Mar 10, 2016
Executives
José Humberto Acosta - Chief Financial Officer Alejandro Mejia - Investor Relations Manager Juan Pablo Espinosa - Chief Economist
Analysts
Thiago Batista - ITAÚ BBA Ernesto Gabilondo - Bank of America Tito Labarta - Deutsche Bank Saúl Martínez - JP Morgan Jason Mollin - Scotiabank Victor Galliano - Barclays Natalia Casas - Ultraserfinco
Operator
Good morning, ladies and gentlemen. And welcome to Bancolombia’s Fourth Quarter 2015 Earnings Conference Call.
My name is Hilda, and I will be your coordinator for today. At this time, all participants are in a listen-only mode.
Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] Please note that this conference call will include forward-looking statements, including statements related to our future performance, capital position, credit-related expenses and credit losses.
All forward-looking statements, whether made in this conference call and future filings and press releases or verbally, address matters that involve risks and uncertainties. Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy and various other factors that we describe in our reports filed with the SEC.
With us today is Mr. Jaime Velásquez, Chief Strategy and Finance Officer; Mr.
José Humberto Acosta, Chief Financial Officer; Mr. Jorge Humberto Hernández, Chief Accounting Officer; Mr.
Alejandro Mejia, Investor Relations Manager; and Mr. Juan Pablo Espinosa, Chief Economist.
I’d now like to turn the presentation over to Mr. Acosta, Chief Financial Officer of Bancolombia.
Please proceed, sir.
José Humberto Acosta
Thank you very much. Good morning and welcome to our fourth quarter 2015 results conference call.
It is a pleasure to be with you all who follow Bancolombia so closely. Let’s start with a brief discussion of the main topics that impacted our business in this period.
You can follow the slide presentation available at our Investor Relations website. We want to start this conference call today by discussing events over the past few days, which as most of you already know that our CEO, Carlos Raúl Yepes officially announced his decision to resign on Monday.
After five very successful years with him in which he consolidated the Bank presence in 10 countries, he decided to step down for personal reasons. The Board of Directors fully understands and accepts his decision, expressing their most sincere gratitude and wishing him the best of luck in his future life projects, as do we all.
Also as many of you know, Juan Carlos Mora, the current Vice President of Innovation and Digital Transformation, will step into the role of CEO as of May 1st this year. Juan Carlos has held numerous leadership roles in the organization through his 25-year tenure at the Bank, including Corporate Account Manager, Head of Investment Banking, Chief Risk Office, Chief Operating Officer, and Head of Innovation and Digital Transformation.
Now, moving on to economic scenarios and the Bank results, we wish to share with you the main topics on this front. In the fourth quarter of last year, we completed acquisitions of Banco Agromercantil of Guatemala, reaching a 60% control of that entity.
These facts contributed to the additional growth of the balance sheet due to the incorporation of assets and liabilities from the operation. Now, Guatemala represents 6% of the assets of Bancolombia and we complete the presence in the countries where we want to be, mainly Colombia, Panama, EI Salvador and Guatemala.
During these periods we saw a minimal depreciation of the Colombian peso against U.S. dollar which contributed to the growth.
Total loan growth grew 27% in 2015 and 9% over the fourth quarter, driven by commercial and mortgage loans. Net income for the fourth quarter was COP 656 billion, a very healthy figure considering the challenging environment, higher accounting cost and rate and the fact that we will have to make close to COP 170 billion [ph] in provisions for our client named Conalvias.
In 2015, our net income was COP 2.5 trillion, which represents a 5.5% growth compared to 2014, even with higher taxes, specifically wealth tax paid in the first quarter, we are satisfied with the performance of all the Bank’s business units. 2015 was a challenging year, specifically because of the general economic slowdown and depreciation of the peso, higher inflation, and dearth of liquidity during the second half of the year.
In 2015, we increased net fees by 9% while also moving the Bank to a digital strategic focus on efficiency, innovation and depreciation in the regional playing field. In 4Q last year, net interest income grew 11%, mainly due to spur of economic activity in the last quarter of the year, normally related to seasonal factors.
Net interest margin was also benefited with a 10 basis-point increase over the quarter. We believe margins will evolve probably moving forward into the year because of assets re-pricing which already happened in the fourth quarter of last year.
It is important to note, asset quality remained healthy despite a clear slowdown in the Colombian economy activity. Total provisions actually dropped 6% quarter-over-quarter, which was very positive in the challenging and macroeconomic environment.
Funding costs increased by 10 basis points but we were able to anticipate much of the funding necessitates by performing through the quarter. Funding composition was similar to previous quarters where the Bank continues to show its strength in funding with 74% of it coming from saving and checking accounts as well as time deposits.
Efficiency improved with a cost to income ratio finishing this year at a level 54.6%. Expenses were clearly hit by the higher FX rate during the year and the mismatch between income and expenses in U.S.
dollars. We are confident however that we can make the appropriate adjustments going forward to assure that efficiency continues to improve in line with our near term target of under 50%.
