May 24, 2016
Executives
Juan Carlos Mora - Chief Executive Officer José Humberto Acosta - Chief Financial Officer Juan Pablo Espinosa - Chief Economist
Analysts
Carlos Macedo - Goldman Sachs Thiago Batista - ITAÚ BBA Nicolás Riva - Citi Ernesto Gabilondo - Bank of America Merrill Lynch Alonso Garcia - Credit Suisse Victor Galliano - Barclays Carlos Gómez - HSBC New York
Operator
Good morning, ladies and gentlemen. And welcome to Bancolombia’s First Quarter 2016 Earnings Conference Call.
My name is Sylvia 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. Juan Carlos Mora, Chief Executive Officer; 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 would like to turn the call presentation over to Mr.
Acosta, Chief Financial Officer of Bancolombia. Please proceed, sir.
José Humberto Acosta
Thank you. Good morning and welcome to our results conference call for the first quarter of this year.
It is a pleasure to be with you all who follow Bancolombia so closely. Before starting with the main topics related to the bank results, I would like to introduce you to Mr.
Juan Carlos Mora, Bancolombia’s new CEO. As you know, Mr.
Mora was appointed Chief Executive Officer of Bancolombia and took office on May 2nd. He has spent the last 25 years of professional carrier at the banks, starting in corporate banking and then leading investment banking division; then assuming the role of Chief Risk Officer and Chief Operations and Technology Officer.
Last year, Mr. Mora was appointed Chief Innovation Officer with the mandate of leading the Digital Transformation of the bank and accelerated implementation of digital banking platforms, which will pave the way for the Bancolombia of the future.
Now, I would like to turn the presentation to Mr. Mora, who will elaborate on some topics relevant to the business.
Mr. Mora?
Juan Carlos Mora
Thank you, José Humberto. Good morning, everyone.
It’s an honor to be here with you today to share some of the recent developments at the bank as well as key strategic objectives as we look forward. In recent years, Bancolombia has grown significantly and it has become a major regional player with presence mainly in Colombia, Panama, El Salvador and Guatemala.
That evolution has created a unique platform to provide financial services of all level of complexity to all types of clients and industries. Bancolombia as a participant in the financial services industry faces many challenges.
Digitalization has changed the way individuals and corporations deal with their cash management, financing and savings or investment needs. And banks are operating in an environment where competition, regulation and then need for value creation present many challenges.
These situations force banks to adopt quickly and also to be closer to clients who are more and more demand in terms of service, channels and products. At the same time, regulatory constraints and need to optimize capital, forces us to permanently assess our strategy, making sure that the business remains sustainable and profitable.
With that in mind, we plan to address several issues. The foremost representatives are: First, our focus on profitability.
All that we do must be reflected in long-term profitability and value creation. I firmly believe that the conditions combined Bancolombia's business case will allow us to achieve gross ROE of 16% in the mid-term.
During this presentation, you will see very good operational results, solid margins, funding cost under control, good performance of fees, product of better and more capillary channels across their regions where we operate. Second, we believe that the value of the Bancolombia's franchise and the coverage network, both physical and electronic is unique to compete and create value.
These two factors allow us to have the largest market share in Colombia, the lowest cost and more sustainable funding base and to process almost half of transactions that occur in Colombia. Our goal is to continue developing these strategies that lead to that monetization of business trends and to grow revenues at the faster pace than the expenses required to generate those revenues.
Third, unrelated to the challenges that I mentioned earlier, innovation plays a key role in Bancolombia’s sustainability and profitability. Developing new ways and challenges to deliver our services to existing and new clients is part of our strategic initiatives.
This is a network related directly to efficiency gains. The ultimate goal is to grow revenues with little or zero marginal cost.
We have invested heavily in technology over the last six years and that effort is paying off as the fastest growing channels today are electronic and mobile. Additionally, digital banking is the best way to tap the markets where 50% of the GDP and the labor force is informal and where four out of five people do not have a credit product.
Finally, on the capital front, we strongly believe that the Colombian regulatory front is stranded and conservative. We understand that banks today require higher levels of capital as compared to those before 2008 financial crisis.
But, even as important as the core capital ratios is the way Bancolombia allocates its capital. We reaffirm our strategy to focus on our core business, which is intermediation on financial services.
Let’s remember that today Bancolombia does not generate a significant source of revenue from proprietary trading activities. With this in mind, we can reassure you that we feel comfortable with the today's capital levels, which are above two times than minimal regulatory requirements.
We intend to keep the Tier 1 capital ratio of Bancolombia above 8%, which will allow the bank to operate in the environments that we have forecasted for the future years. Next, I'd like to continue with the presentation of Bancolombia's financial results for the first quarter of this year.
Now, I'll turn the presentation over to José Humberto, who will elaborate on the main topics that impacted our business in this period. José?
