Oct 28, 2017
Executives
Juan Carlos Mora - Chief Executive Officer Jaime Velasquez - Chief Strategy and Finance Officer José Humberto Acosta - Chief Financial Officer Rodrigo Prieto - Chief Risk Officer Jorge Humberto Hernandez - Chief Accounting Officer Alejandro Mejia - Investor Relations Manager Juan Pablo Espinosa - Chief Economist
Analysts
Ernesto Gabilondo - Bank of America Merrill Lynch Carlos Macedo - Goldman Sachs Thiago Batista - Itaú BBA Tito Labarta - Deutsche Bank Jorg Friedemann - Citigroup Nicolas Riva - Citi Sebastian Gallego - Credicorp Carlos Gomez - HSBC
Operator
Good morning, ladies and gentlemen, and welcome to Bancolombia's Third Quarter 2017 Earnings Conference Call. My name is Sylvia, and I’ll be your coordinator for today.
[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 risks and uncertainty.
consequence, 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 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 Velasquez, 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 will now turn the presentation over to Mr.
Mora, Chief Executive Officer of Bancolombia. Please proceed, sir.
Juan Carlos Mora
Good morning, everyone. Welcome to our conference for the third quarter of 2017.
Given the current circumstances in the Colombian economy and the challenges we are facing, I would like to start this presentation mentioning the impact of this situation on our business. Along the year, the forecast for the Colombian GDP growth has been reduced over 1.6%.
This trend has had an impact on the credit demand as we continue seeing a moderation in loan growth, and we have found reduction in the payment capacity of our clients. On the other hand, we have seen inflation rate converging leads in the range set by the Central Bank.
This fact has permitted several rate cuts in order to promote economic activity. In 2018, we will see the positive feedback of these decisions.
Also, in this channel front, we have seen a consistent improvement in the current account deficit, which has been reflected in the stability of the exchange rate. With this environment, the loan portfolio growth is converging to our estimate of 7% for the year.
This has been a slow year in terms of credit demand, in particular from the corporate side, where we see companies acting in a prudent way. In Colombia, the loans are growing at a pace of 10% year-over-year and 25% in the last quarter.
In our Central American operations, loans grew 4.8% year-over-year. Coupled with the moderate credit demand, we are also experiencing the impact of the internal rate cuts, which have caused the yield of securities and loans to come down over the last 3 months.
Although we have had the pressure of the market rates with option, we managed to end the quarter with a cumulative mean of 6.3%. During this quarter, we successfully issued COP 500 million through Banistmo.
With this transaction, we completed deployment of strategy designed for our operations in Central America, with capital market supporting the growth. We have raised $1.2 billion for our subsidiaries in order to directly form their balance sheet structure.
The last relevant topic impacting the results we are presenting today is the evolution of the asset quality and the related new past due loans formation. On the corporate size front, which have contributed with 31% of the new PDLs, it is worth to mention the case of Electricaribe, where we have an exposure close to COP 600 billion, with provisions covering 53% of the outstanding balance.
We are expecting to reach 75% coverage by year-end. SMEs contributed with 25% of the deterioration, mainly associated to the economic cycle.
Consumers loans have contributed with 34% of its new PDLs and mortgages with 10%. As a result of the deterioration of the loan portfolio, we have accelerated the pace of provisioning, maintaining high coverage ratios.
And if anything, the quality for our balance sheet is our main goal. So far, we have had the cost of credit of 2.1% for the year.
This figure is our expectations so far. Today, we have a 90-day past due loans coverage ratio of 161%, which we believe is a conservative buffer in this part of the cycle.
Our intention is to keep such coverage ratios above 150%. And in order to do so, we forecast our cost of credit to be around 2.2% for the whole year.
We prefer to act early and maintain our protected portfolio instead of taking a wait-and-see approach to provisions. On the efficiency front, we continue our efforts on optimizing our branch network and the simplification and automation of several processes.
