Feb 22, 2017
Executives
Juan Carlos Mora - Chief Executive Officer Jaime Velasquez - Chief Strategy and Finance Officer Jose Humberto Acosta - Chief Financial Officer Rodrigo Prieto - Chief Risk Officer Humberto Hernandez - Chief Accounting Officer Alejandro Mejia - Investor Relations Manager Juan Pablo Espinosa - Chief Economist
Analysts
Tito Labarta - Deutsche Bank Thiago Batista - Itau BBA International Alonso Garcia - Credit Suisse Ernesto Gabilondo - Bank of America Merrill Lynch Maria Barriga - Davivienda Corredores Neha Agarwala - HSBC Edgar Romero - BBVA Valores Colombia SA Sebastian Gallego - Credicorp Capital
Operator
Good morning, ladies and gentlemen, and welcome to Bancolombia's Fourth Quarter 2016 Earnings Conference Call. My name is Hilda and I will be your operator 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, in future filings, in press releases or verbally address matters that involve risk and uncertainty.
Consequently, they are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general, economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy, and various other factors that we describe in our reports filed with the SEC. With us today is Mr.
Juan Carlos Mora, Chief Executive Officer; Mr. Jaime Velasquez, Chief Strategy and Finance Officer; Mr.
Jose Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mr.
Humberto Hernandez, Chief Accounting Officer; Mr. Alejandro Mejia, Investor Relations Manager; and Mr.
Juan Pablo Espinosa, Chief Economist. I would now like to turn the presentation over to Mr.
Mora, Chief Executive Officer of Bancolombia. Please proceed sir.
Juan Carlos Mora
Good morning, everyone. It's a pleasure to be here with you today to comment on the performance of Bancolombia during the fourth quarter as well as the year in general.
I want to start by highlighting the solid results of Bancolombia during 2016. The net profit of COP 2.8 trillion represented an increase of 14% as compared to the previous year.
Several reasons explained the good results. The strong operational performance of Bancolombia during the year and in particular, our Intermediation business was reflected in the net interest income.
After provisions it grew by 25% driven by several factors. Higher interest rates on loans with a focus on maintaining funding cost at low levels.
This led to NIM expansion coupled with volume growth in the Colombian operation. This trend confirms our previous conference calls expectations and was in line with our forecast from the beginning of the year.
Provision charges were mainly due to some segments advantages of costumers on SMEs loans. Although, we had some cases of corporate clients that defaulted and therefore required additional reserves.
Nevertheless, the growth in net interest income was able to absorb this higher cost of credit which was in line with our guidance for the year of 1.8%. On the fee front, we continued to see a sustained growth trend, result of the increased number of transactions and new products that we have promoted over the last years.
Cards and insurance distribution remained the top contributors to our fee revenues. For the year 2016, the cost-to-income ratio was 51% lower than the 54.6% of 2015.
In particular, we are undertaking initiatives in digital transformation along with developing channels that allow us to deliver our products and perform transaction in a more efficient way. The combined effects of higher revenues and strict cost controls were instrumental to achieving these results.
On the tax front, we experienced volatility due to several reasons that we will elaborate in a few minutes. In this front, we managed to minimize the tax burden for the corporation and despite increasing statutory rates we ended the year - with an effective tax rate of 30%.
As we have said during the year, we have been able to build up capital organically. These are the result of retained earnings and in more efficient and location and distribution of assets.
The 9% Tier 1, at the end of the year was 150 basis points above the level that we had one-year ago. Additionally, we expect to retain a significant portion of 2016 earnings, which will enhance our capital position even further.
We feel very comfortable with this level of capital because it is above the range that we have defined to operate the bank. On the economic front, 2016 was a year with many microeconomic challenges.
The GDP growth in Colombia was slow and coupled with high inflation levels. The Colombian Central Bank acted promptly at the beginning of the year to corp inflation and finally in the last quarter, we started to see a change in the inflation trend.