José Humberto Acosta
Thank you, Juan. You can follow the slide presentation available at our Investor Relations website.
Moving on to the first quarter results of this year, I'd like to highlight the following facts. As you know, 21% growth of the bank loan portfolio over the last 12 months was driven by credit demand in Colombia and the consolidation of Banco Agromercantil of Guatemala at the end of last year.
This is a positive fact that despite that deceleration in the Colombian economy, the loan portfolio continues to grow. The performance of the net interest margins, which finally present a clear signal of expansion and of course a positive impact of the net interest income.
NII grew 30% in the last year, way faster than the growth of the loan portfolio. This is a very positive part that reflects the efforts to maintain the funding cost low, improvement in spreads on the new loans and the asset sensitive nature of our balance sheet.
Fees also performed very well, as it grew 19% as compared with the first quarter of last year. In particular, we see the promotion of debit and credit card as methods of payment and the distribution of insurance to our branches as a very efficient way to continue growing fees.
During the quarter, we saw a significant increase in the level of provision charges. This is partially explained by the runoff of some existing past due loans, plus the formation of new ones, which tends to be faster in the first quarter every year.
Finally, we saw a significant increase in the income taxes; this is explained by the differences between tax and financial accounting in Colombia. We'll elaborate more about these in the next coming slide.
Slide number three summarizes the performance of the bank. We are very happy with the good operational performance of the bank since income before taxes grew 8% year-over-year.
This performance is explained by the expansion of the margins, loan growth and solid fee performance. Nevertheless, we have been attracting the provision charges; we have increased about 80% year-over-year.
Net income fell 39% over the quarter. Clearly the divergence between income before and after-taxes is explained by the higher income tax of COP 551 billion.
Now to dive into the income taxes line, it can be summarized as follows. For fiscal purposes, investment in subsidiaries denominated in U.S.
dollars and not converted to Colombian pesos in the balance sheet. Meanwhile, the U.S.
denominated liabilities that from these investments are restated to Colombian pesos. Last year, the depreciation of the peso led to fiscal accounting losses due to the conversion of our U.S.
dollar denominated liabilities into Colombian pesos, therefore lowering the tax base; that’s what that happened last year. This quarter however, the exact opposite took place.
The peso appreciated 5%, which decreased the level of U.S. dollar denominated liabilities when converted into Colombian pesos, thus increasing our taxable income.
IFRS reporting standards subject to our U.S. denominated liabilities to higher or lower risk payments [ph] and tax based on the FX rate.
This can be positively or negatively impact our business. And we must keep in mind that the FX rate is variable.
[Ph] The difference between tax accounting and financial accounting made the effective tax rate higher in the first quarter of this year, after a year of rather low effective tax rate. Lean [ph] and other perspectives, it is necessary to view the marginal performance of taxes.
In the first quarter of last year, we paid COP 258 billion while in this quarter, we pay COP 551 billion. That is an increase of COP 293 billion.
This marginal increase is explained by the fact that the peso depreciated versus the U.S. dollar in the first quarter of last year and appreciated this quarter.
We also paid the wealth tax this quarter, which amounted at around COP 145 billion, slightly lower than the last year. And we will pay the last installment of this tax next year.
Let’s remember that in 2015, we paid COP 160 billion in wealth tax. Now, we’d like to continue with the brief discussion about the economic environment.
For this purpose, we have Juan Pablo Espinosa, Bancolombia’s Chief Economist, who will elaborate more on these matters. 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.
Leading indicators suggest that at the start of this year, the Colombian economy continued the process of soft landing. In terms of economic activity after expanding 3.3% during 4Q ‘15, we forecasted in 1Q ‘16 GDP growth was 3.2%.
This pace of growth reflects the resilience of product consumption and a less negative contribution of net exports, which compensate the weak performance of investment. However, we expect that during the remainder of the year, the pace of growth will moderate as internal demand suggests to higher interest rates, low consumer confidence and a less rosy labor market.
Hence, we keep our 2.6% growth forecast for the whole year. Regarding prices, during the first month of the year, the trend of higher inflation consolidated.
So in March, 12-month rate [ph] was 7.98%, the highest in a decade and well above the ceiling of the central bank’s target range. But as the year passes and the economy grows, [ph] we’ll expect that price pressures will lose steam from a maximum adjustable pay percent in the short-term, we foresee that inflation will close this year at 5.4%.
Moreover, our monetary policy call is that the current tightening cycle will come to an end soon with the maximum repo rate of 7.5%. In terms of the external sector, during the past months, we have seen a mild adjustment of the current account deficit due to our reduction of inputs.
We forecast that current account deficit will adjust from 6.4% of GDP in 2015 to 5.5% of GDP in 2016. In addition, our view for the Colombian peso remains bearish.