It's important to highlight that the evolution of the expenses has been in line with our forecast, which presents a faster growth in the second and third quarters of the year and will converge to the -- to 7% growth for the full year. Finally, I would like to mention our plans in Central America.
Today, the standalone operations are delivering ROEs in the high single digits, still below our target. Therefore, all of our actions are aimed to enhance the profitability levels.
In particularly -- in particular, efficiency gains and revenue expansion are the main goals to do so. In Banistmo, we are concentrating our efforts on loan growth and fee generation.
In Banco Agrícola, the main goal is protecting the quality of loan portfolio. And similarly, in Banco Agromercantil, we have focused aim to increase the coverage ratio and maintaining PDLs under control.
Now I will turn the presentation over to our Chief Economist, Juan Pablo Espinosa, who will elaborate on the main economic topics. Juan Pablo?
Juan Pablo Espinosa
Thank you, Juan Carlo. Now I'll ask you to go to Slide number 3 in the presentation.
Let me start by saying that the Colombian economy is still growing at a slow pace. For the third quarter of 2017, we estimate an year-on-year GDP valuation of 1.9%.
Although this rate is 0.6% higher than the previous quarter's reading, it is still below potential. Private consumption, which is the main component of the country's GDP, it is still performing weakly due to low consumer confidence or job creation.
Going forward, we continue to predict that productivity will gradually gain traction. This shift will be driven by the increasing terms of trade, improving global demand and further cuts in the monetary policy rate.
Hence, by the second half of the next year, the negative output will reduce significantly. Our full year growth forecast for 2017 is 1.6% and for 2018 is 2.5%.
In terms of prices, we foresee that in the next few months, inflation pressures will remain muted and the headline reading will benefit from good performance of food prices. As a result, we forecast that inflation will close the year at 4%, which is the ceiling of the target range.
Moreover, in the first half of 2018, 12-month inflation will continue to correct, thanks again to food prices and a positive base effect. Eventually, core inflation will also recede.
So by the end of 2018, the variation of consumer prices will be 3.5%. As a result of this encouraging inflation prospect and given that in the short term the economy will still be operating with negative output, the scope for the Central Bank to accommodate its monetary policy is now greater.
We anticipate that 25 basis points rate cut before year-end and 3 more cuts next year. So by December 2017, reference rate should be 4.25%.
With respect to the external factor, we expect exports to grow 20% in 2017 and 5% in 2018 as a result of a strong external demand and a competitive exchange rate. This will lead the current account deficit to reduce from 3.9% of GDP this year to 3.7% next year.
Finally, regarding public finances, we think that the central government will comply with its 3.6% of GDP deficit target for this year. However, we'll need some additional austerity measures in order to meet next year's target.
2019 onwards, structural reforms will be required to guarantee a sustained correction of the central government deficit. After this overview of the economic context, let me turn the presentation to José Humberto Acosta, who will discuss the bank's results.
José Humberto?
José Humberto Acosta
Thank you, Juan Pablo. Before entering the numbers for this quarter, I would like to give you a brief overview of the status of our operations across the region.
Please go to Slide number 4 where we can see a snapshot of the 4 main businesses, including Colombia. Please be aware that these numbers are reported under full IFRS and differ from the numbers filed with regulators.
They present cumulative numbers as of September 26 and 27. Also note that these numbers do not include our offshore operations, Bancolombia, Panama, Puerto Rico and Peru.
As a result, the sum of operations present on this slide account for 95% of the total loan portfolio. It is important to highlight that in Colombia -- in the Colombia operation, net loans grew 10% over the last 12 months, driven by consumer loans, which grew 25% in this period.
We saw a slight compression of NIM as a result of recent interest rate cuts and lower revenues from the securities portfolio. Fees also were growing at a pace of 6%, affected by the slow economic activity.