Slide number three summarizes performance of the Bank. Income before taxes grew 32% and net income grew 21% over the quarter.
As we mentioned before, it was a very good quarter with solid NII growth and lower provisions. Moreover, we grew profits over 5% [ph] in 2015, even during a very volatile year, with increase in taxes, big FX movement, bonding pressures and weaker loan volumes.
We made some adjustments in the 2014 numbers that we have previously reported. This was due to the auditing process and the presentation of IFRS standard for the first time.
Income tax paid was significantly lower than the COP 218 billion we paid at a year ago. Looking forward, we are very focused on profitability through improvements in efficiency, especially cost control over the upcoming year.
Now, we would like to continue with a brief description about the economic environment. For this purpose, we have Juan Pablo Espinosa, Bancolombia’s Chief Economist who will elaborate more on these models.
Go ahead Juan Pablo.
Juan Pablo Espinosa
Thank you, José Humberto. Now, I’ll ask you to go to slide number four in the presentation.
The information published since our last conference call points to more challenging macroeconomic conditions in Colombia. In terms of economic activity after expanding at an estimated rate of 3.1% in 2015, we forecast that this year GDP growth will be 2.6% due to a less dynamic internal demand and limit contribution from net exports.
However, if risks to the downside prevail, our negative base scenario of 1.8% growth could materialize. Having said that, it is worth mentioning that the economy will benefit from the substitution of imported goods for local production, the recovery of manufacturing, and the execution of the infrastructure projects.
A silver lining of this slowdown is that after reaching a peak in the short-term, we expect inflation to experience a significant correction in the second half of the year. Besides an increasing negative output gap, lower prices will reflect a normalization of weather conditions, higher interest rates and a positive base effect.
As a result, we expect that inflation will close this year in the 4.4% to 5.4% range. As prices recede, our monetary policy call is that the current tightening cycle will come to an end during the next few months with a maximum term on repo rate of 7%.
Despite the weakening of the peso since 2014, we foresee that Colombian current account deficit this year will remain above 6% of GDP. This high level reflects the negative impact of lower commodity prices as well as low elasticity of both exports and imports to real depreciation.
Therefore, not only Colombia will remain highly dependent on the international capital inflows but our view for the Colombian peso is still bearish. In fact, our yearend USD forecast is 3,400.
Regarding fiscal policy, the recent budget cut announced by authorities makes it more likely to meet central government’s deficit goal of 3.6% of GDP for this year. Nevertheless, we think that additional austerity measures, particularly in the expenditure side will be necessary in 2016 and 2017.
Moreover, medium-term scenarios reveal that our comprehensive tax reform and that increase of central government revenues by 3% of GDP or more is key to achieve the path of deficit reduction set by the fiscal rule. Against this backdrop, we think the Colombia has the ability to achieve an ordered landing of its economy which is necessary to mitigate twin deficits and control inflationary pressures.
This adjustment will pave the way to more constructive macro conditions next year. After this overview of the economic environment, let me turn the presentation back to José Humberto Acosta who will discuss the Bank’s results.
José Humberto Acosta
Thank you, Juan Pablo. On slide five, we see the evolution of assets and sales composition.
We want to highlight the chart that during the year we were focused on allocating more capital to our core business which is lending. Total assets increased 29% over the last 12 months and 30.7% of this growth is explained by the depreciation of the peso versus the U.S.
dollar. Also we consolidated Banco Agromercantil assets, which contributed to 7.8% of the annual growth.
Today, Colombia represents 63% of the total assets of Bancolombia Group, while Central America represents 37%. The average yield to maturity for the investment portfolio is 6.5% and we continue to maintain a structural debt portfolio primarily for liquidity management.
Also, the duration of the securities portfolio remains low at the level of 18.9 months, which minimizes risks in a very volatile environment. We continue originating loans with the strict underwriting standards in order to maintain the high credit quality of the loan portfolio, especially in the consumer segment.
The loan growth in Colombian pesos reached 9% during the quarter, driven by commercial and mortgage loans as well as integration of Banco Agromercantil. We focus our growth in the less risky products, as we want to maintain a very healthy balance sheet.
Regarding currency composition, today, loans denominated in U.S. dollars represent 41% of the total loan book.
The general increase in assets in the quarter and year is explained primarily by the consolidation of Banco Agromercantil, moderate organic growth and FX valuations. Also let’s recall that Bancolombia balance sheet is matched in terms of currency, which reduces impact of FX valuations on the shareholders’ equity.
Finally, our total loan growth target rate for 2016 is 6% to 8%. Now on the slide six, we present a snapshot of the credit quality at the end of the quarter.
In general terms, we saw stability in the quality of the loan portfolio, allowances and past due loans. The 30-day past due loans to total loans, stand at the level of 3.1%, stable compared to the ratio of the 30-day coverage ratio also remains at a level of 119%.