After a period of interest rate hikes in the first half of the year, the Bank cut rates by 25 basis points in December to 7.5%. In 2017, we should expect additional cuts as a result of the conventions of inflation towards the target range.
The economy saw positive trend in the trade front as the deficit was reduced and the current account deficit went from 6% to 4.5% at the end of the year. Looking forward, in 2017 we will focus our efforts on the following aspects.
Profitable growth selecting the best risk adjusted returns, the main goal is to maximize net interest income while keeping the past due loans and provision charges as low as possible. Focus on our Panamanian, Salvadorian and Guatemalan operations to efficiency improvements on key generations, innovation and digital transformation in order to expand our capillarity and capacity to distribute progress in a more efficient way.
Funding the bank at the lowest cost with the goal of mitigating the decline in net interest margin, continue seeking efficiency gains by improving the distribution channels, the branch network and the productivity of the banks infrastructure. Having said this, now I will turn the presentation over to our Chief Economist, Juan Pablo Espinosa.
Juan Pablo?
Juan Pablo Espinosa
Thank you, Juan Carlos. Now, I will ask you to go to a Slide number 3 in the presentation.
After experiencing one of the most severe external shocks of the past decades to the fall in oil prices during the second half of 2016, the Colombian economy bottom and managed to adjust its weight in deficits and to moderate the acceleration of prices. In terms of growth, we foresee a modest recovery in 4Q 2016.
Our growth forecast for disappear at these 1.7%, a 0.5% touch point higher than previous quarters brand. Regarding prices, 12-month inflation has receded from its speaker for almost 9% in July to 5.75% in December 2016.
This correction reflects the fact that this play shocks such as aluminum phenomenon on the pass through of depreciation to consumer prices anticipated. A key element at the end of 2016 was that Congress approved the tax reform.
It will generate additional revenues that we allow the central government to meet its deficit targets for the following years. Furthermore, it contains several elements that will stimulate private investment over the medium term.
For 2017 we foresee more constructive macroeconomic conditions. The economy will benefit from higher term substrate, a gradual rebound in real incomes and a better performance of key sectors such as mining, agriculture and utilities.
As a result, we forecast that GDP will expand by 2.3% this year. However, this forecast implies that the economy will still expand below potential.
On the other hand after accelerating in the short-term, we expect inflation to keep adjusting downwards as demand pressures will remain absent. However, the increase in the general VAT rate and the persistent of high inflation readings make it highly likely that inflation will close this year above that target range.
Our point forecast for December 2017 is 4.3%. In terms of monetary policy, inflation prospects point less contractionary conditions going forward.
After some process in the next few months, we expect the Central Bank to cut its reference rate to 6.25% by the end of the year. Finally, we forecast that thanks to the rebounding experts the current account deficit will adjust from 4.5% to 4% of GDP which implies less external financing needs.
Accordingly, the USD COP would fluctuate this year between 2,900 and 3,000. After December view of the economic environment, let me turn the presentation to Jose Humberto Acosta, who will discuss the Bank's results.
Jose?
Jose Humberto Acosta
Thank you, Juan Pablo. Good morning, everyone.
I would like to start the presentation of 2016 results mentioning three topics that impacted the financial evolution of the Bank. First, we completed the sale process of our stake in Tuya, the consumer grade unit that we run with Éxito.
Since the sales announcement, we have stopped consolidated it and started treating that operation as this continue. With the completion of the transaction, we totally eliminate the contribution of Tuya and recorded a one-off gain of COP 161 billion, product of the valuation of our remaining stake in Tuya.
From now on, our stake in Tuya will be reflected in the equity method on dividend line. As a result, the economics of this joint venture remain unchanged in terms of the income generation for both companies, Éxito and Bancolombia.
Second, we also completed the integration of Leasing Bancolombia and Bancolombia S.A. With these transaction assets and liabilities of Leasing Bancolombia were transferred to Bancolombia and therefore on a consolidated level, we had some minor reclassification of loans.