In the Banistmo operation, the loan growth at 7.5%, the focus of this year has been on corporate clients, deposits growing at a pace of 6%, which allows us to build a solid funding base originated by clients. The 7% growth in fees originated by the bancassurance and credit businesses.
Return on equity of 13% for the first 9 months. In Banco Agrícola in El Salvador, we have started seeing more stability on the macro fund, which has led to agencies to operate the rating of the country.
Our 4.5% loan growth is focused on consumer loans and 9% in deposit growth. Stability in operational cost with a reduction of 9% year-over-year as a result of a strict expenses execution.
In Banco Agromercantil, a loan growth of 9%, mainly driven by corporate clients coupled with higher coverage ratios. Having said this, I would like to move now to Slide 5 of the presentation, where we can see the evolution of the 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 the economic activity and outlook of our growth in the private sector.
The loan growth reached 7% and is in line with our expectations. In retail, we continue with our strategy to focus in medium- and high-income individuals with low indebtedness.
This segment, in particular, grew 70% over the last 2 years. The goal with this shift in mix towards consumers is in line with our estimations that a greater proportion of consumer loans should generate higher revenues.
In the corporate side of the business, we also saw moderate demand. Corporate loans have grown 4.7% over the last year, and our expectation is that for the year end, we will experience an expansion of mid-single digits.
Mortgages, excluding leases, grew 3.8% year-on-year. Regarding the outlook for the rest of this year, we do not expect a significant acceleration of loan growth.
Our expectation is to grow 6% to 8% during this year. Moving on to Slide 6.
We present the situation of the credit quality as of September. Vintages that deteriorated in the first months of the year continued running off, and as a result, the 90-day past due loans ratio increased to 2.9% As a result of this trend, we have accelerated the pace of provisions with a goal of maintaining an adequate coverage ratio of 161%, as Juan Carlo mentioned at the beginning of his presentation.
Consumer loan deterioration is mainly correlated to the economic cycle, and to some extent, to the reduced payment capacity of some buckets of individuals, presumably impacted by the higher tax burden. This is a trend that we were expecting according to our forecast.
And 3% deposit loan ratio for consumer loans is very much in line with our risk appetite and projections. In the commercial business, we have had a deviation from our initial forecast.
Deterioration of big clients have caused the provisions to accelerate above our estimations. Also, the SMEs have deteriorated, impacted by the current macroeconomic environment.
This way, we saw an increase of 1.6% to 2.69% of 90-day past due loans. We continue making provisions in order to sustain the pace of charge-offs and keep a 90-day coverage ratio above 150%.
Next Slide number 7 presents the provision charges of the quarter. As we can see in the blue bars, the provisions for the quarter accelerated to 2.4% cost of risk.
This charge are mainly explained by the runoff of all past due loans rather than the new past due loans formation. So far, the cost of risk for the first 9 months has been -- reached the level of 2.1%.
As we just mentioned, the COP 912 billion in the new past due loans are mainly explained by SMEs and consumer loans that deteriorated in Colombia. The vintages originated in the last 3 quarters present a better performance.
As loan reach the threshold necessary to be written off, we have seen acceleration in these charges, which were COP 560 billion for the quarter. Again, we should see a sustained level of charge-offs during the rest of the year, probably 2.1% to 2.2%, and it should permit to keep a clean balance sheet.
Moving on to Slide number 8. We see the evolution of net interest income and the funding cost.
During the quarter, we saw a reduction in net interest revenues as loan growth moderated and repricing of existing loans reduced the [indiscernible] . This low loan growth that we experienced in the period was offset by the NIM compression, especially NIM from investments.
As we were expecting during the first half of this year, the cost of fund continues to decline, in particular time deposits are maturing and repricing, which allows us to bring down the costs at a faster pace. Similarly, we highlighted reduction in funding with financial institutions to only 11% down coming from 14% 1 year ago.
In savings accounts, we have been able to put costs a well, in particular institutional accounts. At the same time, we are doing efforts challenging the composition of funding.
