Aug 12, 2017
Executives
Juan Carlos Mora - CEO José Humberto Acosta - CFO Juan Pablo Espinosa - Chief Economist
Analysts
Guilherme Costa - Itaú BBA Ernesto Gabilondo - Bank of America Jason Mollin - Scotiabank Tito Labarta - Deutsche Bank Carlos Macedo - Goldman Sachs Domingos Falavina - JP Morgan Alonso Garcia - Crédit Suisse Sebastián Gallego - CrediCorp Capital Andres Duarte - Corficolombiana
Operator
Thank you, ladies and gentlemen, and welcome to Bancolombia’s Second Quarter 2017 Earnings Conference Call. My name is Karen.
I will be your coordinator for today. [Operator Instructions].
Please note that this conference 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 risks and uncertainty.
Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, included -- including changes in general economic and business conditions, changes in currency exchange rate and interest rate, introduction of competing products by other companies, lack of acceptance of new products or services for 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. Rodrigo Prieto, Chief Risk Officer; Mr.
Jorge Humberto Hernandez, Chief Accounting Officer; Mr. Alejandro Mejia, Investor Relations Manager; and Mr.
Juan Pablo Espinosa, Chief Economist. I would now like to turn call over to Mr.
Mora, Chief Executive Officer of Bancolombia. Please proceed sir.
Juan Carlos Mora
Good morning, everyone. I am glad to be back with you today to comment on the performance of Bancolombia during the second quarter.
I am pleased to present the results, which are in line with our expectations and behave according to our plan for 2017. They have been generated in a challenging environment that we’ll discuss during this call.
Briefly, I want to point your attention to the following main topics. On the loan side, the portfolio maintains its growth dynamics and expands 8%.
Colombia and Panama are the markets that lead the lease expansion and consumer loans. In particular is the segment that grows at a faster pace with a year-on-year increase of 19%.
On the liability side, we continue growing the deposit base, especially CDs. Regarding capital, we continue with Tier 1 levels above 10%, which permit us to be prepared for the coming years with an adequate capital structure.
During this quarter, we saw the 90-day past due loan ratio reach levels of 2.6%, mainly as a result of the economic cycle we are facing. In Colombia in particular, the deterioration comes from corporate clients and SMEs, which are impacted by sluggish demand and effects of problems experiencing in 2016 such as transportation strike and El Niño phenomenon and FX volatility.
In the international front, we have experienced consumer deterioration in the segment, especially in Banistmo. Regarding NIM, and according to our initial forecast, we have been able to maintain it above 6%, mainly supported by maintaining the right funding structure while reducing the total cost -- funding cost.
These numbers are the result of several strategies implemented over the last 18 months. Namely, focus on profitability.
We continue growing the most profitable lines. In particular, consumer loans grow at levels close to 19%.
This growth permits to increase revenues and maintain the level of risk under control as we are focusing in mid- and high-income individuals. Our origination process has permitted to pre-approve 6.8 million new loans and originate close to 2 million loans, allowing us to deepen the relationship with many of our existing clients.
We continue increasing the fee generation, taking advantage of utilization of our channels and services. One example is the bancassurance business.
Today we have more than 1.3 million policies that generate about COP330 billion per year in revenue. Similarly, our asset management unit, with assets under management close to COP18 trillion on generation of about COP350 billion per year, has been very successful.
In the efficiency front, we have been taking actions to optimize processes and control expenses. These initiatives involve the automation of many components of the underwriting and origination process and the rightsizing of the back office and business units.
In channel distribution, we have been optimizing the branch network by reducing it by 7% or 90 branches in the last year. At the same time, we increased the number of banking correspondents by 1,000 or 12%.
This strategy [permitted] at a lower cost and increased the capillarity of our footprint. Similarly, we already interact with more than 50% of our retail clients through the mobile banking platform.
And the volume of transactions conducted through the app represents 39% of the total transactions. This is the fastest-growing channel, with more than 20% growth over the last 3 years.
Our mobile application for businesses is also gaining traction, and SMEs in particularly represent a huge opportunity to consolidate this challenge, not only to generate more revenues but also reduce the unit cost per transaction. In the last 12 months, the number of transactions through this platform has more than doubled [until the] 40,000 SMEs and large corporates use this app on a regular basis.