Other bank simplification of the legal structure of the group there was no material impact in the consolidation financials. Third, the tax line presented volatility during the year mainly explained by these factors.
First, the FX variations in particular during the first quarter. Second, in the last quarter of the year we had a significant reversal of income taxes due to the utilization of fiscal credits.
Finally, at the end of the year annual tax reform was approved by the Colombian Congress. The main goal of this reform is to balance the tax codes in between corporations and individuals and mid fiscal sustainability of the government.
The year end Bancolombia's financial statement reflects the impacts of the deferred taxes due to lower statutory rate in the coming years. The effective tax rate for 2016 was 30% and we forecast that will be between 35% and 37%.
On Slide number 4, we see the evolution of assets and their composition. Today, peso-denominated loans represent 62% of the total loan portfolio of Bancolombia, while dollar denominated represents 38%.
The Colombian peso appreciated 4.7% over the last 12 months and depreciated 4.2% against the U.S. dollar during the fourth quarter.
Total assets grew 2% year-over-year impacted by the general appreciation of the peso during the year. Regarding loan book in local currency, loan portfolio growth was primarily driven by mortgages and consumer loans, which continue to exhibit sustained growth at around 10% for this year.
However, growth has a start to some extent due to the year and uncertainty regarding the tax reform and uptake inflation of 2017. In the consumer loans, we executed our strategy to target high income individuals and segments with low indebtedness levels, quite avoiding the risk year segments of the population.
The main input for our scoring models is a track record of the client along with the payment capacity. In relation to the dollar denominated portfolio, it is important to highlight that the volume of dollars loans in Colombia declined during the year.
It was around 25% declining. In the meantime, this Inter-American operation posted a moderated growth in loans, which offset a decline in Colombia, the international operation view at around 4% U.S.
dollars. Moving on investments, the average yield to maturity for the investment portfolio is 6.5% and the ratio remains low at a level of 17.3 months.
The Bank continues to privatizing liquidity and secure funding while maintaining on structural portfolio that limits exposure to higher volatility instruments. We continue to see opportunities in sectors such as manufacturing, touring, our business and infrastructure.
Many of these sectors have been positively impacted by the weak peso. That is why we believe in our growth forecast for 8% to 10% in 2017 for our total loan book.
We will still focus our growth in the less risky products as we want to maintain a very healthy balance sheet. Now on Slide 5, we present the snapshot of the credit quality at the end of this year.
Credit quality improved slightly with past-due loans to total loans dropping at a level of 3.3%, also the coverage ratio lead to a 126% due to higher provision charges. Some loans that were delinquent have continued to deteriorate to some extent.
However, new originations have been less risky and we have had fewer issues with these. Commercial consumer and mortgage on the 90 basis standard show similar credit metrics to the prior quarter and indication that indeed our guidance was accurate the 3Q of last year mark the worst part of the credit cycle.
Having said this, we build our knowledge that the infrastructure sector, have had some noise with the specific cases relating to the bridge and the project in [indiscernible]. Currently, we are assessing the outcome of the change in contract and working closely with the National Infrastructure agency to restructure the operation.
Our main goal is to secure the monitor we have lent to the project and receive it back in the designated schedule. We are paying special attention to new originations of corporate and infrastructure loans, setting up high underwriting standards and defining our risk criteria with a conservative approach.
The most important part of the balance sheet regarding the credit quality and coverage is the fact that the Bancolombia has today a 190% of coverage ratio. We are comfortable with 90 day coverage ratio 150% because that warranties that the Bank has enough caution to solve any potential default of a client.
Slide 6, shows the Provision Charges, which were COP 2.7 trillion for the year and COP 772 billion during the quarter. Provisions for 2016 where 63% higher than 2015, but it still within our risk appetite and the cost of risk of the year was our level of 1.8%, which was in line with our expectations.