For instance, the proportion of savings accounts has increased from 28% 1 year ago to 30% to date, which contributed to reduce the overall funding costs. In the structure of funding, today we have: first, time deposit with less than 1 year to maturity, that will be expressed at a lower interest rate.
Time deposits with more than 1 year to maturity are typically indexed. And therefore, the cost should decrease along with CPI and DTF.
And most of our bonds in pesos also are at a variable rate, and they should also reprise, 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 to offset the impact of the interest rate cut by the Colombia Central Bank and its impact of NIM.
In 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 rates.
As we can see on the chart, most of the 40 basis points reduction in the overall NIM is explained by the compression of the securities NIM. They're leading NIMs pretty much in line with our expectations.
Lending NIM is pretty much in line with our expectations. Nevertheless, in our operations in Panama, both offshore and Banistmo, we continue seeing a NIM expansion as a result of 3 facts.
First, the repricing of the loan portfolio, especially the mortgages and corporate loans indexed to LIBOR; second, higher spreads on new originations; and third, the use of liquidity in the offshore operation in Panama and Puerto Rico to fund the other operations in Central America that originated loans to clients. All together, we estimate that the NIM of the loan portfolio to be between 6.1% to 6.3% at the end of this year.
On Slide 10, we can see the evolution of fees. During the third quarter of this year, we saw stability on the fee front, as total fees amounted COP 607 billion.
Credit and debit cards, in particular, show a moderation in the pace of growth, as we have accelerated the retention of whoever of our loyalty program, and therefore, increased the expenses associated with that program. Additionally, the level of transactions have come down as the economy decelerates.
Asset management fees are growing 25% year-on-year. As assets under management have increased to date, our asset management business oversees COP 18 trillion, the largest money manager in the country.
In the bancassurance business, we continue making progress, and we already have more than 3 million policies outstanding. The year-on-year growth on this property [ph] is 41%.
In the international operations, the growth in cumulative fees in Banistmo is 7% and in Banco Agrícola is 4%. Our forecast of fee growth of -- for this year would be 8%.
Now moving to Slide 11. We present the evolution of expenses, which declined 1% during the quarter.
As we explained in the previous call, some adjustments were made intentionally in order to reduce the volatility in the fourth quarter regarding administrative expenses. That means we are not experiencing any particular increase in expenses out of the budget.
For year-end, we reaffirm our target of expense growth of 7% and efficiency level of 51%. In Slide 12, we present evolution of the main channels.
We continue optimizing the size of the network of physical branches and gradually migrating to digital channels. In particular, we illustrate [ph] the fact that 72% of our total transactions are conducted through online and mobile platforms.
At the same time, the size of the network of branches have declined during 2017. 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 evolution of the capital position of the bank. In line with the trend that we have seen during the first half of the period, the bank has operated above 10% in Tier 1 and is in the process of accumulating capital.
Our strategy in the capital front is to build up equity that will be deployed in organic growth when credit demand recovers, which we estimate should happen in 2018. Additionally, we conducted the liability management transaction by issuing $750 million of Basel III Basel III-compliant subordinated bonds.
This will enhance our Tier 2 for at least the next 5 years. As we have shared with you, we've been 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 for the period, which was 8.2%. We have fine-tuned our estimation of return on equity for the year with the recent evolution of provisions and NIMs.
We estimate a new return on equity of 10.5% to 11% at the end of this year. As a conclusion, we want to highlight for 2017: a loan growth according to our forecast; a strong growth in deposits faster than loan growth; a growth on capital base we do want above 10%; and on the income statement, a slight compression of the NIM; a cost of credit at around 2.2% for the whole year; efficiency level, according to our expectations, finishing the year at a level of 51%.
Fee income growth growing at a pace of 8% at the end of this year; and for 2018, based on what Juan Carlo mentioned at the beginning -- Juan Carlo mentioned regarding the economy. We believe that the loan growth for next year will be in the area of 9%.