This initiative, among others, represents cost savings of COP160 billion per year approximately. Additionally, we have been optimizing revenue by taking decisions in the pricing front.
This initiative aims to enhance segmentation of clients and originate loans to the best risk-adjusted clients. Thanks to this initiative, we will generate additional revenue by COP300 billion in 2017.
The combined effect of cost control and fee generation will permit us to reach a cost to income ratio of 45% by 2019. Another aspect where we are focusing our efforts is the optimization of our business in Central America.
These operations accounts for 27% of our assets and represents a big potential for profitability improvement. In El Salvador, the political situation of the country continues very polarized, and the fiscal deficit is high.
Nevertheless, the asset quality metrics remain in good shape and have not presented significant deterioration. Our main goals for these operations are: maintaining the levels of efficiency by keeping costs under control, expenses this year should not increase more than 2%; maintain the yields on loans by adjusting prices and optimizing the asset allocation.
In Guatemala, over the last year, we have been reducing the network of branches by 7%. We continue fine tuning the process in order to expand profitability.
In Panama, we have been introducing new retail products and normalizing the quality of the corporate loan portfolio. During this quarter, there was an agreement to sell the Soho Mall, allowing us to reverse some provisions.
One of the major opportunities that we have in Panama is related to fee generation. We expect fees to represent 16% into 17% of total revenues.
These three points are [indiscernible] by our innovation and digital initiatives which aim to simplify many of our processes that we conduct at a massive scale. Examples of these actions are the implementation of robotics and the processing of crane applications, which has reduced the number of personnel involved in the operation and has shortened the response time to our clients.
Also digital processes and digital channels are gaining more relevance in the bank’s daily operations. And today, we process more than 90% of our transactions through them.
The ultimate goal is to set up the conditions for a faster growth of loans and fees at a marginal cost. Now I will turn the presentation to our Chief Economist, Juan Pablo Espinosa, who will elaborate on the main economic topics.
Juan Pablo?
Juan Pablo Espinosa
Thank you, Juan Carlos. Now I’ll ask you to go to slide number three in the presentation.
During the second quarter of 2017, the Colombian economy continued to expand at a slow pace. For this period, we estimate a GDP growth of 1.4%, mainly due to a poor performance of internal demand, especially private consumption and investment.
Households and firms are being cautious about their spending decisions because of several factors, including the negative effect of the latest tax reform, low confidence levels, a weak pace of job creation and still contractionary monetary conditions. On the positive side, the external sector is contributing positively to GDP growth, even their recovery of [indiscernible] exports and moderate variation of imports.
Among sectors, it is worth mentioning the recovery that is experienced in agriculture and the resilience of financial and nonfinancial services, which, despite a moderating trend, are expanding above average. Going forward, we continue to predict that economy activity will slowly gain traction during the rest of the year.
The cyclical shift will be driven by the reduction of interest rates and the transmission to financial market rates as well as a positive base effect. We estimate that in the second half of 2017 and the first half of 2018, growth rates will be slightly above 2%.
Moreover, since the second half of next year, the economy should be growing around 3%. In terms of prices and the interest rate, after the downward [indiscernible] in August, we foresee that in the next few months, inflation will accelerate because of base effect and an upward correction of food prices.
As a consequence, we foresee that inflation will close this year at 4.2%. As a result of these growing inflationary risks, the scope for the Central Bank to accommodate its monetary policy stance is limited.
We anticipate two additional 25 basis points cuts for the remainder of the year so that intervention rate by December would be around 5%. Finally, it is worth mentioning that the Colombian economy will face several medium-term challenges, which will require the implementation of a comprehensive reform agenda.
These challenges include the increase of the potential growth to levels above 3% as well as a further adjustment of the current account deficit and a sustained correction of the central government deficit. After this quick overview of the economy context, let me turn the presentation to José Humberto Acosta, who will discuss the bank results.
José?
José Humberto Acosta
Thank you, Juan Pablo. Before entering the numbers for this quarter, I would like to highlight two main topics that were relevant for our business during this quarter.