As we share with you in our previous conference call, the cost of risk for the year was higher than in 2015 due to arbitration in consumer and SME loans and some particular issues with corporate clients. The provisions made during the quarter were specifically designated to cover that being touched [to pay] that have deteriorated our one half to our higher levels of the delinquency.
New past due loans was COP 347 billion down from COP 892 billion in the last quarter, which shows an improvement in the quality trends. Our strategy right now is to be more selective with the clients that meet our risk we were our criteria and set some stringent underwriting standards, aiming for keeping the cost of risk under control.
We forecast cost of risk for 2017 similar to 2016, getting a level between 1.8% to 2%. Moving on to Slide number 7, we see the evolution of net interest income and funding costs along with the funding performance.
As we have seen through the year, NII growth has been possible through the combined effort of two fronts. First, optimizing the funding terms and its structure in order to keep cost as low as possible, and second, pricing loans at higher spreads.
NII grew 34% year-over-year and 28% in 4Q of last year, compared to the quarter of 4Q 2015. As we were able to maintain margins at a level of 6%, while keeping total funding cost very stable through the last quarter of this year.
In December, the Central Bank lowered rates by 25 basis points, which we believe is the first step in gradually easing the money to recycle. Repo cuts rates come in 2017 on a level of 6.25% as long as inflation is not impacted by any significant external factors during the year.
As shown in the graph on the bottom right, while DTF rate increase 164 basis points during the past year, the funding cost increase only 97 basis points. These dynamic caused NII growth.
Similarly the Central Bank increased rates by 170 basis points during 2016 to respond to factors including the transportation projects in July, a linear season effects, and pass through effects of exchange rate as well. During 2016, we have focus our efforts, not only on keeping the funding cost as low as possible, but also increasing the average time to maturity of the stock liabilities.
In particular time deposits and long-term debt. The outcome of the strategy has been the stability in the lending that we saw in fourth quarter even with reduction of the repo rate.
Moving over to 2017, we believe we can sustain net interest margin during the first half of the year and forecast that volumes could grow better than expected. If the economy were to pick up in the second half of the year.
We remain cautious with regard to the liquidity management and believe once again our competitive advantage in funding through as we continue to have the lowest funding cost is Columbian banking industry. Remember, our savings and checking account 3% over 40% of the total fund instructor, which places us kind of unique position in the system.
Turning to page to Slide number 8, we showed that net interest margin. The year 2016 was a very good for NIM evolution as it's explained - expand 98 basis points.
The main reason for this expansion, where they higher rates on new origination as well as a repricing of 16 viable rate loans, coupled with relatively stable cost of funding. During the last quarter, we saw a small reduction in the reported net interest margin the rate at a level of 6%, 20 basis points below last quarter, explained by a compression in investment in net interest margin.
Let's remember that security purpose in 7% of total assets - of these of our protocol of investment is in U.S. dollar, where Central American sovereign bonds that were impacted because of the volatility during the last quarter.
In the lending business, we saw stability of NIMs as we continue to make disbursement at competitive spreads in marketplace. Our guidance for 2017 is to maintain the NIM on a level of 6%, because of combination of two factors.
The NIM for the local currency will compress in between 10 to 15 bps, but the NIMs of our international operation in dollars will increase assuming that the interest rate in the U.S. market will increase.
We are focusing our efforts in keeping the deposits on low cost as possible in particular, savings accounts, as a vehicle for our clients to keep their money within Bancolombia’s guideline. Current accounts, which benefit from our transactional capacity and CDs as a mechanism to provide the stability of funds and enhance the maturity profile.
The evolution of fees is presented in our Slide number 9. This is a trend where we continue making progress as we can see in recent results.
During the fourth quarter total fees increased by 5.4% and they grew 16% as compared to the fourth quarter of 2015. The main services and products that lead the fees growth were banking and ATM services as well as debit and credit card fees.