As we have mentioned last quarter, Conalvias, a client from the construction sector, filed for bankruptcy during the third quarter. As of December however, the client was officially past due and is now accounted for in our balance sheet.
We forecast to have a 30-day coverage ratio ranging from 110% to 120% in the medium-term, which we believe is more than enough to absorb potential credit losses. Similarly, 30-day past due loans should represent this increase of 3.5% of gross loans.
This forecast includes the default of Conalvias. At the bottom of the table, we compare 30-day past due loans which is the Colombian standard and 90-day past due loans which is a better indicator of credit quality as we have a significant portion for our assets in countries that use that standard.
90-day past due loans have been very stable over the last two years, as a result of our good credit origination process. They represent 1.8% of gross loans as of December 2015 with the coverage ratio of 211%.
Slide number seven shows the provision charges, which were COP 460 billion during the quarter. They represented 1.3% of average gross loans when annualized and include the additional provisions made this quarter for Conalvias.
In the shaded row of the table at the bottom, we present the amount of loans that became 30-day past due during the quarter. The COP 615 billion new past due loans represent an increase as compared to those in the pre quarter of last year and the mainly represented by retail loans and SMEs.
Let’s remember that the numbers presented in this slide do not include the Tuya operations. One of the outcomes of not consolidating Tuya is a lower NPL formation and higher credit quality.
Besides the issue with Conalvias, we feel comfortable with evolution of the loan portfolio and forecast provision charges to be around approximately 1.7% of gross loans during 2016. As we have shared with you in recent months, it is important to keep in mind the context in which we are operating.
The Colombian economy is growing at a slower pace, the Central Bank is tightening the interest rates, and we should see the impact of these facts in the coming quarters. By that we mean that the pace of loan growth will be lower and we can see an increase in the number of delinquencies.
As of today, we have only seen mild evidence of these trends. But we are taking the measures to prevent any negative impact in the next coming quarters.
Today, we’ll rather to grow less in an attempt to prevent a possible deterioration of the loan portfolio and higher provision charges. Moving on to slide number eight, we see the evolution of the net interest income and funding cost along with funding composition.
NII for 4Q last year was COP 1.95 trillion, 14% greater than the same quarter of the previous year, driven by higher loan volumes and the depreciation of the Colombian pesos versus U.S. dollar.
Bancolombia’s funding cost was pressured upwards mainly by higher cost of long-term debt and in a lesser extent by the central bank interest rate hikes and lower liquidity, which fueled competition among banks for deposits. The total funding cost increased only 2 basis points while the central bank’s reference increased 100 basis points to reach the level of 4.75% by the end of the quarter.
During this year, we have focused our efforts not only in keeping the funding cost as low as possible but also in increasing the average time to maturity of the stock of liabilities, in particular, time deposits and long-term debt. Nevertheless, during the fourth quarter, most of the pressure was on time deposits, we have recognized higher interest rates on the new CDs, as you can see with cost of deposits rising 10 basis points.
Our goal is to keep funding cost as low as possible, which we have been able to achieve over the past months while maintaining a conservative approach to liquidity risk management, in an effort to defend or expand the NIM and grow the NII. We have in our favor, the asset sensitive condition of our balance sheet, which is beneficial for NIMs.
Turning the page to slide number nine, we show the net interest margin. During fourth quarter last year, we saw 10 basis points increase in the reported net interest margin, mainly in the loans NIM and improvement in the investment NIMs.
The NIM from securities was minus 0.5% due to the depreciation of the Colombian government securities. We had to link the weaker NIMs to significant depreciation of the Colombian peso against the U.S.
dollar over the past few quarters. Net interest income is recognized in the income statement using the average FX rate of the month, while the stock of loans is presented in balance sheet using the FX at the end of the month.
As a result of the difference between the average and the period-end FX, when we calculate a NIM divided by NII by average loans, the denominator looks bigger, and as a result, the NIM looks lower. The central bank will most likely to continue raising rates in the near term.
The gradual rise in rates is a good predictor of higher NIMs as we move into the next quarter. A breakdown analysis of fees is presented in the slide number 10.
During the fourth quarter, net fees decreased by 1% compared to the last quarter, due to increase in expenses related to the mild [ph] program and customer rewards. Electronic service and ATM fees were a key driver of fees during the quarter.
We are experiencing sustaining growth in the credit cards and users in Colombia due to the rising wages and ample credit availability. We continue to see more credit and debit card transactions during this year, as a result of our commitment to promote the use of cards for in-store transactions.
In addition, we are tapping into a new business segment when it comes to promoting and introducing numerous benefits. In addition, we saw a higher level of insurance distribution fees which generated COP 78 billion during the 4Q of last year and grew 30% during the quarter.
Fees represented 19% [ph] of the total revenues of the bank. Our non-banking corresponding channel is steadily growing as we find new, cheaper ways to bring banking to Colombian most underpenetrated geographies and client segments.
