Feb 22, 2018
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
Tito Labarta – Deutsche Bank Ernesto Gabilondo – Bank of America Merrill Lynch Nicolas Riva – