accounts for 13% of the total loan portfolio. Finally, our guidance is we are estimating our growth target for this year at around 10%.
Now on Slide 5 [Indiscernible] we present a snapshot of the credit quality at the end of the quarter. The 30-day past due loans to total loans ended the quarter at 3.1%, stable compared to the June ratio.
The 30-day coverage ratio also remained very stable at a little over 148%, in line with our forecast. In general terms, we see the portfolio with a healthy quality, well covered by allowances and with past due loans under control.
We forecast to have our 30-day coverage ratio of around 150% in the medium term. We believe that it’s more than enough to absorb potential credit losses that the bank would eventually have.
Similarly, past due loans should represent around 3% of the gross loans at the end of this year. On Slide 6, we compare the evolution of 30-day past due loans, which is the Colombian standard and the 90-day past due loans, which is a better indicator of credit quality, as we have a significant portion of our assets in countries that use that standard like Panama and [Indiscernible].
90-day past due loans have been very stable over the last two years, as a result of our growth credit origination process. It represented a slight increase in September, [Indiscernible] have deteriorated in the first and second quarters and reached the 90-day threshold.
Nevertheless, [Indiscernible] has not a significant impact in provision charges as we have moved in advance and provision a major portion of those loans. We continue seeing a positive performance of the credit quality of Banistmo, product of a more proactive and disciplinary maintenance and collection process, which we put in place in the first months of the acquisition.
At the beginning of the last year, Banistmo 90-day past due loans represented 1.9% of total gross loans. But today, they represent only 1.5%.
This means that today Banistmo has the lowest 90-day past due loan ratio among all the operations in the Bancolombia Group. We estimate that a sustainable level of past due loans in Banistmo is at around 1.4%.
Overall, the 90-day coverage ratio is 268%, which we believe is more than enough to absorb potential credit losses. Slide number 7, shows the evolution of provision charges, which was COP 284 billion during the quarter.
It was 1.6% of average gross loans when analyzed. For the first nine months of the year, the cost of credit was 1.5%.
In the second row of the table at the bottom, we present the amount of loans that become 30-day past due during the quarter, at 404 billion reflects higher deterioration compared to the second quarter and the third quarter of last year, which were abnormally good due to the high recoveries that we experienced in those quarters. These past due loan formation during this quarter, the 3Q, was mainly explained by a few isolated cases of corporate clients in Colombia and Guatemala that became past due.
Nevertheless, it was not a generalized trend and we do not see a reason for concern in that matter. The most important thing regarding the loan quality is that [Indiscernible] over the last year present today a very good performance as a result of strict underwriting standards and they should not present abnormal deteriorations in the rest of this year.
We feel comfortable with the evolution of the loan portfolio and forecast to have provision charges around 1.5% of gross loans during this year. Moving onto Slide number 8, we see the evolution of net interest income and funding cost and composition.
NII for the 3Q was COP 1.48 trillion, the highest record in Bancolombia’s history and 22% above the same quarter of the previous year. This yearly growth is explained mainly by two main factors.
First higher volumes of loans during the year, and second expansion of the NIM caused mainly by the reduction of funding costs. The evolution of NII is in line with our decision to allocate a greater proportion of our assets to the lending business and maintain this portfolio at around 10% of assets and with a lower level of risk.
The ultimate goal is to increase the profitability of the loan book. Let us remember that in September we closed a 2016 dollar-denominated senior bond and paid a premium of COP 25 billion for the early redemption.
Normal funding expense effect is temporary to the cost of long-term debt and the NIM. But in the next coming quarters the total funding cost should be normalized in the US dollar business.
On the other hand, we issue about a trillion Colombian Peso subordinated bond during the quarter with maturities of 10, 15 and 20 years and linked to inflation. This issuance has two purposes.
First to enhance the Tier 2 position and the BIS ratio for Bancolombia, and second obtain the resource to fund long-term loans that we estimate to originate in the next common tiers. During this year and in the third quarter in particular we have focused our efforts in not only keeping the funding cost as low as possible, but also in increasing the average time to maturity of the stock of liabilities, in particular CDs and long-term debt.