For 2016, we forecast a fee growth of around 10%. In slide 11, we present evolution of expenses.
Total operating expenses grew 9% year-over-year, partially explained by the depreciation of the Colombian pesos versus the U.S. dollar which naturally puts pressure on efficiency.
The cost to income ratio has been improving over the last 12 months, and was 56% in the fourth quarter of last year. Our target is to set this number under 50% in the next couple of years.
For the full year of 2015 the cost to income was 54% coming from 56% at the beginning of the year. In the fourth quarter of last year, the equity tax that we paid in 2015 was reclassified as operating expenses.
And as a result the reported cost to income was higher. If we exclude this item, I mean the equity tax, which was COP 159 billion, the cost to income ratio were 53%.
If we take only Colombia operations denominated in pesos, the efficiency has improved consistently as a result of more selective criteria for undertaking projects, successful pricing endeavors, a faster development of local channels such as the mobile banking and agents of which we have 6,000 already. Operating expenses consist primarily of personal expenses and administrative expenses, which have been kept under control in their respective currencies.
Today Bancolombia’s oriented towers, developing channels with low marginal cost and growing expenses in line with nominal GDP. Our guidance for 2016 is an increase of expenses ranging from 7% to 8%, which we believe will be the key in obtaining strong profitability levels.
Moving on to slide 12, we see the evolution of the net loans to deposit ratio which ended the quarter at a level of 110%. The proportion of loans that we do not fund with deposits is funded with long-term debt in order to have a similar duration in both sides of the balance sheet.
This strategy reduces the volatility of the net income and shareholders’ equity. It makes more sense to us to fund long term loans with long term liabilities and that’s why the 110% is a level that gives us comfort about the liquidity position of the Bank.
The liquidity and capital levels that Bancolombia presents today are optimal for the business plan we have designed. Regarding capital, at the bottom right hand side, we show the capital adequacy ratio.
The Tier 1 ended at the level of 7.5% to 300 basis points above the regulatory minimum of 4.5%. The tangible capital ratio defined as shareholders’ equity minus goodwill and intangible assets divided by tangible assets was 6.4% at the end of 4Q.
As we have said before, we look to operate the Bank at the optimal Tier 1 ranging from 8% to 9%. Let’s also remember that the earnings generated during 2015 have not been converted to equity yet.
After the annual general meeting next week, we will reinvest about two thirds of that profit into the business. As a result, this will have an impact of Tier 1 of around 90 basis points, reaching at level of 8.41% of Tier 1.
We would only see that Tier 1 ratio in March 2016 after the annual shareholders’ meeting. For the Tier 2 ratio, we ended the fourth quarter of last year with 4.9% for a total BIS ratio of 12.5%, above the regulatory threshold of 9%.
Slide number 15 shows a return on assets and return on equity of the Bank. Cumulative return on equity for the year was 13.62% and cumulative return on assets was 1.53%.
Return on equity jumped to 15.8% for the quarter due to a lower provisioning and a stronger NII growth. We expect to continue growing the net income although at a moderate pace while maintaining solid solvency indicators for the rest of the year.
Our guidance for return on equity for 2016 will be to be at around 14%. Overall, for 2015 we can highlight, first, Bancolombia maintains solid and stable loan interest margins based on a strategy of funding cost and pricing control.
Second, enhance the liquidity position of the Bank while controlling funding cost and pricing loans, according to a new interest environment and outlook. Third, our strategy today is focused in maintaining risk under control.
And this implies prudence with credit origination and monetary and moderated pace of loan growth. And finally we are doing efforts in making sure that the costs grow under control while revenues grow at a faster pace.
We target to have our cost to income ratio 50% to 52% at the end of this year. After going over these slides and discussing our fourth quarter results, I would like to invite you, our audience to ask any questions you might have and we’ll be ready to take it from there.
Thank you.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] We have a question from Thiago Batista from ITAÚ BBA.
Thiago Batista
Hi guys, thanks for the opportunity. I have two questions, the first one related to the asset quality evolution.
You had a comment during the call that you’re expecting that also the expenses to expand to around 1.7% in ‘16. This is a material increase over the 1.3 you posted last year.
So, my question is in what segment are you expecting to see this material increase in provisions during this year? And then second question is a very simple one regarding the tax rate.
I’m facing a hard time to estimate your tax rate, what is the tax rate that you’re expecting for ‘16.
José Humberto Acosta
Thank you, Thiago. Regarding your first question, the cost of credit for 2015 was really 1.5; it came from 1.2, 1.3 that was in 2014.
And in which sectors we are taking some measures, basically on commercial loans. We are seeing namely on SMEs, some evolution and deterioration and obviously in some sectors as oil and gas transportation.
But we don’t have any particular strong data suggesting that the deterioration is in consumer. We believe that maybe on commercial loans, mostly, again SMEs and some corporate loans regarding some sectors.