First, we certainly continued through a demanding credit cycle and higher provision charges. We must frame the higher provisions within the economy situation that Juan Pablo just described.
The economy in Colombia is growing at a lower -- at a slower pace and that has impacted the credit quality and credit demand to some extent. In particular, during the second quarter, we experienced some runoff in SMEs and new past-due loans in consumer loans.
Nevertheless, the cost of credit remains within the estimated range around 2%. Second, regarding Central America, we want to share with you the recent performance of our operations there.
Please go to Slide number 4, where we can see a snapshot of four of our -- of our four main business, including Colombia, which complements the points that Juan Carlos mentioned at the beginning. Please be aware that these numbers are reported under full IFRS and differ from the regulatory numbers filed with regulators.
They present cumulative numbers as of June 2016 and 2017. Also note that these numbers do not include our offshore operation that we have in Bancolombia Panama, Puerto Rico and Peru.
As a result, the sum of the operations presented this slide accounts for 96% of the total loan of the portfolio. We want to highlight in the Colombia operation that the net loans grew 10% over the last 12 months, driven mostly by consumer loans which grew 25% in this period.
Additionally, we saw a slightly reduction of NIM despite recent interest rate cuts. Fees growing at a level of 8%, affected by the slow of economic activity.
In the Banistmo operation, the loan growth is 11%. The focus in the second quarter has been on corporate clients.
Deposit is slowing at a pace of 12.8%, which allows us to build up a solid funding base originated by clients. The 35% growth in fees by bancassurance and credit card business is a relevant point.
The return on equity of the Banistmo operation is 17%, mainly caused by the reversion of provisions associated with Grupo Wisa and its Soho Mall. In Banco Agrícola in El Salvador, 8% of the loan growth, focus on consumer loans, and 12% in deposit growth; stability in operational cost, with a growth of just 0.9% as a result of strict expenses execution; 14% growth in fees, driven mainly by bancassurance.
In our operation in Banco Agromercantil a loan growth of 14%, mainly driven by corporate clients. Having said this, I would like to move now to Slide number 5 of the presentation, where we can see the evolution of assets and their composition.
We continue seeing a moderate demand of credit across the sectors and regions. This trend is highly correlated with the pace of economic activity and outlook of our growth in the private sector.
The loan growth that we have experienced so far reaches 8%, and it is in line with our expectations. Nevertheless, our strategy in the last 1.5 years has been to focus the origination process in medium- and high-income individuals with low level of indebtedness.
The reaction has been positive in this segment, and consumer loans have reacted to this strategy. This segment in particular grew 5% over the second quarter and has grown 19% over the last year.
Currently, we have identified more than 7 million commercial opportunities just in Colombia, many of them coming from our clients in the deposit side that do not have credit products. The analytical tools that we have been using permit us to increase utilization of our portfolio by existing clients.
In the corporate side of the business, we also saw moderate demand, partially due to weak demand from the consumer and enough starting capacity to absorb this demand. Corporate loans have grown at a level of 6.6% over the last year, and our expectation is the same for the year end.
Mortgage denominated, excluding mortgage leases, grew 14% year-on-year. Please keep in mind that 37% of our loan portfolio is denominated in U.S.
dollars and that the 5.7% depreciation of the Colombian peso during the quarter caused this portion of the portfolio to grow faster when converted to pesos. Excluding the impact of FX, the loan growth would have been at around 6% year-on-year.
Regarding the outlook for the rest of the year, we remain with strict underwriting standards, and we do not expect to see a significant acceleration of loan growth. Our expectation is to grow 6% to 8% in 2017.
Moving on to Slide 6, we present the situation of the credit quality as of June. We certainly are experiencing a credit cycle right now, and that is highly explained by the economy situation.
Vintages that deteriorated in the first month of the year continue to running off as a result of the 90-day past-due loan ratio increased to 2.6%. The relevant point here is that we maintain an adequate coverage ratio of 171%.
Nevertheless, it is important to see that the pace of the deterioration of 30-day past-due loans was slower in the second quarter as compared to the first quarter. As a matter of fact, the first quarter deposit loan ratio increased 79 basis points, whereas in the second quarter, it increased only 17 basis points, which somehow suggests that we are probably in the worst part of the past-due loan cycle.