Of course, this caused the cost of these types of liabilities to go up in [Indiscernible] higher interest rates from the Colombian Central Bank. But we have positioned the balance sheet in a better shape [Indiscernible] standpoint of view and also for capturing the eventual increase of benchmark rates that we use to price a significant portion of our loans, the DTF in particular.
Regarding the DTF, we are experiencing an abnormal situation in Colombia because these benchmark rates are not fully reflected yet the heights of the repo rate. While the central bank rate in Colombia today is 4.5%, the DTF is 4.2%, but is gradually converging to the former, which is good for our need.
Our expectation is in the next coming quarters the DTF will be around 4.6%, 4.7%. Our goal is to keep funding cost as low as possible in an effort to defend or expand the NIM and grow the NII.
Regarding our table, the asset sensitive condition of our balance sheet, which is beneficial for the NIMs in a harsh environment. Slide number 9, shows the evolution of the net interest margin.
The NIM from loans ended at the level of 6.2%, slightly below the 6.3% of the previous quarter. This increase was mainly explained again by increasing the funding cost that we explained in the previous slide and the COP 25 billion premium that we paid for the early redemption of the 2016 senior bonds.
Nevertheless we should see a sustained trend in NIM expansion in the next coming quarters, our lending NIM to be between 6.2% to 6.5% at the end of this year. The securities NIM was 0%, down from 0.2% in the previous quarter.
We do not forecast neither big gains nor big losses from this portfolio. As we mentioned at the beginning of this presentation, the Colombian Central Bank increased the repo rate, 125 bps to 4.5 % in the meetings held this year.
We can foresee a positive contribution in our NIM due to a small increase in our reference rate DTF. Fees are represented in Slide number 10.
This line grew 4% during the quarter and 23% compared to the third quarter of last year. Again the fees of this quarter were the historic high records.
We continue experiencing more credit and debit card transactions during this quarter, product of our effort to promote the use of plastic to pay in stores and increase the number of credit cards in new segments, in particular online purchases and more cards outstanding contributed to the quality growth. Additionally, we saw a sustained level of insurance distribution fees, which generate about around COP 170 billion during the first nine months of this year.
Finally, we saw a good performance of our asset management business and investment banking business, product of our greater volumes of assets under management and more deals during the quarter. Since we have a very good performance of fees during the first nine months of this year, and we believe they should remain stable or even increasing a bit in 4Q, we keep our forecast for fee growth this year 12% to 15% for the whole year.
On Slide 11, we present the evolution of expenses, which decreased 1% during the quarter. This quarterly performance reflects the initiatives to keep cost as low as possible and growing the loan revenues.
The headcounts remains stable and we are being very selective with the projects that we execute and the evolution of administrative expenses. Our guidance for this year is an increase of expenses of around 12% taking in consideration we will have 12 months of Banistmo expenses and last year we had incorporated only two months, November and December.
The cost-to-income ratio using the same methodology that we have used over the recent years was 55% during the quarter. This metric is calculated dividing the operating expenses plus goodwill amortization into operating income before provision charges.
Now, if we exclude items that are not exactly administrative expenses, like goodwill amortization, deposit insurance costs, and depreciation from the calculation, the cost-to-income ratio is 46%. On the bottom right hand side, we see how OpEx to total assets decreased during the quarter as a result of lower expenses and growth in assets.
Our efforts right now are focused on improving the efficiency of the bank. Revenues should grow faster than expenses, and the main drivers for cost growth, headcount and branch network expansion are very stable.
Our goal is to perform a greater number of transactions through electronic and low-cost channels, such as our mobile banking and agents. Moving to Slide 12, we see the evolution of the net loans to deposit ratio, which represents to 102% during the quarter, as a result of the loan growth.
We want to keep this loan-to-deposit ratio at around 100%. This quarter we ended slightly above the number due to the strategy to reduce the most expensive deposits and use the proceeds from the stock issuance of February and the subordinated bond issuance of September.