The number will be increased in 20 bps, 1.5 to 1.7. And you have to take in consideration that we already had a huge provision last year of Conalvias that accounted COP 200 billion that was a very strong base to compare for this year.
Regarding your second question, at the beginning of this year, our expectations so far were effective tax rate were to be in the range of 23% to 25% in 2015. If you double check, the number would be at around 20%.
The reason why the taxation looks very low in the fourth quarter is because we made some provisions at the beginning of the year. But if you do the calculation for the entire year, it would be 20%.
What we expect this year, we expect that the taxation will be at around 26% to 28%.
Operator
Our next comes from Ernesto Gabilondo from Bank of America.
Ernesto Gabilondo
As we summarize your guidance, I got loan growth of 8%, cost of risk of 1.7%, fees growth of 10%, expenses growth of 7% to 8%, effective tax rate of 20%, ROE of 14%. And so, I just wanted to know is -- I am writing all those numbers and what we can expect in terms of the correlation of lending growth and the net interest income growth considering the assets re-pricing, and with all the assumptions, what we expect in terms of net income growth?
On my second question, can you share with us the Bank’s exposure to oil and gas? And finally, if may I, are your interested in the Citigroup credit [ph] sale in Colombia; how do you plan to finance that acquisition, considering the required capital; should we expect capital increase with a follow-on with that acquisition?
Thank you.
José Humberto Acosta
Thank you, Ernesto. Regarding your first recap about the guidance, we have only to make some corrections in terms of taxation.
The taxation that we expect for this year, that will be 26% to 28%, as I mentioned previously but the rest of the numbers are fine, 1.7 cost of credit; 6 to 8 loan growth; 10% fee growth; 14% return on equity. Those numbers are right.
Regarding your question exposure in oil and gas, remember that our exposure in oil and gas today is at around 0.8, 0.9 of our total loan portfolio plus companies related to sector which is transportation, logistics that implies another 70 bps. So, our exposure in oil and gas, it is in oil specifically will be at around 1.5% to 1.7%.
Regarding the question of capital, you see that we have enough cushion, to sustain the growth, expecting the loan growth 6 to 8 and expecting to be in the range of 8% to 9%. Again, at the first quarter we’ll be at the middle of the range.
And remember that the Bank is able to generate on-capital base on assumption that we distribute only one-third of our net profit. So, we don’t expect any particular increasing of capital.
On the DCM [ph] market, maybe we will do something for our international operation or something here in Colombia in the local currency. So, once we see an opportunity to get funding for DCM [ph] market, we will do it.
Ernesto Gabilondo
Do you need in-store [ph] sale in Colombia; is this something that should increase your capital or do a follow-on to that acquisition or it’s not something that you’re expecting right now?
José Humberto Acosta
Ernesto, we’re not contemplating acquisitions, we’re not contemplating any particular process in front of the Citibank opportunity. And again, we’re right now focusing our efforts in sustain the profitability; in maintaining the control for international operation.
Our managements are focusing basically on trying to improve operation there. You see our good performance in the last few years, which we go back again to the loan growth in Banistmo, we’re trying to improve every single business line in Banistmo.
Today, we’re focusing mostly in for profitability and maintaining the control on our subsidiaries.
Operator
Our next question comes from Tito Labarta from Deutsche Bank.
Tito Labarta
A couple of questions, first following up on provisions, I understand your guidance of 1.7%, cost of risk for this year. But I want to understand a little bit in the quarter, we saw provisions decline even though you had additional provisions related to Conalvias.
So, just, given the some deterioration you expect this year with the slowdown in growth, just wanted to understand why provisions, I think a bit low this quarter given that you have the additional provisions and you expect a big increase in 2016. So, you kind of reconcile the two there.
And in terms of -- with the slower growth that you expect this year, how much do you think NPLs [ph] could potentially deteriorate this year because of that? And then second question in terms of net interest margin, I understand it was impacted a bit by the currency.
So, given you expect further currency depreciation this year, could that offset the increase in rates; do you think you can get any margin expansion this year when you factor all those elements into that? Just want to get a bit more understanding of how your margin should evolve this year, given higher rates but also potential depreciation of the currency.
Thank you.
José Humberto Acosta
Thank you, Tito. Let’s begin with the second question, you are right.
We believe that because we’re asset sensitive, NII will increase because there is two upsides, the first one is we outlined in a better interest rates with yield is increasing; second because remember that 70% of our loan portfolio is floating in this year, and the other 20% related to inflation. So, we believe that we will be to increase a little bit in local currency.
What we expect in U.S. dollars, our expectation is at least to maintain the NIM in our international operations, which will be at around 4% from U.S.
dollar operation. So, the configuration of NII will be dependent on the volatility of FX every month.
But if you remember the first equation of Juan Pablo, we’re expected that to close at the end of this year at the level that we’re having today in terms of FX. So just to give you an answer, we are going to increase the NIM in local currency because the two FX that we mentioned at the beginning.