In fact, our average USDCOP forecast for the year is 3180. In the fiscal front, the 0.7% of GDP budget cut announced a few months ago has dissipated short-term risks on central government’s finances.
Despite this, in order to comply with the fiscal run rate in the medium term, the government will need to implement comprehensive reforms. In this regard, a key development will be the discussion of a structural tax reform, which according to the Ministry of Finance will take place in the second half of the year.
Let me conclude this section by saying that so far the country has managed to adjust orderly to global headwinds. Going forward, growth will accelerate further and external and fiscal challenges will still be acute.
Against this backdrop, our resilient internal market and adequate policy response will allow Colombia to remain one of the best performing major Latin American economies. After this overview of the economic context, let me turn the presentation to José Humberto, who will discuss the bank’s results.
José Humberto Acosta
Thank you, Juan Pablo. On the next slide, we see the evolution of assets and their composition.
We see the evolution of assets in a very positive way. The growth part is sustained although moderating the pace in recent months.
Most importantly, we are very comfortable with the allocation that we have today, which as you can see, is mainly focused in the lending business. Total assets increased 22% over the last 12 months and incorporation of Banco Agromercantil loans portfolio experience 6.4% of this growth.
However, during the first quarter, the peso appreciated against the dollar which contributed to a quarter-over-quarter decline in the total net loan portfolio. Some important facts about Colombia's assets and loan portfolio.
To-date, peso denominated assets represents 61% of the total assets of Bancolombia while dollar denominated represents 39%. As mentioned before, the Colombian peso appreciated 4.7% against the U.S.
dollar during the first quarter. Loans outside Colombia represent 37%.
All the products are growing in line with our expectations. The average deal to maturity for the engagement portfolio is 6.8%, and we continue to maintain structural debt portfolio, primarily for liquidity management.
Also the duration of the securities portfolio continues to drop and is very low at a level of 17.1 months, which minimizes risk 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 portfolio in Colombian pesos decreased 0.5% during the quarter affected by the FX rate we just mentioned and by the moderation of in credit demand. The loan portfolio is growing less than we saw last year in 2015, which is perfectly in line with our risk and credit standards, since the Colombian economy will not be growing above 3%, which was the case last year.
Nevertheless, we start to perceive opportunities in some sectors of the economy such as our manufacturing, building [ph] and infrastructure. Many of these sectors have been positively impacted by the weak peso.
That is why we are slightly increasing our growth forecast of the loan portfolio to 10% this year. Originally, we designed a forecast of 8%; now, we are moving to 10%.
We still focus our growth in the less risky products, as we want to maintain a healthy balance sheet. It is also important to mention that Bancolombia's balance sheet is matched in terms of currency, which reduced impacts of FX variations on the shareholders’ equity.
Last but not least, we want to highlight the fact that it’s very important to understand our view on capital that is a high regulatory capital consumption of all our assets. The proportion of risk weighted assets with that market risk to total assets is 88%, a ratio that is very high but also gives us comfort because the risk weightings a very conservative in the Colombia's regulatory framework.
Now, on the slide number six, we present a snapshot of the credit quality at the end of the quarter. In general, we saw an expected deterioration in the quality of the loan portfolio and the coverage ratio.
It is not a matter of where it’s right now. Essentially [ph] it is something that we monitor permanently because we want to make sure that NPLs are under control and we do not get negative surprises.
The 30-day past due loans to total loans came at a level of 3.3%, above the 3% we had in the previous quarter. Also, the coverage ratio dropped to 106% from the last quarter levels of 115%.
This quarter, we finished the provision of Conalvias, making a small COP 30 billion bend in our P&L. We forecast to have a 30-day coverage ratio ranging from 110% to a 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 between 3% to 3.5% of gross loans. This forecast includes any foreseeable deterioration of corporate clients.
At the bottom of the table, we compare 30-day past due loans, is the Colombian standard and 90-day past due loans, which is a better indicator of credit quality as we have significant portion of our assets in countries that use that standard. 90-day past due loans have been very stable over the last two years.
However, they were slightly affected because during this quarter, not surprisingly, it is more challenging -- in this more challenging credit environment. They represent 2% of gross loans as of December 2015 with the coverage ratio of 192%.
The reason why the coverage ratio is dropping in this quarter is basically because the IFRS standards. When that credit is past due and it has warranty behind that, we don't have to have the same level of provisions that we used to have.
The level of coverage that we are having right now is because of IFRS and because of regulation. Slide number seven shows the provision charges, which were COP 537 billion during the quarter.
They represent 1.5% 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, which is impacted by seasonal factors.
The COP 810 billion new past due loans represent an increase as compared to those in the 4Q last year and are mainly represented by retail loans and SMEs. Furthermore, total past due loans totaled COP 4,646 billion.