Regarding capital, on the bottom right hand side, we present the capital adequacy ratio at the end of the quarter. The reported Tier-1 ended at 8.5%, lower than the 9% at the end of June.
The decrease was the result of growth of assets. It is necessary again to highlight the treatment of growing earnings under the new Colombian capital regulation.
The earnings of the year are not considered in Tier 1 and the shareholders [Indiscernible]. As the result, the COP 1.4 trillion earnings generated during the first nine months are not included in the Tier 1 calculation.
Regarding Q2 because we went to the market and increased our level of subordinated debt, we increased almost 90 bps the Tier 2 ratio going from 4.5% to 5.5%. Let us remember that the minimum required to operate in Colombia in Q1 is 4.5%, and the level that we have today puts us in a comfortable situation of equilibrium between strength of balance sheet and return for shareholders.
Slide number 13 shows the return on assets and return on equities of the bank. Return on assets ended the quarter at the level of 1.3% and return on equity declined to 10.6%, product of a lower leverage of the balance sheet due to the capital increase in March.
Considering the capital raise and our net income forecast for 2014, we are expecting a return on equity of 13 % this year. After presenting these slides with the third quarter numbers to you, I would just like to highlight where we stand today and our plans for the near future.
First our balance sheet reflects a moderation of growth of the loan portfolio. The focus today for Bancolombia is to increase the profitability of our assets.
Second, the trends in NIM reflects our focus of profitability based on the optimization of funding cost. Third, the performance of the deposit loans and our level of provisions in this quarter reflects a healthy loan portfolio.
Four, the efforts of fee generation are impacting the overall resource in a very positive way. And finally, the operating income is growing which is to be more efficient.
Having said these, we are happy to take any questions that you might have.
Operator
Thank you. We will now begin the Question-and-Answer session.
[Operator Instructions] And our first question comes from Tito Labarta of Deutsche Bank. Please go ahead.
Tito Labarta – Deutsche Bank
Hi good morning. Thank you for taking the call.
My question is if you look it on gross interest rate, just want to understand the dynamics better, you mentioned in the quarter you said from this reduction of this bonds, so that if you scoot that what kind of margin would you have and also kind of going forward with -- to the deposit ratio above 100% can you really see some margins expansion just wanted to understand that little bit better also given loan growth running below 10% even on organic loan growth, even along 5% that we should expect I think you mentioned 10% loan growth for the year but is that too conservative? Do you think you can grow faster than that given the type of growth we are seeing in Columbia just want to get a sense in terms of your net interest outlook given the loan growth you are seeing and if you can really improve the margin.
Thank you.
José Humberto Acosta Martin
Thank you Tito and regarding your first question it's here in Columbia very common situation that is not increasing at the same speed or same trend that the it's growing the interest rate of the central bank. We are expecting that gain previous to touch the level of parties for 0.7% of the second quarter of next year but assuming that we recall the bond, they need expansion of their name of our name could be between 10 to 15 beeps these quarters we have to pay in advance of $10 billion in interest fund of bond so again we expect our name will increase the next coming quarters at least 20 beeps more because of their procession of the asset.
That's we are expecting again. Will go up in the next coming weeks or months.
Regarding your second question, growth we decided growth on the control basically on the consumer side for example because we want to experience any kind of deterioration of the loan portfolio and we too expect to do exactly the same next year. So next year we are expecting growth 10% to 15% driven opportunities more on the corporate side to first half of the year and maybe on the second half of the year we will experience an increase of the consumer size.
Tito Labarta – Deutsche Bank
Okay great. Excellent.
This is very helpful and just maybe a little bit more color in terms of net margin for next year I mean once you get this maybe 20 basis points improvement from the increase in rates we see redemption of the bond no longer impacts the results, do you think you will have further margin expansion into next year or is it 20 basis point improvement and kind of a stable margin going forward.
Juan Carlos Mora Uribe
We have to do the tracks. In terms of local currency, we will experience an increase of 20 or little bit more because the local currency will be impacted by the but in the of our business we are not expecting to increase our name.