We believe that we are able to grow in terms of fee income at around 10% to 12%. So that will support to get a level of return on equity in between 13% to 14% next year.
After presenting these slides and discussing our third quarter results, I would like to invite our audience to ask any questions you may have. Thank you.
Operator
Thank you. [Operator Instructions] And our first question comes from Ernesto Gabilondo from Bank of America Merrill Lynch.
Ernesto Gabilondo
Hi. Good morning, Juan Carlos and good morning to all your team and thanks for taking my call.
My first question is on asset quality. We saw a big jump in provision charges during the quarter and the cost of risk of 2.4% of average loans So can you elaborate on how much of the provisions is coming from corporates and if you can mention, which of them, and how much from SMEs and consumer loans?
My second question is regarding NIM. Given the softer loan growth and lower interest rates, how are you seeing the NIM for the next year?
And finally, following IFRS 9 next year, are you expecting to create additional provisions by moving to an expected loss model? Thank you.
Juan Carlos Mora
Thank you, Ernesto. This quarter, we mentioned was challenging in terms of risk.
Provisions came around 30% from corporate clients. In these corporate clients, we have some corporates that are the main cause of these provisions, mainly Electricaribe, as I mentioned, it's a big one.
And we are expecting to cover our COP 6 billion exposure of around 75% at the end of the year. Others worth to mention are the [indiscernible] exposure, which is also accounting for some of the provisions.
But we are expecting that - that particular case evolves positively during the fourth quarter. Also we have corporate clients related to mass transportation systems in Colombia.
We have a coverage of 33% of that exposure. So that's the main clients, the exposure for - around corporate.
Also SMEs had some deterioration, and they account for around 25% of the provisions, and consumer loans are around 33%. So overall, you see the distribution of the provisions are on all of the loan portfolio classes.
What we expect for next -- for the fourth quarter is that the behavior of the economy is allowing us to forecast probably a similar behavior of what we had during the last quarter. Regarding NIM, we are forecasting a NIM around - between 5.6% to 5.8%.
The margin on loans -- the net margin on loans is around 6.3%. And we will continue seeing some pressure on NIM.
But we think that we have the tools to manage the pressure on the NIM. And we expect to get that number that I mentioned in that, we will have NIMs around 5.6% to 5.8%.
Regarding the IFRS 9, I will pass that question to José Humberto.
José Humberto Acosta
Thank you, Juan. Just to complement the provisions chapter, we have to divide the provisions into different chapters, if I may say.
First, we have a stock of faulty loans coming from all vintages that we are managing with the collection division. But the new vintages going or behaving much fair.
So they are not increasing the level of provisions. So that is why we expect that probably we will get the same level of faulty loans and provisions in fourth quarter of this year.
Regarding IFRS 9, we can't say -- when we implemented IFRS 3 years ago, we had to create on the equity side and special reserves regarding IFRS. On the IFRS 9, next year, probably we will have to increase the level of provisions.
And that will be against the equity, and that will be against those results, which means that we will not be affected by our solvency ratio, because those reserves currently is not accounting right now as a part of the solvency ratio. So just to make you clear, IFRS has not impacted the level of solvency.
It's impacted the level of equity next year.
Operator
Our next question comes from Carlos Macedo from Goldman Sachs.
Carlos Macedo
Thanks. Good gentlemen.
A couple of questions. First question on expenses.
You guys have talked a lot about curbing expenses and controlling expenses, particularly in face of the declining rates. And you talked a little about next year.
Can you give us some color of where you expect cuts if it's Colombia and where in Colombia or if it's -- you talked about efficiency and improving efficiency in your operations in Central America, if you give us some color there. Second thing, I think we talked a little about cost of risk next year.
Could you give us some color if you do really expect that? I mean, in the past, it was well below 2%.