And the second one is we are contemplated to maintain the NIM in U.S. dollar basically because we have control and we have the currency in both sides of our international operations.
The other question is regarding cost of risk. Remember that BAM is affecting the financial statements but it’s not affecting the P&L.
So that’s the reason why it looks a lower level of provisions in the income statement, in the balance sheet. But at the end of the day, in the first quarter, you’ll see a better performance of NII and maybe you’ll see the optimum level of provisions for Banco Agromercantil.
So that’s the reason why we believe that 20 bps will be enough to absorb those potential extra provisions that we will have because of Banco Agromercantil. I have to highlight, Tito, that today in the Guatemalan operation, we have a level of provisions of 120% to date of deposit [ph] loans in Guatemala.
And remember that the Board of Directors in Guatemala have been composed for also management of the Bancolombia since we the announcement of the 40% stake. So, we’re adjusting state by state in Guatemala provision levels.
Tito Labarta
Okay. Thanks, that’s very helpful.
Just want to follow-up on the FX forecast for the year that you had mentioned 3,400 by year-end, so it does imply some depreciation from the current level today which is just above 3,100. Did I misunderstand that or…
José Humberto Acosta
That’s correct. But again, in our forecast, we assume almost -- remember that at the beginning of this year, in January we had 3,400 FX, so we’re having almost the same level.
Those are mainly volatile that we’ll explain every single quarter, what’s happening and how it will affect us. Remember that 41% of our assets today are in U.S.
dollar. So that will be very complex and we have to give you all the elements to understand how the volatility affecting NII and how the volatility will affect the efficiency ratio which is the two main [indiscernible]
Operator
Our next question is comes from Saúl Martínez from JP Morgan.
Saúl Martínez
Good morning, guys. Thank you for allowing me to ask a question.
First, I want to drill down a little bit on your view on the macro economy. Your economist sounded somewhat cautious, and that makes sense.
When I look at Colombia, there do seem to be a lot of macro imbalances; the current account deficit is very, very sizable. It doesn’t seem like aggregate demand has corrected yet to reflect that inflation is running high, you have monetary policy tightening, still negative real rates; fiscal dynamics are somewhat challenged and it doesn’t seem like we’ll get a tax reform until at least later this year.
You mentioned the downside, because there’s more downside risk to your base case but what probability do you see, even worse scenario playing out over the next couple of years, a harder lending scenario? Because if you take a step back and look at Colombia, you haven’t had a recession, I believe since the 1990s.
And it does seem like there are lot of macro imbalances that are affecting the economy. So, how do you sort of gauge the risk of a worse lending than what you’re expecting and including a sovereign downgrade?
What was not necessarily a hard lending scenario mean, but a downside case scenario, so the 1.8% real GDP growth mean, José Humberto, for your guidance for your outlook, how do you think about that scenario, what it would mean for your cost of risk, what would it mean for loan growth, how would you think about that?
José Humberto Acosta
Thank you, Saúl. I’ll jump to Juan Pablo to answer the first part of the question and then we’ll talk about the second part.
Juan Pablo Espinosa
Yes, sure. As we mentioned before, actually risks to economic activity are biased to the downside.
And in that sense with today’s information, I think that the likelihood of having the 1.8% growth scenario for this year is becoming more likely. But I would also say that basically what we think is that -- I mean if you compare the situation to previous ones, what we think is that, I mean we are not in -- I mean it’s not very likely to see a sharper deceleration but instead to have a long period of low growth, basically because first, the external shock that the economy has received has proved to be more prolonged than we expected before; and secondly, because we don’t see that there is a scope for countercyclical policies and/or monetary or fiscal side.
So, in that sense, the potential change in trend in growth that we could see in the future would be I mean more autonomous type of recovery which would be a rather mild one. And the second thing to mention is that -- I mean based on the current position of Colombian GDP actually the possibility of seeing a sharper slowdown than possibly negative growth will be contingent on the performance of consumer, first; and second, the performance of investment.
So the last time that Colombia had a recession, what we saw was a simultaneous reduction in both consumer and investment. And we actually think that -- I mean despite of the challenges, that type of scenario is not very likely right now.
What we do think is that I mean out of those two components, the most effective thing in the situation could be perhaps investment. But, we have to remember as well that going forward infrastructure projects will be very important factor behind that part of GDP.
Saúl Martínez
So, your view is that the most likely scenario that recession is unlikely but that the most likely scenario is that Colombia grows below potential GDP for a handful of years.
Juan Pablo Espinosa
Yes, this and perhaps next year as well.
José Humberto Acosta
Just to complement the answer of Juan Pablo aligned with Juan Pablo’s scenario, what we are seeing in our committees and our risk committees and our business committees is based on hearing from the industry, we didn’t see any huge deterioration. We see activity; we are seeing dispersion; people are moving.