So as a combination of the two different currencies, local currency 70% of our loan portfolio will increase in the 20-25 bits and US dollar on very stable. We are able to say that 20 bits of increase in will be sustainable at least the first half of the next year.
Tito Labarta – Deutsche Bank
Okay. Thank you very much.
Operator
Thank you. Our next question comes from (inaudible) from UBS.
Please go ahead.
Unidentified Analyst
Good morning everyone. Thank you for the conference call.
The question which is actually follow-up on the common asset qualities and I wanted to see if you could give us some color on the TDL formation which accelerates in the quarter. So relatively high in the third quarter and if this means the we are seeing in Columbia was one of the best GDP growth in the region, I wanted to see how you reconcile this and maybe get a sense of where will go in the next quarters?
Juan Carlos Mora Uribe
Thank you. Yes, as we mentioned in the presentation we increase our level of provisions and the new are a little bit higher because of unspecific cases on the corporate business in Columbia and Guatemala in some leasing business but that's any kind of trend.
We expect under control. We are not expecting any kind of deterioration.
We are able to we have remained healthy at a level of 3% and also the 150 so this quarter maybe driven by an unspecific cases with corporate loans but that doesn’t reflect any particular concern regarding any particular segment. Consumers are behaving very well.
Corporate loans are also behaving very well. Credit cards are more of same trend.
So the Colombian economy as a whole is not reflecting any kind of deterioration probably the possible income -- still are very solid trend.
Unidentified Analyst
Okay. That’s good and you think those specific situations will be resolved already in the fourth quarter?
José Humberto Acosta Martin
Yes sir.
Tito Labarta – Deutsche Bank
Okay. Maybe just the final follow-up considering everything you mentioned on margin and since on what would be your revised or guidance on the ROE for this year and next year?
José Humberto Acosta Martin
For next year we are expecting to increase our return on equity between 14% to 15%, because of under IFRS we don't have to considering of the goodwill and also because we are pricing of the assets faster than the liability side so we will be able to say that 14% to 15% is achievable.
Unidentified Analyst
That's great. Thank you very much.
José Humberto Acosta Martin
Okay.
Operator
Thank you. And our next question comes from Philip Finch – UBS.
Please go ahead.
Philip Finch – UBS
Yes. Good morning everyone and congratulations on your results.
The question I want to ask first of all is regarding these big gain you had in your foreign exchange business where you saw I think $127 billion gains which was much higher than you have had in previous quarters. So question here is for over increase the big improvement and going forward what could one assume as a sustainable level and secondly on slide 13, in your presentation, you have a very useful chart there showing ROE and ROA going back a few years and what’s quite striking is Q4 in each year seems to be have particularly good quarter so could you just remind us what the seasonal drivers are for Q4 which may suggest that fourth quarter this year could also be a good quarter for you.
Thank you.
José Humberto Acosta Martin
Thank you Philip and yes this is a very particular quarter regarding your first question because the was particularly high 7.5% so this is also same on sustainable of course. Rate and since we are buying to maintain between 2000 and 200 and 2000 and 100 basis so that will be only for these specific period because that was very high.
So we don't expect to see there again in the next coming quarters. Regarding your second question we expect to close up at the end of this year based on the assumption that we will have the same trend this quarter next quarter our return on equity would be at a level of around 13%, 13 point something percent.
And the return on assets will remain almost flat.
Philip Finch – UBS
So just clarify fourth quarter should be stronger bottom line.
José Humberto Acosta Martin
It could be because usually the last quarter you will increase the volumes of loans so we will be benefited of that.
Philip Finch – UBS
Okay. Great.
Thank you very much.
Operator
Thank you. And our next question comes from (inaudible) from JP Morgan.
Please go ahead.
Unidentified Analyst
Good morning and thanks for taking my question. My question is related to the tax reforms, the proposed tax reforms in Columbia.