Should we expect it to fall below 2% again? And is it going to be a gradual process or something more abrupt as some of these loans you were talking about right now start being written off?
Thanks.
José Humberto Acosta
Thank you, Carlos. Regarding expenses, as you pointed, yes, 7% will be achievable this year.
Basically, the operation in Colombia is growing below that. What we expect this year, the upside of the efficiency level will be provided by the international operations.
If you double check the numbers of our international operations, they are -- we have still room to reduce the level of efficiency. That's the reason why we are forecasting that the efficiency next year will be at the area of 50%, assuming the expenses will grow 6% to 6.5% next year.
And the upside will be basically the international operation. How?
Because of the Guatemala operation, we are expecting to optimize the size of the branches. Because of Banistmo right now, we have a better cost control and also in [indiscernible].
Regarding your second question, the cost of risk that we are planning for 2018 will be at -- around 1.8% because of combination of 2 factors. First, loan growth.
Next year, we are expecting at around 9% that we have to dilute the faulty loans. And second, because the economic cycle that explained by Juan Pablo and Juan Carlos, we're seeing better conditions interest rates below 5%, inflation in the range of 3% to 4%.
That suggests that the performance of the loan portfolio, especially in consumer, will behave much better.
Operator
Our next question comes from Thiago Batista from Itaú BBA.
Thiago Batista
Yes. Hi, guys.
Thanks for the opportunity. I have just one question regarding the number of branch and employees.
We saw in last quarters, let's say, a big decline in the number of employees and some contraction in the number of branches. Is it possible to say that this trend will continue going forward, the reduction in number of branches and also the headcount?
Juan Carlos Mora
Thank you, Thiago, for your question. As you mentioned, we made an effort on the front of the headcount and number of branches.
We will continue working on that front, but what you see probably now is marginal. We don't expect big numbers there.
But the effect of what we have done so far is going to be seen next year, because now, we have the investment in our balance sheet of those strategies. But we will collect the benefits in the coming years.
So now, as I mentioned, we will have all the costs this year, but the benefits will come in the future.
Operator
Our next question comes from Tito Labarta from Deutsche Bank.
Tito Labarta
Hi, good morning. Thanks for the call.
My question is, José Humberto, you mentioned you expect ROE next year of 13% to 14%. I understand the cost of risk you expect to come down.
But how confident can you be with that number? I mean, I think you were expecting a similar level for this year.
I understand the economy has been a bit tougher than expected. But with the cost of risk coming down a bit, is that going to be an offset to the pressure on margins?
Maybe the economy should improve next year, but still growing below 3%. So just wanted to get a sense, I guess, in your confidence level of being able to reach that 13% to 14% next year?
Thank you.
José Humberto Acosta
Thank you, Tito. Yes, we expect to get that level not only because of cost of risk, also because of combination of several factors.
The first one is efficiency. If you do the math, coming from 51% to 50% efficient, that would help.
The second thing is to sustain the NIM, we are expecting to sustain the NIM in the loan portfolio at a level, as Juan mentioned, to 5.9% to 6.1% the loan portfolio NIM. That will also help a lot.
And the fee income growth also will help, basically because, again, the international operation by now is moving in right direction. We are increasing the level of fee income in those countries.
So if your loan portfolio grows 9%, your NII will also grow as well.
Juan Pablo Espinosa
And Tito, let me emphasize that we are very confident that we can achieve those numbers, because we think that next year will be first in Colombia, which is around 70% of our operation. The economy is going to behave much better.
2.5% allow us to do -- or to have much better performance in Colombia. And on top of that, the strategies that we have been implementing during this year are going to have the positive effects next year.
Of course, if the Colombian economy will not behave as we expect, that will affect our level of confidence. But we think that the Colombian economy has the potential to grow around 2.5%.
And on top of that, the Central American operations are going to positively contribute to that number. So we think that, that number, the 13% - around 13% ROE is achievable.
Operator
Our next question comes from Jorg Friedemann from Citigroup.