Besides a few specific corporate planning situations, we feel comfortable with evolution of the loan portfolio and forecast provision charges to be around approximately 1.6% to 1.7% of gross loans during this year. This is the guidance that we have been maintaining, which is cost of credit could be at around 1.5% to 1.7%.
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 on a slower pace; the Central Bank is tightening 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 we emphasized in the last conference call, we are taking all the necessary measures to prevent any negative impact in the coming quarters.
In today's market, it is preferable to grow less in order to prevent a faster 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.
This is perhaps the most positive trend in our business because over the last 12 months we have been able to grow NII much faster than the volumes of loans and as a result the operating income of the bank has grown steadily as well. This is a combined effort in two fronts.
First, optimizing funding terms and structure in order to keep cost as low as possible; and second, pricing loans at higher spread. NII for this quarter was COP 2.3 trillion, 30% greater than the same quarter of the previous year, mostly driven by higher loan volumes, which grew 21% over the last year, higher spread on loan originations, depreciation of the Colombian pesos versus U.S.
dollar, 15% last 12 months, the 114 basis points increase in DTS [ph], which is the benchmark rate that we use to price a significant portion of our loans, and as a result an improvement of net interest income. Bancolombia's funding cost was pressured upwards, mainly by higher cost on long-term debt and also by the Central Bank interest rate hikes and a tighter liquidity environment, which is explored competition with other banks, driving [indiscernible] this year.
The total funding cost increased by 36 basis points during the quarter, while the Central Bank's reference rate increased 75 basis points and the DTS [ph] increased 114 basis points. These increases exemplified one of the Bancolombia's competitive advantage, which is a fact that about half of our deposits in our operation in Colombia are not sensitive to the interest rate.
And therefore, our funding cost was significantly less than the Central Bank's rate. On the other hand, a larger proportion of loans were priced with higher rates, and the NII and NIM grow as a result of that dynamic.
During this year, we have focused our efforts not only keeping the funding cost as low as possible but also increasing the average time to maturity of the stock of liabilities, in particular, time deposits and long-term debt. Nevertheless, during the first quarter, most of the pressure was on time deposits as we have to recognize a higher interest on new CDs, as you can see with cost of deposits rising 32 basis points.
The trend in interest rate hike, increasing funding cost and NIM expansion that we have seen in recent months should stabilize in the second half of this year, as we believe that we have captured a significant portion of the benefits already. Our goal is to keep funding cost as low as possible, which 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 the NII.
We have in our favor, the before mentioned, asset sensitive condition of our balance sheet, which is beneficial for margins. Turning to page on slide number nine, we show the net interest income.
During the first quarter, we saw substantial improvement in the reported net interest margin at 5.7%, 60 basis points above the last quarter, explained by both, the investments net interest margin and the loans net interest margin. In particular, three main factors positively impacted the investments NIM during the quarter.
First, the appreciation of the Colombia peso [ph] and some other securities, even though the investment portfolio is only 8% of total assets; second, investment flows, mainly from international players entering the Colombia fixed income market; and third, more clients demanding structural projects for hedging purposes such as affect FX swaps, options et cetera. In the lending business, we have to link the stronger names to asset sensitive condition of the balance sheet and to the higher spreads of new originations.
The Central Bank will slightly hike another 25 bps in the near-term in order to control inflation expectations. The rise in rates is a good predictor of higher NIM, as we continue move through the year.
Although, as we mentioned in the previous slide, we believe that most of the lending NIM expansion already occurred in the first three months of this year. A breakdown analysis of fees is presented on the slide number 10.
Fees are another front where we were successful with the recent results. As Mr.
Mora mentioned at the beginning of the presentation, we are monetizing the competitive advantages that Bancolombia has, number of clients, channels, products and market share. During the first quarter, net fees increased by 10% compared to the last quarter, due to the lower expenses related to the credit card loyalty programs.
Banco Agromercantil bank contributed to a 2.6% of the fee growth. Electronic services and ATM debit and credit card fees were a key driver of fees during the quarter.
We are experiencing sustaining growth in cards and users in Colombia due to rising wages and also the promotion of this as a method of paying. We continue to see more credit and debit card transactions, as a result of our commitment to promote the use of cards for in-store transactions.
In addition, we are tapping into new business segments when it comes to promoting and introducing numerous benefits and customer reward initiatives. Today, Bancolombia has 19% number of plastics [ph] in the credit card market and 33% in debit card market.
Also the bank has 25% market share of billings in credit cards and 44% in debt cards. This creates an enormous opportunity, because the plastic usage is not only [indiscernible] source of efficiency.
Banking services and asset management also are major contributor for fee growth during the quarter as well as an asset management. In addition, we saw a sustained performance of insurance distribution fees, which generated COP 72 billion during the first quarter and grew 35% year-over-year.