Today, in Colombia, the sectors that present the largest formation of past-due loans are the SMEs and the consumer loans. We continue making provisions in order to sustain the pace of charge-offs and keep the coverage ratio above 100%.
The next Slide number 7, presents the provision charges of the quarter. As we can see in the blue bars, the provisions remain relatively stable as compared with the first quarter and represent 2% cost of risk.
This cost has been in line with our expectations, and we believe that for the next quarters, it will remain around COP800 billion per quarter. As we just mentioned, the COP926 billion in the new past-due loans are mainly explained by SMEs and consumer loans that deteriorated in Colombia.
As loans reach the threshold necessary to be written-off, we have been accelerated in these charges, which were COP424 billion for the quarter. Again, we should see a sustained level of charge-offs during the rest of the year, and it should permit to keep a clean balance sheet.
Moving on to Slide number 8, we see the evolution of the net interest income and the funding cost. During the quarter, we saw stability in the net interest revenues as loan growth also moderated.
The loan growth that we experienced in the period was offset by the NIM compression, especially NIM from investment. Nevertheless, the overall performance of NII has been quite positive and certainly above our estimations at the beginning of the year as we were forecasted -- forecasting a faster NIM compression.
It is important to highlight that NII from loans still grows during the quarter, and the compression is mainly extended in NII from investments, which accounts only 3% of the total net interest revenues. Regarding loans, we experienced a faster grown in NII from our retail business, as the consumer credit increased at a significant pace of 19% year-on-year.
Liquidity and interest rate dynamics in Colombia suggest that the cost of funds is reaching a turning point, and we should see continued decline in the next coming quarters. The first component, where we saw our reduction in the cost in -- it is time deposits.
In savings accounts, we experienced some increase in the cost due to the fact that we attracted more deposits from institutional clients. And the share of both checking and savings declined slightly during the quarter, which caused the overall cost of deposits to increase 5 basis points over the period.
Please note that the loans to deposit ratio can come -- have come down over the last year as a result of 3 different aspects. First, the growth of the stock of deposits, in particular time deposits.
Second, during the last year, we have reduced the financial obligations for -- from -- with Colombian promotion banks. And third, during this quarter, we redeemed $200 million of superannuated bonds that Bancolombia issued 10 years ago, with a corresponding benefit in the cost of long-term debt and, in general, the total funding cost.
Our strategy right now consists in reducing the funding cost in order to prevent a fast compression of NIMs. In the structure of our funding we have time deposits with less than one year to maturity will reexpress at a lower interest rate in the next coming quarters; time deposits with more than one year to maturity are typically indexed, and therefore, the cost should decrease; and most of our bonds in pesos are also at a variable rate, and they should also reprice, helping the funding cost to come down as well.
This is a combination of tools that we have to reduce the total funding cost and defend the NIM for the rest of the year. The fact that the loan portfolio is growing at a very moderate pace and that the bank generates free cash flow permanently releases pressure from the funding side.
On Slide number 9, we present the NIM, which was impacted by the conditions we just described. NIMs in Colombia have shown a compression trend as the Central Bank continues cutting rate.
Nevertheless, in our operations in Panama, both offshore and in Banistmo, we have started to see NIM expansion as a result of three facts. First, the repricing of the loan portfolio, especially the mortgages and the corporate loans indexed to LIBOR; second, higher spreads on new originations in both operations; and third, the use of the liquidity on the offshore operation in Panama and Puerto Rico to fund the other operations in Central America that originate loans to clients.
In particular, Bancolombia Panama has expanded NIMs by 50 basis points, and Banistmo has expanded NIMS by 20 basis points over the last year. These are trends that offset the compression in the peso-denominated portfolio and permit to sustain the overall NIM as high as possible.
We estimate the NIM to be between 5.7% and 6% at the end of the year. On Slide 10, we can see the evolution of this.
This has been challenging front in 2017, as the impacts of the fiscal reform have impacted consumption patterns of individuals in Colombia. This, of course, has been drag for the evolution of our credit card business.