We are experiencing sustained growth in cards and usage in Colombia, due to rising income of individuals, and also the promotion of plastic as a method of payment. We continue to see more credit and debit card transaction, as a result of our commitment to promote the use of electronic methods for in-store transactions.
The number of credit cards grew 5% during the year and the billing grew 14%. In addition, we are tapping into new business segments when it comes to promoting and introducing numerous benefits and customers rewards initiatives.
Today, Bancolombia has 24% market share of the system, billing and 17% of the number of cards outstanding in Colombia. Banking services and asset management were also a major contributor for fee growth during the quarter, as well as asset management.
In addition we saw a sustained performance of insurance and distribution fees, which generates COP 98 billion during the last quarter and grew 29% year-over-year. Fees represented 70% of operating income in the last quarter, which is the good share since our transactions that do not require a significant amount of capital compared to the lending business.
These fee initiatives are not limited to Colombia and we are focusing on steadily growing the credit card segments in El Salvador, Guatemala and Panama. We highlight the relevant of the JV with like minds, which we have marketed in our all geographies and that provides an interesting avenue for growth and an increase of banking penetration in the region.
Finally, we forecast our fee growth of 10% to 12% for 2017. Now moving to Slide 10, represent the evolution of expenses which grew 18% during that year.
It is necessary to mention here that the consolidation of Banco Agromercantil de Guatemala contributed with 7% out of this 18% and the FX variation contributed with 3%. Therefore, the organic growth in expenses was 8% during the year which was in line with our forecast.
The cost-to-income ratio for the year was 51% below the 54.6% at the end of 2015. This decline was mainly experienced by the good revenue performance and a strict cost control initiatives.
Our target is to maintain this number at the same level at the end of this year. Operating expenses consist primarily of personal expenses and administrative expenses, which are being kept under control in the respective currencies.
As we have stated last quarter, Bancolombia is committed to developing lower cost channels based on technological innovation and optimal consumer segmentation, as we strive to grow the expenses in line with nominal GDP. This strategy related to the year end innovation, looks to not only control our expenses, but also to create better pricing strategies, commercial synergies and a low sales team to deliver better service and products inefficient and revenue boosting model.
Our guidance for 2017 is an increase of expenses in between 6% to 8% on organic level, which we believe will be key in obtaining a strong profitability levels. Moving on to Slide 11, we see the evolution of capital composition of Colombia.
The Tier 1 is at a level of 9.02%, 452 basis points above the regulatory minimum of 4.5%. This is a very good ratio and most importantly, the continuous growths in domestics lead us to reaffirm that in fact we are in the period of capital accumulation.
If we consider a dividend payout of one-third and appropriate the remaining portion of the earnings, we estimate that in March of 2017 you could see our Tier 1 ratio close to the level of 10%. As we have said before, we look to operate the bank at optimal Tier 1 ranging 8%, 9.5%.
For the Tier 2 ratio, we ended the 4Q 2016 with 4.2% for a total BIS ratio of 13.3%, above the regulatory threshold of 9%. The Slide number 12 shows the return on assets and return on equity of the bank.
The return on equity for the quarter was 22.1% and return on assets was 2.3%. These solid returns as explained by an exciting growth of NII during the year coupled with the focus on efficiency and generation and the specific case of the practice.
The return on equity for 2016 was 14.5% which marks an improvement over the last year and demonstrates that the performance based success of our business during the year. The effective tax for the year was 30% which added to high provisions is downside for overall profitability.
Nevertheless, we are pleased with the number and we expect to continue on our upward trend. We expect to continue growing net income although at a moderate base while maintaining the solvency indicators for the rest of the year and improving profitability.
Our estimated return on equity for 2017 would be in the range between 13% and 14%, while the medium-term target continued at a level of 16%. The finally, the final message that we want to send is this is a very positive and very strong year in terms of the business lines.
NII and NIM and fees during the fourth quarter remained solid and growing at a very good pace. We already have some volatility on the tax margin and expenses, but at the end of the day the numbers remain strong.