Obviously people are cautious, people are trying to reduce the level of debt or they’re trying to reallocate it but we are not foreseeing any particular worst case scenario, Saúl. And when we decide a business plan at the beginning of the year, obviously the worst case scenario has had weight 15% to 20% of our total forecasting.
So of course, we contemplated the worst case but in a very-very-very low percentage. And again, if you go to the committees here in the Bank, you’ll see a very important activity and the companies are using the banking services, companies are taking loans, actually are taking local and U.S.
dollar loans because the FX, [indiscernible]
Saúl Martínez
Okay, that’s helpful. And just one just generalized comment, because it does -- and I mention it because it does matter for -- my cost of risk for ‘15 was the same as Thiago’s, it’s 1.3.
So, I mean I mentioned it because, and we can go over the details offline perhaps but going from 1.3 to 1.7 is very different than going from 1.5 to 1.7 in terms of the earnings impact it would have. So, maybe offline we can discuss that but it does -- I seem to have the same number as Thiago does.
Alejandro Mejia
Saúl, this is Alejandro. Remember something that the incorporation of BAM assets only affected the balance sheet.
So, when we calculate the average of risk loans is higher than the cost of provisions for the whole year. So that tends to underestimate the cost of risk.
If we isolate the impact of BAM, probably we’re reaching a level closer to 1.5% that’s why we mentioned that figure.
José Humberto Acosta
Exactly.
Saúl Martínez
All right, I’ll go over this with you, go over it offline because maybe I’ll have to look at how we -- honestly how we calculated the average because I think we’re not, I mean we’re probably giving a little bit too much weight to BAM, but even then, even if we don’t, I don’t think we get to 1.5 but I’ll go over this with you offline.
José Humberto Acosta
We will double check and we will go back with you Saúl and all of you there.
Operator
Thank you. Our next question comes from Jason Mollin from Scotiabank.
Jason Mollin
Hi, everyone. Thank you for taking my question, in fact I have two.
My first is just on the top down, you been talking about the slowdown in GDP in Colombia to this 2.6%, let’s say base case. What about with over a third of your assets in Central America, what are you looking for in El Salvador, Panama and Guatemala, and should you give us some color?
And particularly maybe you can relate that to the growth in loans coming from those markets out of this 6% to 8% guidance that you’re talking about for 2016? And my second question is how does Bancolombia assess or calculate its cost of equity in the current environment; what is kind of your hurdle rate for investments or putting your capital to work?
Thank you.
José Humberto Acosta
Okay. Thank you, Jason.
Yes, regarding the rest of the geographies in which we are -- when we talk about 6% to 8%, it goes out to wide range of growth in operational side. First, El Salvador, we’re expecting to a loan growth 3%.
If you remember that the economy has grown almost flat. In Guatemala, we are expecting 7% to 8% because there is activity in Guatemala because the proximity of Mexico.
And in Panama, we’re assessing that loan growth could be again another good year as the previous one that was 10%, this year we’re expecting 8% to 10% on loan growth for Banistmo. So, those are the combinations.
And plus Colombia gives us the comfort to talk about 6% to 8%, regarding your first question. Regarding your second question, the cost of equity today we’re calculating obviously based on different scenarios.
We’re talking about today at around 13% of cost to equity. And if you want to growth on these details, what we’re contemplating to this calculation, we can talk to you directly.
Operator
Our next question comes from Victor Galliano from Barclays.
Victor Galliano
I have a few follow-ups here. Just on the provisioning for Conalvias, I heard you still had a number of COP 170 billion.
I then heard you throw out another number answering one of the questions of COP 200 billion for provisions for Conalvias. Can you just clarify, which is the right number there.
And where are you in terms of the provisioning process there; is it all done in 2015? That’s my first question.
And my second question is about capital. So, you talked about 90 bps coming through to add into core equity Tier 1, following the approval of the accounts in March.
Is that retained earnings; or do we need deduct something from that 90 bps for dividends? That’s my second question.
And I do have a third question but I’ll let you deal with those two first.
José Humberto Acosta
Regarding Conalvias, let’s present some numbers. The total amount of capital of the loan was COP 260 billion.
In the third quarter, we announced a private provision because we want to prevent deterioration. So, we made a provision in the third quarter of COP 86 billion.
In the fourth quarter, we made the next provision of COP 117 billion. So, at the end of the year, the total provision out of COP 260 billion was COP 203 billion.
That’s the reason why we are talking of the fourth quarter a provisioning level of COP 117 billion but as a total including the whole year COP 203 billion.
Victor Galliano
And is that now do you expect to do some additional provisioning?
José Humberto Acosta
We expect to do some additional provisions and maybe at the end of the first quarter, we will have fully provisioned. The second point regarding the capital, the 90 bps that we will increase, those are retained -- goes to directly to legal reserves and it will be accounted as Q1.
Victor Galliano
What? Do you also disclose your fully loaded core equity Tier 1 or is that something we should discuss offline?