We continue promoting the use of plastic as a method of payment and increasing the client base. Other components of our fee generation strategy are doing very well.
In particular, asset management fees are growing 24% year-on-year. Also bancassurance is performing well as the number of policies continues growing.
In the international operation, it is remarkable the growth in fees, in Banistmo, with 34%; and Banco Agrícola, with 13% year-on-year. Our forecast is to grow fees around 10% for the year as we expect that the second part of the year becomes more dynamic, especially for our credit card business.
Now on Slide 11. We present the evolution of expenses, which grew 1% during the quarter and 15% during the year.
This number is explained by some adjustments that were made intentionally in order to reduce the volatility of the next coming quarters regarding administrative expenses. Regarding labor expenses, grew due to higher costs related to layoffs as the headcount has decreased over the last year and higher provisions related to bonds payments.
Administrative expenses increased during the quarter by 16%, due to -- we have program, some IT, advertisement and cash transportation payments in a linear way along the year based on the contracts with vendors. This approach increases the expenses in the second quarter by around COP 45 billion but smooths the impact of expenses in the third and fourth quarters on this year.
That means that we are not experiencing any particular increase in expenses out of the budget. It is just a normalization of those expenses for the third and fourth quarter.
Also the 5.71 of FX variation during the second quarter impacted the 35% of our total expenses that is expressed in U.S. dollars.
Finally, the higher VAT that Bancolombia is paying this year starting of March represented an increase of COP 15 billion in the second quarter. The cost to income ratio for the quarter was 52%.
Our target is to maintain this number at around 51% for this year and under 50% for the next coming years. We reaffirm our goal for expense growth will be between 6% to 8% this year.
In Slide 12, there are several initiatives that we have been implementing to become a more efficient institution. We want to present some of them in three main fronts.
First, regarding physical branches, as Juan mentioned, we are analyzing our current footprint of branches and putting in place several strategies such as not opening new branches and, in some cases, replacing them for our banking agents. As you can see the graphic, we have been reducing around 9% of our branches and increased banking agents by 311% in the last five years.
Regarding alternative low-cost channels, we have grown the number of banking agents by 12% over the last year and to date. For the first time, this channel performs a bigger number of transactions than the branch network.
Regarding the digital transformation, the participation of mobile banking plus Internet over the total transactions that we process is 72%, and we have reached 6.4 million downloads on the personal app, with 2.2 million active users and around 52,000 downloads in app for companies, with 39,000 of it active. We are going to continue enhancing the offer of digital services to our clients, maintaining a strict cost control, continue rebalancing the existing network and focusing in optimization.
Now let’s move to Slide 13, where we present the evolution of the capital position of the bank. We continue accumulating capital, and the fact that the loan portfolio expands at a moderate pace allows us to continue with the process during the rest of the year.
Our strategy in this front is to build up equity that will be deployed in organic growth when credit demand recovers, which we estimate to happen at the beginning of 2018. As we have shared with you, we feel comfortable with the current levels of capital and consider them optimal for the business plan that we have set for the bank.
Finally, we present the return on equity of the period, which was 12.3%. We maintain our estimation of return on equity for the year between 12% and 13%, considering our forecast for earnings and capital accumulation.
For the long-term view, we want to reach the level of 15% to 16% on return on equity in the next coming three years. As a conclusion, we want to highlight on the balance sheet that the loan growth is according to our forecast, which is 6% to 8%; strong growth in deposits, faster than the loan growth; growth in the capital base, with a Tier 1 above 10%.
On the income statement, a slight compression of the NIM coming from 6.3% to 6.2%; cost of credit according to our forecast, which is 2%; and efficiency levels according to our expectation with some internal adjustments in the second quarter. After these presenting -- these slides and discussing our first quarter results, I would like to invite the audience to ask any questions you may have.
Operator
[Operator Instructions] And we do have the first question from Guilherme Costa from Itaú BBA.
Guilherme Costa
This is Guilherme Costa from Itaú BBA. I have 2 questions.
First, could you give us some additional details about the reversion in the loss provision expenses of the Banistmo? What was the name of the 2 groups?
You said Grupo Wisa. The other one I didn’t get the name.