Fees presented today 29% of total revenues, which is a good share since these are transactions that do not require a significant amount of capital compared to the lending business. Our non-banking corresponding channel is steadily growing as we find new, cheaper ways to bring banking to Colombia’s most underpenetrated geographies and client segments.
Today, we have more than 6,000 of them. Finally, we forecast a fee growth of around 8% to 10% for this year.
In slide 11, we present evolution of expenses. Total operating expenses grew 24% year-over-year or COP 347 billion.
When analyzing this growth in margin terms, we find that the consolidation of BAM at the end of 2015 represented 45% of the increase. In other words, excluding BAM, the growth would have been at around 13%, which is also updated by the depreciation of the Colombian peso against the U.S.
dollar over the last year. The depreciation of the U.S.
dollar in the last 12 months accounted 15%. And proportion of expenses in U.S.
dollar of BAM [ph] is around 14%. Operating expenses consist primarily of personnel expenses and administrative expenses, which have been kept under control in their respective currencies.
Let’s remember the seasonal performance of these items, which causes them to grow more slowly in the first quarter of the year. To-date Bancolombia’s oriented towers, developing low cost channels based on technological innovation and optimal customer segmentation, as we try to grow expenses in line with nominal GDP.
Our guidance for this year is an increase of expenses ranging from 8% to 10%, which we believe will be the key to obtaining the strong profitability levels. Moving to slide number 12, we see the evolution of the net loans to deposit ratio, which ended the quarter at a level of 114%.
This ratio has become relatively stable over the last year and is a level where we feel comfortable. The proportion of loans that we do not fund with deposits is funded with long-term debt in order to have a similar duration of both sides of the balance sheet.
This strategy reduces the volatility in 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 114% is a level that gives us comfort about the liquidity position of the bank.
Regarding capital, at the bottom right hand side, we show the capital adequacy ratio. The Tier 1 ended at the level of 8.2%, 370 basis points above the regulatory minimum of 4.5%.
The capital levels that Bancolombia presents today are optimal for the business plan that we have design, in particular we identify four factors to support our business. First, the Colombian regulatory is very conservative and the risk weighting of assets is very high.
That's why a minimum Tier 1 to operate in Colombia is 4.5%, which is looks low compared to other regulations. Remember that risk weighted assets plus market risk are 88% of our total assets.
Nevertheless, Bancolombia is well above the regulatory capital levels and the fact gives us comfort. Secondly, the simple leverage of Bancolombia is very low; the ratio of assets to equity is only 10 times.
So, in general terms, our balance sheet presents the greatest comforting of equity that banks [indiscernible]. Third, when we run our model to estimate economic capital required to operate a bank with the asset composition that we have and the risk parameters that we’ve planned in our model, we find that the requirement is to have a Tier 1 of 4.4%, which is very similar to regulatory requirements.
So, we can say that we run the business without 400 -- with about 400 basis points of capital above the level that we believe is required from economic standpoint. Finally, given the business cycle that we are going through today, we do not see the need to have more capital.
The credit growth for capital this year is very moderate and we will organically originate capital to achieve that growth. We do not plan to post more M&A opportunities in the coming years as we are focusing optimization of our operations in [Indiscernible].
As we have said before, we look to operate the bank at optimal level of Tier 1 ranging from 8% to 9%. For the Tier 1 ratio, we ended the first quarter of this year with 4.8% for the total BIS ratio of 13%, above the regulatory threshold of 9%.
The slide number 13 shows the return on assets and return on equity of the Bank. The return on equity of the quarter was 8.1% and return on asset was 0.8%.
Return on equity was significantly affected by the 56% of effective tax rate for the first quarter by the wealth tax as well as the higher provision charges. We do not see this quarter as a good proxy of the performance of the Bank and prefer to focus on the income before taxes, which is not impacted by the gap between fiscal and financial accounting and therefore a higher effective tax rate.
We expect to continue a growing net income although at a modular pace, while maintaining solid solvency indicators for the rest of the year and improving profitability. Our target of return on equity for this year will be 13% to 14% while the medium term target will be 16%.
After presenting these results to you, I wish to reaffirm two main goals for the future, first, our focus on profitability. This will come from a combined effect of growing of our lending business and sustain a development of our long portfolio services.
The lending business should benefit from higher volumes and better margins as well as an optimal diversification and a risk management criterion, which is a key during the next coming quarters. Second, our focus on efficiency.
This is a necessary and mandatory condition to sustainability and profitability. Our efforts in digital transformation increased capabilities of our channel, and project optimizations will contribute to this initiative and will permit the business to continue delivering value our shareholders.
After presenting these slides and discussing our first quarter results, I would like to invite our audience to ask any questions you might have and we are glad to take it from there.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] Our first question comes from Carlos Macedo from Goldman Sachs.
Carlos Macedo
Couple of questions; first on the tax rate because as you mentioned, it was a little bit -- or significantly higher than what we've been seeing and the currency contributed. Is there any kind of visibility that you can give for the tax rate this year?