I just wanted to get a sense of what your thoughts on and then how do you see it impacting ROE targets for 16% kind of medium to longer term.
José Humberto Acosta Martin
Yes, the tax reformation is still in process so we have been discussing with government and the reseller of nice around the final numbers on we are expecting a very long process of approval from the government but if that were the case, now we have the same tax for equity that we had four years ago we will be impacting at least double the size of the tax because we increased our capital twice in the last four years because remember we went to the market twice in our two follow-on operations that the impact will be very important.
Unidentified Analyst
Okay great. Thank you.
Operator
Thank you. And Our next question comes from Jose Barria from Bank of America Merrill Lynch.
Please go ahead.
Jose Barria – Bank of America Merrill Lynch
Sure good morning gentlemen. Thanks for the question.
Just a follow-up on the previous question on asset quality. Given that you are saying that the deterioration you saw in the quarter was more specific due to some cases, I expect that then maybe we should see provision charges not be as high as what we saw in this quarter.
I wanted to get your thoughts on where provision drivers loan should be and then also if you could briefly tell us what your Q1 capital would be if you had allowed to include earnings to this year so far or where it should be at the end of the first quarter when 2014 capital generated. Thank you.
José Humberto Acosta Martin
Thank you. Yes regarding Q1, the calculation assuming that we are capturing 60% of the net income that we have today that will increase to 9.2% to 9.3% of Q1 to-date.
So that's the math that we are presenting. Regarding provisions, yes we are expecting to reduce the level of provisions maybe at the same level as we had in the second quarter of this year.
So that will be between 250 billion to 280 billion. Based on the assumptions that there will not be deterioration of the loan portfolio.
Jose Barria – Bank of America Merrill Lynch
Got it. Thank you very much.
José Humberto Acosta Martin
My pleasure.
Operator
Thank you. And our next question comes from Thiago Bovolenta Batista from Itaú BBA.
Please go ahead.
Thiago Bovolenta Batista – Itaú BBA
Hi guys this is I think I would like to ask question about your expectation for operations in 2015 and do you expect to see improvement in the profitability and I would also like to confirm the sustainable ratio of 90 days is it 1.4% ?
José Humberto Acosta Martin
Okay regarding I mentioned in the beginning the news are – the banks are running in a very good way. We are expecting an increase next year of the loan portfolio at around 10% mostly in line with the rest of the competitors this year 2014 and next year 2015 we will be most focused on more efficient to work under own system.
So we don't expect big increase of the loan portfolio growth neither big increase of the liability side. So again, operation will represent an increase in terms of loan portfolio at around 10%, 8% to 9% on the deposit base and then level of profit so about around $100 million at the end of next year but next year we will have a lot of CapEx investing of the replacement of the systems that we are putting place in our operation.
Regarding the 90 day loans check the numbers that will be very stable number and we expect to maintain the same level at least for 2015 which means 1.5% of 90 days.
Thiago Bovolenta Batista – Itaú BBA
Okay. Perfect.
Thank you.
José Humberto Acosta Martin
My pleasure.
Operator
Thank you. And our next question comes from Boris Molina from Santander Investment Securities.
Please go ahead.
Boris Molina – Santander Investment Securities
Yes. Thank you.
Just wanted to – could you explain a little bit your non-operating income you had a big jump in cost there and non-operating expenses and what is this, is this that is going to be affected by the management and do you have any idea of more or less how are you doing in terms of your execution of your cost for I think you mentioned something around $30 million and if you are in line to meet that target and what is the number that would you expect for next year?
José Humberto Acosta Martin
Yes Boris. Thank you very much.
Effectively this is the expenses that we are expecting for next year at around say $30 million of OpEx in management. That's the number that we will reflect next year in our P&L.
Boris Molina – Santander Investment Securities
And is that going to be reflected in non-operating income in this quarter there was a big jump in that line and if you look at earnings before taxes, there was more or less okay but then you had a big jump in non-operating expenses and this really quarter
José Humberto Acosta Martin
Yes, the big jump Boris is as we released in the previous weeks, remember that we had a mistake about our treasure operation in 2012 and 2013 that we have reflected this month at of this jump. That’s the reason why you see an operating expenses these adjustments.