And have you reversed all the provisions you had for those 2 groups? And then my second question is about 2018.
I know it’s too soon to talk about 2018, but could you comment on general terms, what are your main expectations for 2018, in terms of margins, loan growth, asset quality, fees and expenses?
José Humberto Acosta
Thank you, Guilherme. Regarding your second question, our expectations about 2018.
You see that the macro environment for the second half of the year is showing you a slight reduction of inflation, interest rates coming down, unemployment level, it remains stable. Industrial production is -- it’s beginning to growing up, exports also.
So we believe that 2018 will be a year in which probably the GDP growth will be at around 2.3%, 2.5%. That means that probably the loan growth for 2018 will be 8% to 10%.
So we do foresee a better environment for business, for corporate business and also for retail business. Regarding your first question, Wisa, remember that with Wisa, 2 quarters ago, we had a -- we had to increase the level of provisions because they were in an intervention.
Finally in the second quarter of this year, we sold the project, the Soho Mall, and we were able to collect again the loan that we had. We only maintain a loan of at around 10% of the total exposure that we had in the past.
So we reversed that provision in the second quarter. That explained the positive results of Banistmo that accounts -- and on this quarter more than 25% of the total income of the group.
Operator
[Operator Instructions] And our next question comes from Ernesto Gabilondo from Bank of America.
Ernesto Gabilondo
A couple of questions on my side. One question on NIMs.
We saw the last 1.5 years, the re-pricing of your loan portfolio has helped net interest margins. But given the reduction of the reference rate by the Central Bank, I would like to know your view on NIMs for next year.
My second question is on taxes. We saw that your effective tax rate was 29% in the second quarter.
I just want to know if this should be the level for the next quarters. I remember that last year, you did some tax reversals in the last quarter of 2016, so I just want to know if there is room to do the same this year, or should we expect off year-over-year counts in the last quarter of the year?
José Humberto Acosta
Thank you, Ernesto. Let me begin with your second question.
The reason why the tax for this second quarter is low, below 30%, is because, as you saw in the presentation, that positive numbers coming from international operation are relevant. So remember that we are paying their 25% of tax, statutory tax, and also the FX help us, so when you increase the net income from international operations, you are having less tax to pay.
And the other point is, we had also a very positive second quarter of the offshore operation in Panama. We pay 0% tax because it is an offshore.
So because of combination of those 2 factors, that was -- our tax was below the 30%. For the year end, we expect a tax -- statutory tax range between 32% to 35% the second half of the year.
Regarding your first question, NIMs, again, we are trying to maintain at a level of, as we mentioned, 5.7% to 6%. We expect that next year, based on the economy, growing -- and based on the interest rate, it remains probably at the same level.
We are forecasting a NIM at the same level. I mean, the NIM for 2018 that we’re forecasting, it is between 5.6%, 5.7% to 6%.
Basically, because we have strength in the funding cost, and we’re able to reduce the company cost as well.
Operator
And our next question from Jason Mollin from Scotiabank.
Jason Mollin
I’ll keep it to one. From a strategic point of view, we’ve seen you, according to the regulator numbers in Colombia, gaining market share, over -- looks like over 300 basis points from May 2016 to May 2017.
Can you talk about that dynamic and this decision to grow faster than the system and maybe give us some color on who’s losing share, how you’re getting the share and maybe thinking about the dynamic of the asset quality, you mentioned the economy being difficult, and the decision to take the share at this point in time.
José Humberto Acosta
Thank you, Jason. First, yes, we have been growing a lot, but we have been growing because of combination of 2 factors.
The first one that we mentioned, which is consumer loans. We are growing at a pace of 25%.
And yes, we are gaining market share on the consumer business here in Colombia. How we are doing that?
Basically we are working with our current clients. Because of the analytics and the database that we have today, we are pre-approving credit to our current clients, and they’re taking advantage of that, and they are using the loans.
So we are not increasing our consumer loans with new clients. It is with existing clients.
And the math that we are doing is, the generation of NII, it’s better that the provisions that they are generated. So at the end of the day, it’s a business that is helping to increase over NNI -- NII to sustain the NIM and try to maintain the return on equity at a level below -- above 14%.