José Humberto Acosta
We can discuss offline.
Victor Galliano
Okay. And just very quickly on Central America.
You made some references earlier about Banistmo and that especially with regard to acquisitions, interest on acquisitions; clearly the focus now is to extract better returns from the acquisitions that you’ve made over the last 3 to 4 years. Can you give us a little bit more color around what you see in terms of those ROEs in those businesses, in particular in the case of Banistmo, where you’re -- where you were in 2015, and perhaps where you expect to be in 2016 a bit?
You’ve given us guidance on ROE overall of 14%?
José Humberto Acosta
Perfect, Victor. What happened in Banistmo is we replicated same risk criteria that we’re having in Colombia.
So, we’re right now very active of cooperating on those. The new challenge in the Banistmo operation is how to sustain the loan growth of 10% that I mentioned previously and the challenge is how to fund it.
So, we have to use some different funding resource, different retail business, so that’s the reason why we closed the deal a year ago of a syndicated loan of $300 million. And also we put in place a new facility from international banks of at around $1 billion, and that was at the end of 2014.
So, the challenge is if we want to maintain that growth, we have to touch international market in order to provide funding. What we are doing also in terms of the efficiency level, remember that we have our brand new systems IT platform, and we’re right now developing new products with add value services than we believe that from the retail business we’ll increase the level of income.
And we believe that our pace of growth in the corporate loans also that give us the comfort to increase the NII. So, as I mentioned, we expect to increase the return on equity for the next coming two to three years at least to the level of 13% to 14% of return on equity, based on those considerations.
Support it, maintain the loan growth and moving to new products and increase the level of services that we have in Panama.
Victor Galliano
Okay. So, where was the ROE in 2015?
José Humberto Acosta
10%.
Victor Galliano
10%? Thank you very much.
Operator
We have a question from Natalia Casas from Ultraserfinco.
Natalia Casas
Hi. Thank you for the conference.
I’d just like to know a little bit more about the efficiency ratio. You just mentioned that the FX depreciation makes pressure on the efficiency ratio.
So, I’d like to know what are you going to do to improve this ratio in this year, because you’re expecting 8% peso depreciation for 2016 and you already have been promising for like two or three years an efficiency ratio around 50%. So, I’d like to know what are you going to do this year to achieve this guidance or what should we expect about it?
José Humberto Acosta
Thank you, Natalia for the questions. When we talk about the expenses, remember that we divide this into two tracks, the first one is what’s happening with U.S.
dollar is not under our control. And remember that 41% of our total expenses are denominated in U.S.
dollars. Not only the expenses, cost of the operation, also some expenses locally tied or related to FX.
So, that will be very complex to maintain control on this model, I mean FX. What we’re doing, and that’s the reason why we explained the second track is what we’re doing in terms of growth in each geography.
In the case of Bancolombia, we’ve been able to maintain cost under control and the big effort we’re focused here in Colombia and it’s happening and the number looks very, very solid in terms of efficiency. The Colombian self operation is local currency.
And what we’re doing in the other geographies is doing exactly the same that we’re doing in Colombia, implementing for example PMO, [ph] reducing the level of projects, maintain labor cost almost closely, different measures we have been very successful here in Colombia. Now we’re in the second stage implementing those measures cross border.
Natalia Casas
So, 2016 will be the year to achieve the guidance like to achieve like the 50% number, right?
José Humberto Acosta
52%, if we don’t see any particular big change on FX, again based on the assumptions that at the end of this year, we’ll have the rate of 3,400 U.S. dollar, we’ll be able to reach that level, 52%.
Operator
Our next question comes from Carlos Anaya [ph] from [indiscernible]
Unidentified Analyst
Good morning. Thank you for the opportunity.
I’d like to ask, given that you have proved an increase in authorized capital, would you -- how likely would you consider to be a new IPO for this year, given that you are not looking into any acquisitions and that you are looking into an increasing 90 basis points in Tier 1? I’d just like to know, if you have any plans of making any new issuances in this year?
José Humberto Acosta
Thank you, Carlos. As we made an explicit announcement, two months ago and relevant information announcing and telling to the investors we are not contemplated to go to the capital markets to raise equity.
And the only one purpose of that general and extraordinary assembly was put in place some corporate governance rules. And we took the momentum and took the advantage to put an authorization to increase the capital level.
But that was only the point to get an authorization. Remember that Bank usually wants to have clear hands to work, if the market conditions were optimistic.
But today, gain, it’s not contemplated and we don’t have any particular issue into the Bank in which we believe that the level of capital would drop. Again for 2016, the Bank is not contemplated to such the market, I mean the equity market.
José Humberto Acosta
Okay. Thank you very much for attending the conference call.
We hope to see you next conference that would take place in three months. Thank you, everyone; have a very good day.
Operator
Thank you. Ladies and gentlemen, this concludes today’s conference.
Thank you for participating. You may now disconnect.