So I want to recap, first, NII generation was solid through the year. Second, fee generation was above our forecast, which proves once again that the bank has fiduciary finance strong time base.
Third, our efficiency level of 51% is a proof of our commitment to control our tighten expenses. Four, the provision in level has grown due to the several macro economies of great cycle factors, but it is important to mention the cost of risk ended the year in nine of our guidance of 1.8%.
Despite the volatility tax rates on a quarter-to-quarter basis the effective tax rate for the year was 30% better than initially estimated. And finally, capital accumulation continues to solidify our capital position.
After presenting these slides and discussing our fourth quarter results, I would like to invite our audience to ask any questions you might have and we are gladly 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 Tito Labarta from Deutsche Bank.
Tito Labarta
Hi, good morning, thanks for the call. Couple of questions.
I guess first on expenses. We did see a big pickup in expenses in the quarter.
I think, there was additional maybe bonuses paid given the high ROE for the quarter, but that was partially due to the negative tax rate. So, I want to understand what will be more recurring level of expenses going forward?
I know you mentioned for the year if you strip out Banco Agromercantil and the appreciation of the currency, it would be around 8%. Is that the kind of growth that we should expect going forward or it could be even maybe below that given the additional bonuses paid in the quarter and then the second question I guess is on the tax rates, I understand with the tax reform, the tax rates coming down, but it just still be pretty high in 2017, I think around 40% or maybe just below that.
So what would be an effective tax rate that we should expect, I guess for this year and next year? And do you think it will come down to that 32% in 2019?
So if you could give some more color on that? Thank you.
Juan Carlos Mora
Thank you, Tito. Yes, we are expecting for this year 2017 an increase of expenses at around 8%, as you mentioned that’s correct.
The pickup of expenses in the fourth quarter was explaining those factors that you mentioned. Again the guideline will be 8% for 2017 and we don't expect any major change on the expenses front.
Second, the effective tax rate, yes, was 30% for 2016, we expect 35%, at around 35% for 2017 and maybe the same level for 2018.
Operator
Thank you. Our next question comes from the Thiago Batista from Itau BBA.
Thiago Batista
Yes. Hi, guys.
Thanks for the completely presentation. I still have one question on loan growth.
During the presentation, you already mentioned most of the guidance for the mainline of the business in 2017. But you didn't mention anything about a loan growth.
Could you share with us your loan growth expectation for this year, divided by the main segments of the bank?
Jose Humberto Acosta
Thank you, Thiago. Yes, the loan growth that we are expecting for 2017 will at around 7% to 8%.
In our geographies, the upper side of that range will be the Columbian operation maybe reaching the level of 9% and on the lower side of the range will be our operation in Banco Agricola that will be between 3% to 4%. In corporate loans, we expect a growth of 9% in consumer and SMEs, we are expecting a loan growth in Columbia operation at about 10%.
Operator
Thank you. Our next question comes from Alonso Garcia from Credit Suisse.
Alonso Garcia
Good morning everyone and thanks for taking my question. I would like to touch base again in net interest margin, considering the lower Central Bank rate you are anticipating and also in terms of the kind of the mix you're expecting for loan growth in terms of segments and currency, and what is your forecast for net interest margin this year and what kind of margin on that securities is embedded in that forecast?
Thank you.
Jose Humberto Acosta
Basically the NIM that we are expecting for treasury business, this is very complex to talk about it. But we are expecting to maintain on NIM, based on the assumption that the sovereign papers will be at a level of 7% and the funding cost at a level of 6%.
We are expecting on NIM of at around 1%. Regarding the NIM for 2017, what will happen in Columbia, that will be a slightly compression of the NIM, because interest rates will go down.
So we will expect a compression of the NIM of 10 bps. As we mentioned on the speech, previous in the U.S.
dollar lending, we will expecting an increase of the NIM because of the interest rate of the asset sensitive condition that we have in our internal operations. Basically what we are doing right now is to promoting the increase of the loan portfolio in consumer and SME segments.