Of course if the peso continues to gain value, the tax rate will be higher. Is there a rule of thumb, every 5% [ph] value, the effective tax rate is 100 basis points.
Anything you can give us guidance in order for us to better forecast your bottom line. Second question, you mentioned that margins are probably reflected all that they will, at least the lending margins with the increase in rates that your credit costs -- the cost of risk is 1.5% for this quarter; it’s probably at the low end of your guidance for the year, which means it's going up that with the economy still growing, but not at a very fast pace that loan growth will probably not accelerate from credit levels, if anything decelerate.
Excluding the tax, you probably did around a 15% ROE this quarter, should that be -- would that be a good level for the remaining of the year? I mean, given all this pressure, is that something that we should expect going forward or is 15% a little bit too strong?
José Humberto Acosta
Regarding your first question, I have to highlight one specific thing, we are not talking about tax rate, we are talking about provisions of tax that would be at the end of the year based on the FX of the last day of the year. So, this is only a provisioning and we will expect to have a certain level of volatility.
And just to give an idea, as we close the year at the same level of FX that we're having today, at the end of the day nothing will happen because at the beginning of the year FX rate was 3150, and as you heard from our Chief Economist, we expect kind of same FX rate. So, excluding that effect that obviously implies volatility, our tax could be at around 30%, 32% at the end of this year, excluding the effect of variation of FX.
Carlos Macedo
Okay.
José Humberto Acosta
Regarding your second question, yes, we believe that a kind of deterioration will come because you see the numbers, the growth of GDP is below as expected, maybe a little bit of unemployment rate, interest rate is going up. So that's the reason why we are keeping in mind that 20 bps extra for the next coming three quarters.
So again, we continue our guidance in terms of cost of credit. We believe that today, it is 1.5% in a very orthodox way.
We expect to close this year at a level of 1.7%. But again, as I mentioned during the presentation, our restructuring [ph] and we are now tightening [ph] the standards in order to prevent any potential deterioration.
That deterioration as you saw basically is on SMEs and usually these kinds of companies are very impacted and very sensitive for FX variations and some buckets of the population in terms of consumer but nothing relevant or material in terms of deterioration.
Operator
Our next question comes from Thiago Batista from ITAÚ BBA.
Thiago Batista
I have two questions, the first one, Mr. Mora commented at the beginning of the call that the revenues tend to expand at faster pace than expenses in the coming years.
Do you believe that the main highlight of the revenues will come from the margins or from the NII or from the fees? You mentioned that the fees already achieved 20% of your total revenues.
How much do you imagine that this should achieve in the medium term? And my second question is about asset quality, especially on the corporate or the company segment.
We saw some deterioration in this portfolio in the first Q, how much more do you believe that your PDL ratio should expand, especially in the corporate segment?
José Humberto Acosta
Regarding your first question, the NII, the strong of the NII or the support of the NII for the next coming three quarters will come basically from the lending business. If you double check the presentation, the NIMs there are very positive.
And the fee growth, again, as you mentioned, the growth 18% this year's the guidance, for us this year could be at around 10%. So, three-fourth of the total NII will come from the lending business and 25% will come from the fee income business.
And the fee income business basically is supporting in the level of constructions [ph] and also based on the assumption that we will ask for more fees for our clients. So, the level of transactions is growing at a very good pace.
So, that's the way we designed the NII for the year. And as the marginal point of view, the 8% of the securities would support in some quarters because of the volatility, for example, this quarter it helped us with 3% NIM.
And remember that two quarters, the previous, the last quarter of last year was 0% of NIM. So that depends on volatility.
Regarding your second question, the deterioration in corporate are very, very unique; I mean there is some specification, we don’t foresee any kind of deterioration as advantageous, because corporate loans and commercial loans in Colombia, for example, to give an in terms of U.S. dollar, they have a natural protection because they are exporters, so they have protection.
So, we don’t see any specific deterioration. And in our operations outside in Central America, which means Guatemala, El Salvador and Panama, we don’t foresee any potential deterioration as a trend; always you will see and especially this case.
And if you ask us about oil industry and regarding the industry related to oil, we have only an exposure of 1.4% of our total loan portfolio in those industries. So, we don’t expect the major deterioration.
Juan Carlos Mora
Let me complement a little bit José Humberto; this is Juan Mora. And regarding your first question, we firmly believe that we need to work hard on expenses.
So, when I say that we believe that income will grow faster than expenses means that we are working on both sides, but certainly believe that we have work to do on expenses and the bank to be more efficient. So, it’s both sides as José Humberto mentioned; we expect fees to grow since we have been working heavily on new products, and also the mix in our loan portfolio moving to segments with higher profitability, while working on risk and also our firm commitment keep working on expenses.