Boris Molina – Santander Investment Securities
Okay. Wonderful.
Thank you.
José Humberto Acosta Martin
My pleasure Boris.
Operator
Thank you. And our next question comes from Cristian Hernández from Ultrabursatiles.
Please go ahead.
Cristian Hernández – Ultrabursatiles
Hey guys. Thank you for taking my call.
I have got one question. I would like to know you recently signed collective having increase their salaries next year at around 7%, should we expect efficiency given this or how could you guys work that out?
Thank you.
José Humberto Acosta Martin
We don't expect operation on these because we again as I mentioned during the speech we are very normal the labor cost. So we are not trying to – we are not expecting to increase the headcount.
We want to be more efficient we want to work with the same people. So we don't feel any particular pressure regarding that issue.
Remember 7% we applied for or the 6% of the total employees because we are talking about the Colombian operation but outside in our operation in Panama we have a different situation that will be tied to the inflation in those countries. So as a result of that we don't any particular operation of expenses at the labor cost.
Cristian Hernández – Ultrabursatiles
Right. Thank you.
José Humberto Acosta Martin
My pleasure.
Operator
Thank you. And our next question comes from José Restrepo from Serfinco.
Please go ahead.
José Restrepo – Serfinco
Good morning. Thank you for the conference.
I have one question. You have been mentioning direct intersection to electronic channels is the key to improve efficiency.
Can you give us an idea how the number of transactions in those electric channels are growing compared with the brand transaction made on branches in terms of volumes and you have guidance coming years. Thank you.
José Humberto Acosta Martin
Yes, we have explained efficiency in two different ways. First the increase of the channels right now we are increasing the physical branch 6 to 7 branch per five years ago we grew 6 to 7 branches so that effects on the maintain of the control, the increase of the operating.
Today we process around 7 million transaction per day and only 8% of that transaction are processed through the physical branches. The rest, the 92% are processed through different channels such as internet, mobile banking, telephone banking.
So this is the new way to distribute products and to use the channels. We are focusing on that effort, trying to move the people outside their offices and try to use different channels.
Juan Carlos Mora Uribe
And José we are not just processing around 91% of the transactions electronically but also the base of the growth that the electronic transactions as much, much faster electronic transactions are growing around 4% monthly all transactions just monetary transaction but only transactions around electronic channels. So the base is very clear to move from the physical branches to the electronic channels.
José Humberto Acosta Martin
Right now people are using the physical branch but we are in the second stage and we are trying to promote people not using the ATMs, the use of the debit card really increasing in different ways through gas stations, supermarkets, that's the reason why you see an increase of fees, because people are – right now we are promoting the use of debit cards.
José Restrepo – Serfinco
Do you have an idea on how the electronic transaction will grow in the future or do you – you expect to go to 95% or more?
José Humberto Acosta Martin
The composition will be the same, 92% to 95% to these channels and the will depend on the economy it depends of how fast the people move to electronic channels. Right now we are promoting that.
We have 6 million, 7 million clients and the population right now just to give you an example, the transaction through internet is growing up the pace of 20% per year which is a lot.
José Restrepo – Serfinco
Okay. Thank you.
José Humberto Acosta Martin
My pleasure.
Operator
Thank you. And our next question comes from Marcelo (inaudible) from Goldman Sachs.
Please go ahead.
Unidentified Analyst
Hello good morning gentlemen. My first question is just the follow-up on the event of this quarter I believe that you had an 89 billion extraordinary loss this quarter related to this correction on your trading portfolio.
I just like to make sure that this 89 is pretax and also if we should expect any other adjustments or non-recurring items similar to these in the next quarter and then I will follow-up with my second question. Thank you.
José Humberto Acosta Martin
Thank you Marcelo. Effectively it's a pretax the 89 billion pesos.