Meanwhile, the corporate loans remain at a level of 7%. So you'll see in the next coming years maybe at a slightly change on the composition of the loan portfolio, take it and back that of the momentum of the economy.
So our efforts in Colombia operation will be focused on retail machines business, as well as in Banistmo operation in Panama.
Operator
Thank you. Our next question comes from Ernesto Gabilondo from Bank of America.
Ernesto Gabilondo
Hi, good morning and thanks for taking my call. Two questions on my side.
One is given the new tax reform is likely to affecting the bid loss, what are you expecting for the consumer loan growth and for the cost of risk, do you expect to create additional provisions related to Electricaribe or Oxbridge. And can you share with us Bancolombia's exposure in both cases.
My second question is about the tax reform, I just want to know if this has excluded the wealth tax and I would like to know how much do you expect it, this could strengthen the capital ratio?
Jose Humberto Acosta
Thank you, Ernesto. The tax reform, no doubt that we will impacted in the consumer segment at least for the first half of the year.
That's the reason why we are expecting and we are telling you that our guidance of cost of credit will be 1.8% to 2%, assuming some deterioration at the consumer front. But we believe that the second half of the year, the number will be much better in terms of that.
Regarding corporate loans, yes, we have been doing a provision regarding some specific cases and again that 2% that we are telling you about cost of risk is including additional provisions that probably we have to do in the corporate segment. Regarding the wealth tax, that would be the final and in the first quarter you’ll see the final quarter of wealth tax, but we don’t foresee any other tax regarding corporate tax for 2018 neither 2019.
Operator
Thank you. Our next question comes from Maria Barriga from Davivienda Corredores.
Maria Barriga
Hello. Thank you very much for taking the question.
I had one question regarding El Salvador operation which is rating agencies have taken negative actions against the countries rating, so I was wondering if our further rating could impact your operations there or an impairment? Thank you.
Jose Humberto Acosta
Thank you. Regarding our Salvadorian operation, we are focusing there in profitability.
As I mentioned previously, loan growth will be very low at a level of 2% or 3%. The only impact that we received from the current situation in El Salvador that was the evaluation of our securities portfolio that we have in sovereign bonds in El Salvador, but if you double check the numbers of El Salvador, the return on equity remains at a level - on a very stable level.
We don’t foresee any specific concern regarding liquidity. The last two years we have been working, diversifying the funding structure you see probably that we went to the market two years ago with bond issuance.
So at the end of the day the operation remains stable and we are trying to focus to maintain the book in a very healthy way. And you see that the level of provisions there it is very high and the level of past-due is under control.
Operator
Thank you. Our next question comes from [indiscernible].
Unidentified Analyst
Hi. Thank you very much for taking my questions.
I have two doubts that I will be glad that you help me to solve. My first question is regarding your operation in Central America.
Can you tell us more about how is the operation going there? And my second question is regarding asset quality.
Do you have any concerns about Bogota massive transport companies and small and medium size enterprises here in Colombia?
Jose Humberto Acosta
Okay. The operations in Central America, the growth there is still low.
We are there promoting the products we are replicating in our experience here in Colombia with services focusing on retail and individuals trying to implement products technology. So we see a huge potential of upside on the retail business.
On the corporate business, we are taking advantage in Panama for example. The loan growth there is positive, so at the end of the day - the next two, three years we will focus there on efficiency and try to improving operations basically helping with the loan growth.
Regarding the asset quality and both names that you raised, we have right now enough level of provisions and this is up very - we are monitoring every month the situation, as again the 2% will reflect our idea about how we will increase the provisions for 2017.
Juan Carlos Mora
We are also working very closely with the authorities of Bogota and also with the operators of the mass transport systems to work out the solution for the debt of the system. As Jose Humberto mentioned, meanwhile we have enough reserves to cover the risks while we are in the process of solving the situation.