Regarding other leasing operation, yes, we increased the loan volumes because remember that the last year, we merged our leasing operation in our loan book in Colombia. That’s the reason why it appears that we grew 300 basis points.
It’s basically a consolidation process.
Operator
And our next question come from Tito Labarta from Deutsche Bank.
Tito Labarta
I’ll ask one question as well. I think Slide 4 on your presentation, it’s very helpful the breakdown by the different subsidiaries.
But if we look at the ROE of each of them, if it wasn’t for the provision reversals at Banistmo, it looks like your ROE would be around 10% or maybe slightly below that given the different subsidiaries. So maybe if you can give some color for each of the subsidiaries.
And what kind of ROE should we expect? I know you said 15% to 16% you expect in two, three years.
But what about by subsidiary? Can you give maybe some granularity in each of the subsidiaries and where ROE should get to?
Juan Carlos Mora
Thank you, Tito, for your question. Juan Mora here.
Yes, you are right. The ROE of Banistmo at the second quarter of 2017 has some impact from our extraordinary income or the reversion of the provisions.
What we are expecting regarding, ROEs on Banistmo, it’s to be around 10% this year, coming from 6% that you -- or around 5% last year. So it’s a big improvement on the ROE of Banistmo, taking out the extraordinary issues around provisions.
So we are improving our operation in Banistmo. And for coming years, we expect that ROE to keep improving, reaching levels probably around 12% to 13%.
In the case of the other operations, in Central America, Banagricola, we are expecting levels of ROE for the year around 11% to 12% and keeping at that level on the coming years. In the case of Banco Agromercantil, we are improving the entire operation.
It’s slower than in the other ones. Since we just took control of the operation at the beginning of last year.
So the ROE will be around maybe less than 10%, 8%. But we will keep improving the ROE also on BAM in the coming years.
Operator
And our next question from Carlos Macedo from Goldman Sachs.
Carlos Macedo
A couple of questions, maybe following up a little bit on the last one. You talk about margins declining through the end of the year, cost of risk staying kind of where it is, loan growth not accelerating significantly, a bit of relief on expenses, but not too much.
First half around 12% ROE. You talked about 12% to 13% maybe in the second half.
Where does the difference come from given that you’re not going to have much relief from elsewhere in your income statement. And then following up again into next year, cost of risk at 2% for this year.
Where do you think a through-the-cycle cost of risk can be? In the past it was as low as 1.5%.
Is that something that you can return to once the cycle is done in Colombia? Or given the mix with more consumer now, would that be a bit higher?
José Humberto Acosta
Yes, Carlos. Regarding your question, the ROE, how we will get to 12% to 13%.
The main driver in our operation, how to increase the return on equity for the next coming quarters, is through the efficiency level. You are seeing that we came from 56% two years ago, and right now we are about a 51% area.
So at the end of the year, again, 12% to 13%, because increasing of the equity side. But the key driver would be efficiency.
Regarding the next year, basically, I’m sorry, you question was...
Juan Carlos Mora
Yes, let me ask -- answer you the question, Carlos. Next year, we are expecting the cost of credit to be around 1.6%, 1.7%.
We don’t expect next year to return to 1.5%. But on long run, we should expect to be around 1.5%.
But not next year. Next year, we will be more around 1.6%, 1.7%.
And let me complement the answer about this year ROE. You are right.
Cost of credit is going to be around 2%. We wouldn’t expect an improvement there.
As José Humberto mentioned, we still have some room on the efficiency side in expenses to improve. Also, fee generation is going to be a source of income that we expect to help us reaching the ROE that we are forecasting.
Operator
And we have our next question from Domingos Falavina from JP Morgan.
Domingos Falavina
My question is more regarding those cost. I believe there was little bit of change in seasonality in this quarter.
And also, I think, to Carlos’ question, the efficiency ratio is ultimately a consequence of your top line and your cost, right? And given you’re not expecting loans to accelerate too much next year and NIM to slightly come down, you would have to pretty much either cut cost or grow very close to zero.
Is that the outlook you have for next year?
José Humberto Acosta
Domingos, we expect to align the growth in expenses to inflation. So we expect next year that the increase of cost will be of the area of 4% to 5%.