José Humberto Acosta
To complement what Juan said, one of our main goals is to reach a level of efficiency at around 50% in the next coming two years. Obviously when you see our numbers, 40% of our expenses are related to FX.
So, the impact of the evaluation or appreciation of the currency will put some volatility in our company.
Operator
Our next question comes from Nicolás Riva from Citi.
Nicolás Riva
Yes. Thanks, José Humberto.
My question is I’m going to go back to capital. So, your Tier 1 ratio did increase 70 basis points quarter-on-quarter this quarter, as you capitalize the return earnings from last year.
However, this increase was slightly below your guidance of about 100 basis points increase; we’re expecting to be at about 8.5%. I know also, you’re not going to be capitalizing earnings for the next three quarters.
But you will grow your assets and know you’re guiding for 10% loan growth this year and probably your risk weighted assets could grow in line with that. So that means that by the end of this year, your Tier 1 ratio could be very close to the 8% or below that, which is the minimum of the range that you think you feel comfortable without issuing equity.
So what makes you confident that you will still not need to raise equity? And also something specific on this?
Right now, the minim Tier 1 ratio in Colombia’s 4.5%. However, Colombia still not in Basel III.
Is there a timeline in which Colombia is going to Basel III requirement and in that case is Colombia expected to impose additional capital requirements, which means that the minimum probably is not going to be 4.5% but higher than this? And then my second question on loan loss provisions, if you can repeat the number of provisions you booked for Conalvias this quarter and if you expect now to be fully covered your exposure to the Company?
José Humberto Acosta
Regarding your first question, our guidance originally was, yes, to increase our level of Q1 of 100 basis points after our generally assembly. But, if you double check, the growth, the loan growth is better than expected.
So that consumes far of the capital that we talk at the beginning of the process. Our guidance originally was to grow 6% to 8% loan portfolio and we’re seeing a strong growth going.
So that was first reason. The second one question regarding what would happen [ph] with the capital in the Q1 during the year.
Yes, the level of capital will drop, once the loan growth appears. But remember that to understand what happens with the Colombian banking regulation is there will be a jump of Q1 every March, once the general assembly took place.
So, we see the number below 8% last December; you will see the number below 8% this December. But again, you see the number above 8% on March based on the dividend payout.
So, again, this is kind of floating goal, but at the end on average, the level of capital will be at a level of Tier 1. Regarding your second question, yes, we have fully covered the Conalvias.
We believe that we have the coverage that is comfortable for the processing, which we are right now. And we think it was COP 30 billion for Conalvias?
COP 30 billion, that for the last portion. We did provision of Conalvias in three different tranches.
In the third quarter of last year, the big tranche, one in the last quarter of last year and the remaining portion was this quarter.
Operator
And next question comes from Ernesto Gabilondo from Bank of America Merrill Lynch.
Ernesto Gabilondo
Can you share with us, what are you hearing regarding the new tax reform, like there won’t be an increase in the value added tax in some government cuts? So, considering this impact and a tighter cycle insight goal to continue, are you comfortable with your expectations for a GDP growth of 2.6% for the year?
And my second question is related to the net interest margin expansion. Could you share with us how much have you re-priced loans and do you have a sensibility of how much Bancolombia's net interest margin benefit from an increasing interest rates?
And lastly, in terms of your expenses growth guidance, what are the measures behind to improve the cost to income level; can you give us more color on your process optimization?
Juan Pablo Espinosa
I can maybe speak about the tax reform proposal. Well, basically what we have today is a series of recommendations by several commissions that have been analyzing the Colombian tax structure.
However, these recommendations are not mandatory for the government. Actually the government is working at this moment on a proposal.
So, at this moment, we don’t know the details of such proposal because that would be something would be present into congress by July. What we would expect from that reform is or basically the goals of that reform would be two-fold: First, increase the tax revenues by around 2% of GDP, but secondly, to adjust the fiscal -- I mean the tax efforts by the agents in the economy.
So, there is a consensus in the country that especially the tax rate paid by corporations need to be revised. So, we would hope to expect those types of elements in the reform.
But, as I mentioned, it is too early to be very specific on that. And because of that precisely, we do not include any type of tax effect on our growth forecast because we’d like to first see how would be the composition of the tax effort by components, so we can -- I mean be more if there is going to be an effect on internal demand during that.
Juan Carlos Mora
Let me complement a little to Juan Pablo. We heard directly from the President two weeks ago that they will present the tax reform to the congress during the second semester of this year.
And as Juan Pablo mentioned, we expect this to be positive, as you know, the tax structure in Colombia is complex. So, we hope that this reform simplifies the tax structure and allow us to predict taxes in a better way.
José Humberto Acosta
And Ernesto, going to your question regarding NIMs, the sensitivity for every 100 basis points on the central bank moves the interest; our incentive [ph] NIM sits at around 9%. Regarding pricing of loans, it was a combination of factors.