Operator
Thank you. Our next question comes from Neha Agarwala from HSBC.
Neha Agarwala
Hi, I have a question on the deferred tax assets, have you see or do you expect to see the impact from the division in the tax rate on your deferred tax assets and should that affect your effective tax rate in the coming year’s annual rate? Thank you so much.
Jose Humberto Acosta
Thank you, Neha. Yes, our tax rate you see was 30% in 2016.
We expect 36% in 2017 and we will expect a kind of same level for 2018. The tax reform you never know what happen in the medium-term loan, so our expectations is to maintain almost the same level for 2017 and 2018 again 35% or 37%.
Operator
Thank you. Our next question comes from Edgar Romero from BBVA.
Edgar Romero
Hi, good morning. Thanks for the call.
I have two questions. The first one is how much can we spend Bancolombia to provision in Puerta del Sol during the first quarter 2017?
And the second one is how much does Bancolombia as committed in financial closings for projects just to expect how much their Bank will cash during 2017? Thanks.
Juan Carlos Mora
Edgar, thank you for your question, regarding Puerta del Sol, we are ahead on provisions of what the law requires. So we are very comfortable with the level of provisions that we have right now and we don't expect during the first quarter any change from that and we also suspect that the situation is going to evolve in a way that we can find a solution on that project that is going to help the continuity of the 4G projects in Colombia.
So we are very optimistic and as a matter of fact there are news today about how that situation is going to be solved and as a matter of fact we don't see any additional provisions. Regarding our commitments on the 4G projects, I just want to say first that 4G and infrastructure projects are very important for Colombia for the development of Colombia and Bancolombia and also as a financial system have committed to promote the development of the projects and I think that should be the case going forward.
In the case of Bancolombia so far we have commitments around COP 5 billion and those commitments are going to be completed in the next four years to five years. And as we mentioned during our speech, we will keep analyzing any project and how they are going to develop in the future, but we are optimistic that the way that Puerta del Sol is going to be solve, it is going to mark the track for the development of future projects on 4G.
Operator
Thank you. Our next question comes from Sebastian Gallego from Credicorp Capital.
Sebastian Gallego
Hi, good morning, everyone. Thanks for the presentation.
I have two questions. The first one is regarding efficiency in Central America operation.
Could you share with us current level of efficiency in each of the operations where you have a bank and also could you share with us the target for each operation in terms of cost to income ratio? And the second question from my side is also an asset quality, I know when you mention your guidance of 1.8% to 2% in cost of credit, but could you share a low cases scenario for this year?
Thank you.
Jose Humberto Acosta
Sebastian, yes, in terms of efficiency we have a very mature operations in El Salvador for example, which the level is below 50% of efficiency. But we have as you know very well, our - if I may say brand new operation in Banistmo, we have to implement new systems.
We have to implement new procedures. So the level of efficiency there is still very high level.
So in both cases on Banco Agromercantil, the idea is in Guatemala and Panama try to reduce that level and that would be a very long run. So we have to do it and the new target of two to three years to take a level of the three operations at least at a level of 50% to 55% efficiency level.
That's the idea in terms of their international operations along with a growth and increasing the NII. Regarding asset quality we have scenario a positive of scenario assuming that some of the corporate case will run in a better position that the cost of credit would be - again the range would be 1.8% to 2%, but could be 1.7% in very optimistic scenario.
Operator
Thank you. We have no further question at this time.
Do you have any final remarks?
Juan Carlos Mora
We would like to thank for attending these conference call and your interest on Bancolombia’s results. We expect 2017 to be a year and which we continue to consolidate our operations in Central America to continue the trend on gaining efficiencies and looking for ROEs in the line that we mention.
Again thank you very much for your interest in Bancolombia and we hope to see you soon and expecting to be with you on the first quarter 2017 results. Thank you very much.
Operator
Thank you. Ladies and gentlemen, this concludes today's conference.
We thank you for participating. You may now disconnect.