We have to invest it, we have an operational margin operations, but the relevant point is what’s going on through our channel distribution. You see that every single quarter, we are reducing the volumes through the branches, which is the big generating of cost.
And today, we only process 4% of our total transactions through branches. So that would be the best way to maintain -- align the cost, basically, to inflation.
So what we expect next year, we expect, as Juan mentioned, a reduction of cost of credit to 1.8%, maybe 1.7%, and expenses growth of around 5%. Loan growth will be of the area of 10% to 12%.
If you combine those effects, we will probably get again a level of 14% to 15% of return on equity. But again, mainly -- the main driver will be efficiency.
Fee generation today accounts only 8%, but this is basically, for the first half of the year, basically because of the economic cycle. But if you double check the numbers in the previous years, the fee generation, it’s on the arena of 12% to 15%.
So with the economic activity increasing the second half of the year and maybe next year, you see again a re-bouncing of the fee generation, 10% to 12%.
Operator
And we have our next question from Alonso Garcia from Crédit Suisse.
Alonso Garcia
In regard to the NIM, I would just like to confirm the kind of NIM [Indiscernible] that you expect or that you are embedding in your 5.7% to 6% NIM. I -- if I recall correctly, you had mentioned in the past that a normalized NIM on securities was close to 1%.
So far this year, it has been above that. It was 3% -- 3.2% in the first few months, 2.3% in the second quarter.
So I just wanted to check if you believe this 2.3% can be sustained? Or what kind of NIM [Indiscernible] is embedded in your guidance?
José Humberto Acosta
Yes, Alonso, our forecast for the NIM of the securities always will be of the range 1%. What happened in the last 2 quarters.
The 3% that we are having, this is basically because of the volatility of the [Indiscernible] interest rates. But we always forecast at around 1%, assuming cost of funding 3% and assuming the securities portfolio having an interest rate of 4%.
So we don’t expect more [Indiscernible] of that.
Operator
And we have our question from Christina [Indiscernible]
Unidentified Analyst
On shareholders’ equity, we are seeing a significant increase of 13% in the cumulated of the others comprehensive fee income. What is causing this increase?
Can we get more details about the situation?
José Humberto Acosta
It is a combination of the FX. Remember that we have a portion of equity in U.S.
dollars, and we are talking about that FX, the evolution of 5%. At the other end, it’s that we retain income from the previous periods.
This is a relevant point, because if you double check the last 6 quarters, we have been gaining capital every quarter. And we will accumulate more, and the first quarter of next year when we have our general assembly.
Operator
And our next question comes from Sebastián Gallego from CrediCorp Capital.
Sebastián Gallego
Just a follow-up on the -- on previous questions regarding efficiency. Do you have a specific target for branches for the next 12 months, or do you have other specific targets that you could comment on and you can share to reduce the OpEx?
José Humberto Acosta
The target that we have -- as we mentioned previously is inflation, to increase same level of inflation. We don’t expect -- we don’t have especially task to reduce the branches, because it’s one of our strengths.
We are optimizing and optimizing meaning maybe to merge some of them. But we don’t expect a more reduction in a very important way of branches.
In Colombia, branches is critical, because it gives us capillarity and give us funding costs. On the international operation, we are contemplating an optimization of the branches in Banco Agromercantil in Guatemala.
And you will see maybe more reductions in branches that we expect in the next coming quarters.
Operator
And our last question comes from Andres Duarte from Corficolombiana.
Andres Duarte
Regarding the tangible common equity ratio of 7.52% that you’re publishing, I wanted to know if you had a target ratio and what has been the evolution of it.
José Humberto Acosta
Our target would be the range of 8%. And again, our target to maintain the Tier 1, which is more relevant, it is just to stay at the 9.5% to 10.5% the next 2 years.
Operator
And we have no further questions in queue.
Juan Carlos Mora
We would like to thank you all for your interest on our presentation of the second quarter results. And we hope to see you on our next conference call.
Thank you very much, and have a good day.
Operator
Thank you, ladies and gentlemen. This concludes today’s conference.
Thank you for participating. You may now disconnect.