And we make the adjustments – we make the corrections so we are not expecting any other kind of mistakes that we realized on the treasury business. Remember that that was because we implement a new system the system of that time but today the operation is very well established and very well normalized.
Unidentified Analyst
Very, very thank you for clarifying and my second question is related to the plan I would just like to hear from you guys what is your expectations regarding any – was there any impact on your growth, maybe next year or 2016 and what we should expect in terms of lending through you guys towards these specific project in the coming years. Thanks.
José Humberto Acosta Martin
Thank you Marcelo. We have been talking about infrastructure over the last four years and we definitely we expect that the end of the next year and beginning of 2016 we will experience an increase of these kind of projects and in the same line we will experience an increase of our lending business of that matter.
I shall that we prepare and that's the reason why we went to the market to get money for in order to be prepared for lending that business. Is not the risk, it's not the matter of risk project.
It's how to financing the better way to offer to the clients and to the projects financing. So we will – you will see the impact of the new business at the end of last year meaning last quarter of 2015 and you will see a very, very important movements during 2016.
Unidentified Analyst
Perfect. Okay just to make it clear, so you mentioned that you are expecting your loan growth to accelerate next year so maybe we should expect few stronger growth in 2016, is it fair to assume this kind of pickup in growth in 2016 as well?
José Humberto Acosta Martin
We are not expecting any next year we are expecting 10% to 15% which is three times the GDP growth or 3.5 times maybe in 2016 we will experience an important because of that. But next year, we are based on the assumption that we will grow exactly the same as this year.
This year we will grow 10%, next year 10% to 15%.
Unidentified Analyst
Perfect. Thank you very much.
José Humberto Acosta Martin
My pleasure.
Operator
Thank you. And our next question comes from (inaudible).
Please go ahead.
Unidentified Analyst
Hi! Good morning guys.
I have question regarding efficiency and CapEx and from the breakup merger business model to alternate channels how important is it going to be the recurrent CapEx in IT going forward and in terms of non-recurring CapEx how much do you need to invest in total for in terms of technology and also if you can provide us some guidance on your income for next year that will be great.
José Humberto Acosta Martin
Okay. Based on assumptions the population and our clients maintain the same behavioral we will expect fees again 10% to 13%, 14% next year.
In terms of investment we have received an investment of around 30 million to 40 million next and that will be most of them on CapEx and our leader partner in OpEx. So we don't expect and this is discounted.
When we talk about to receive $100 million profits from operation that is included. Our guidance for expenses for next year will be 8% to 9%.
Juan Carlos Mora Uribe
Let me explain a little bit on the IT expenses. As you know we have been investing heavily in the past years on IT and we are not expecting to change that level of investments in IT in the future, we are going to maintain the level but we are going to see the results of those investments that we made in the past and that we are going in the future on the expansion of the new – the electronic channel.
So you don't see in the future big jump on IT expenses.
Unidentified Analyst
Okay thanks. Just to follow-up on the how do you compare your technology with your peers in Columbia and I mean is bank of Columbia prepared for disruptive low cost IT model?
José Humberto Acosta Martin
We have been preparing for that model for a couple of years. I think in technology you need to keep investing in banking which is heavily dependent on technology, you need to keep investing.
So I think we have been doing that and we will be doing that in the future. As the low cost model I think moving to the electronic transactions that we have been mentioning in this call and of our strategy is going to help us to move to that low cost model.
In terms of your other part of your question how our technology compares with our peers in Columbia, I think we are in the same level. We are all investing in channels.
We are investing in how to reach in much efficient way to our customers and also we are investing in the process of replacing our core banking systems in order to help to be more efficient. So I think we are all working in the same the page.
José Humberto Acosta Martin
Okay. Thanks.
Operator
Thank you. I will now turn the call over to Mr.
José Humberto Acosta Martin, CFO for closing remarks.
José Humberto Acosta Martin
Thank you very much. I hope to see you in the next conference call that will take place in April.
Thank you very much.
Operator
Thank you and thank you ladies and gentlemen. This concludes today's conference.
Thank you for participating. You may now disconnect.