Jorg Friedemann
Thank you very much for taking my call. I’d like to follow up on the question of margins.
I know that you're confident that you could maintain net interest margin between 5.6%, 5.8% next year. But when I look back in time and see levels of interest rates that are expected for Colombia next year below 5%.
In those times back, you were also working those margins below 5%. So could you elaborate a bit more, where you believe you could offset the pressure of low rates to continue, I know, supporting margins above 5%?
José Humberto Acosta
Thank you, Jorg. Yes.
Our thesis is basically supporting 2 different tracks again. The first one is, remember that 1/3 of our loan portfolio is denominated in U.S.
dollars. And in those countries, we see the opposite.
We see an interest rate in U.S. dollar going up.
So we will benefit and we are lending on a better interest rate, if you double check the numbers in Banistmo and El Salvador. So we believe that the NIM in U.S.
dollar will increase a little bit because of that, because interest rate and because the market conditions in those countries. On the Colombian operation, yes, we believe that the interest rate will go down, but we have been prepared to sustain that NIM, basically moving to savings accounts, which is one of the cheapest way to get funding where we have our time deposits right now, as we explained during our speech.
It's almost floating as well, because all time deposits are more than 1 year of the repricing. And most important, on the asset side, on the loan side, you'll see an increase in consumer loans.
Now those loans have better, better, better deals. So that's the reason why we're supporting the decision.
We are able to sustain the NIM at that level.
Operator
Our next question comes from Nicolas Riva from Citi.
Nicolas Riva
Thanks for taking my question. I guess, it's a follow-up on the previous question.
What you were mentioning about consumer lending probably helped you support net interest margins going forward. When I look at loan growth on a consolidated level, you're growing about 6% year-on-year in nominal terms, which is moderate, and that's clearly explained by what's going on with the economy.
But specifically in the consumer lending segment, you're growing 17% year-on-year. So the question there is, what strategies are you going to pursue to achieve these fast growth in consumer lending?
And also how much confidence you have that this is not going into translate into higher NPLs down the road, given the situation of the economy right now? And then a second question, which is a bit more specific on Electricaribe.
You mentioned already the exposure is about $200 million and you are 53% covered and you're going to increase that coverage by year-end. The only thing is, in the third quarter, can you disclose how much booking provisions for Electricaribe?
Thanks.
José Humberto Acosta
Thank you, Nicolas. Regarding the consumer lending, why we are confident regarding consumer lending.
If you double check the numbers of the economy as a whole, the consumer lending in the system is touching the lowest level. And with a combination of better condition of the macro economy, you'll probably see a potential for the next year.
Plus this fact that we are doing our job internally pre-approving into -- within our own customer base, we are able to achieve same growth in consumer at around 15% to 20%, again, because of market conditions, because the lowest level of consumer loans in the hold to date and because we are doing mining -- growing with our own customer base. This is regarding your first question.
Regarding your second question, again, the vintages of the re-origination of consumer loans, the new vintages and the SMEs suggest that the worst happened in the previous quarters. So we are not foreseeing for the future, looking forward that the vintages is behaving in a different way.
The problem, as we mentioned, is the provisioning that we're having today is because there's stock of the loans that re-originated a year ago. So that's a combination of factors.
Again, that's the reason why we expect the cost upgrade to touch the level of 1.8%.
Juan Carlos Mora
And regarding Electricaribe, Nicolas, we provisioned on this credit around COP 70 billion, during the quarter.
Operator
Our next question comes from Sebastian Gallego from Credicorp.
Sebastian Gallego
Hi, good morning. Thank you for the presentation.
I have two questions. The first one is, could you comment on the coverage on a 90-day NPL in Banistmo and in Guatemala below 80%, if you feel confident with those levels?
And then the second question, could you provide more color on Guatemala? On a consistent basis, we're seeing profitability lagging and also efficiency not coming down.