We increase on average our loan portfolio for corporate and consumer. On average, we increased 150 bps and therefore price occurred during this first quarter on a very important portion of the loan book.
And obviously that effect you’ll see very important during these first two quarters but the second half of the year, you will see a kind of plateau in terms of NIM growth and NII growth. And Nicolás, regarding your previous question, I am sorry about that, regarding Basel III, remember that the local regulation is there is some specific points regarding Basel III, but we expect that the second wage of Basel III will take place maybe 2018 and they will be focused mainly on buffers of provisions; they would be focus on liquidity but we are not still working on that.
But, the level that capital we are having today is the kind of Basel III. If you want to double check very, very internal details, we can share with you in another call.
Operator
[Operator Instructions] Our next question comes from Alonso Garcia from Credit Suisse.
Alonso Garcia
Regarding the investment portfolio; and I know there might be somewhat little bit here. But, what kind of NIM do you believe would be fair to expect for the remainder of the year compared to a 3% this quarter or in terms of contribution compared to about COP 184 billion reported this first quarter?
José Humberto Acosta
Our base, our models are suggesting that the NIM could be at around 1% to 1.5%. And this is a comparison between the benchmark interest rate against our trending cost of the total deposit base that what we are having, so 1% to 1.5% is the guidance for NIM for securities portfolio.
Operator
Our next question comes from Victor Galliano from Barclays.
Victor Galliano
You did mention talking about, little further about capital; I saw in your forecast that you're looking at a depreciating peso going through the year-end. There is obviously loan growth of about 10%.
You’ve got over third of your assets in dollars, which is positive for your earning stream. But, can you explain to us -- I think you mentioned that you -- I don't know how, but that that was going to be some -- there was less sensitivity to the peso depreciation of the capital ratios.
Can you explain to us a little more and give us a little more color on that about how you're doing that? Because the sense I have is that clearly your loan dollars, so that for this should actually adversely impact your capital ratios?
And in addition to that it seems like you have a lot of your intangibles in dollars as well.
José Humberto Acosta
Yes, Victor. First, yes, because of the further depreciation of the currency, we used at around 40 bps of Tier 1 last year because depreciation of 30%.
As you can see in our forecast, we expect to close at around 3180 FX. So, we don't expect a huge impact in terms of consuming capital because of depreciation of the currency.
But I have to highlight one specific factor. We have at around 20% of our equity in U.S.
dollars that gives us a kind of protection in terms to protect us from the volatility of FX. So, with that in mind, we don't expect a major impact of capital because of devaluation.
Victor Galliano
Okay, but you have a lot of more assets in dollars, right?
José Humberto Acosta
Yes. Right now, we have -- 40% of our assets are in U.S.
dollar, but 22% of our equity also in U.S. dollar.
Operator
Our next question comes from Carlos Gómez from HSBC New York.
Carlos Gómez
On the tax rate, you gave the guidance of 30% to 31%. Could you clarify that does or does not include a wealth tax?
And then specific question about your credit card portfolio, we have looked at your 20-F, and when we look at your domestics credit card portfolio, it has declined 25% year on year, was that the reclassification or was that a natural reduction in your credit card business?
José Humberto Acosta
Regarding your first question, we are not contemplating in our guidance a 30% to 32% tax; we have not contemplated the wealth tax. The wealth tax is assuming on the financial statements as expenses; it is not a tax.
So, we're not contemplating that. Regarding your second question, as you mentioned, now we are losing some market share, we have to double check the numbers, if it's a billing or number of plastics sold, we'll call you back during the morning, just to clarify what happened with the local business.
Juan Carlos Mora
But Carlos, in general terms, our credit card portfolio has been very dynamic in terms of plastics, number of plastics, in terms of fees, in terms of interest rates; it's one of our focus. The portfolio is growing, it's not just growing in Colombia but it's also growing in the other markets in Central America.
So, we have to double check the numbers. But, in general terms, it's growing healthy.
And we're keeping our focus on credit cards and on payments specific, and it's going to be one of our main sources of income, of revenue in the future.
José Humberto Acosta
Carlos, probably what's happened is billing in U.S. dollars for Colombian population because of the FX variation; people reduced in a very domestic way, the appreciation in the U.S.
dollar grew. So that was one of the reasons that billing maybe showed some drop but we'll double check with you.
Operator
We have no further questions at this time. I'll now turn the call back over to Mr.
Acosta for final remarks.
José Humberto Acosta
Thank you very much and thank you all of you. And I hope to see you in the next conference.
And if you have any specific questions, feel free to contact us, Alejandro, even in person with me. Thank you again.
Operator
Thank you. Ladies and gentlemen, this concludes today's conference.
Thank you for participating. You may now disconnect.