I know you comment some initiatives, but can you go a little bit further on those initiatives in Guatemala? Thank you.
José Humberto Acosta
Thank you, Sebastian. Regarding the coverage of 90-day past due and the coverage, yes, we have to attract on the international operation regarding the provisioning.
There are some operations in which it's still below our standards. But again the conditions -- the market conditions suggest an increase in the level of provisions in those operations that we'll be setting up with a different pace of growing in consumer, in provisions in Colombia.
So at the end of the day, we are confident that: first, we have to increase a little bit the provision size of the international operations; but as a whole, we're seeing better conditions basically on the Colombian market.
Juan Carlos Mora
Let me elaborate a little bit on that. This is a process that takes some time as -- if you see our operation in El Salvador, which we bought almost 10 year ago and we it bought with a level of coverage -- a very low level of coverage.
Today, it's on a very good standard. Same thing in Banistmo, which we bought around 3 years ago and we bought it with a coverage ratio -- with a very low coverage ratio, which was under the owner.
Now we have more coverage, and we will continue moving on that direction, but it's going to take some time. Other thing that I want to mention on the case of Banistmo is that the percentage of mortgages on the assets on the loan portfolio in Banistmo is high.
So that loans require a level -- a lower level of coverage because of the risk that they have. But we will continue improving on the midterm the coverage of those operations.
José Humberto Acosta
Remember that in Banistmo, 25% of the loans are mortgages. Regarding your question on Guatemala, Guatemala is still a very small operation in total.
It accounts only 5% of the total assets. And the tax there is cycled to get a better level of efficiency because of the branches.
And Guatemala is offering us a possibility of loan growth because of the economy. So with those factors, improving efficiency level and loan growth at around 5% to 6%, we are also confident that the operation will be more upside in the medium term and long.
Operator
Our next question comes from Carlos Gomez from HSBC.
Carlos Gomez
Hi. Good morning.
Two questions. First, I would like to know what do you expect your tax rate to be for the next 2 or 3 years, your effective tax rate?
Second, you mentioned that you expect better asset quality. But again, if we look at the corporate portfolio you're having two more [ph] operations, do you see any evidence whatsoever that corporate asset quality is getting better in Colombia?
One does not get that impression, but we could be wrong. Can you tell us where do you see that there is an improvement?
Thank you.
José Humberto Acosta
Thank you, Carlos. So regarding your first question, our tax rate for this year will be at around 32% to 34%.
And for next year, we anticipate at a level of 33% to 35% tax rate for 2018. And this year, again -- sorry, this year will be 33% to 35% as well, same level of taxation.
And regarding...
Juan Carlos Mora
And regarding corporates, as we mentioned, we see the duration and basically see the corporate clients, and we are working on how to solve the situation of those customers. But that's going to take some time.
So that improvement you will see it over time. And we don't foresee a deterioration -- much deterioration on corporate.
We will -- when we have some specific sectors on customers, big ones that have had a difficult situation, and we're working on how to solve those issues. But we don't expect additional deterioration on corporates.
Operator
Our final question comes from [indiscernible] Capital.
Unidentified Analyst
Hello, guys. Thank you for attending my question.
I would like to understand, is the estimate of ROE for next year. Considered the potential impact of an increase in the cost of risk regarding the [indiscernible] in the mid to low yield for IFRS 9?
Thank you.
José Humberto Acosta
We have the numbers yes, about how that will impact our P&L. But again, as I mentioned at the beginning in terms of solvency, we will not have an impact regarding solvency ratio.
But again, when we have the calculation about how it will be impacted in terms of provisions, we will let you know.
Operator
We have no further questions at this time. I'd like to turn the presentation back over to Mr.
Mora.
Juan Carlos Mora
Thank you, everybody, for your interest and for your participation in this conference call. We will see -- we will be together next time on our conference call, in which we will present the results of -- for the full year 2017.
Again, thank you so 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.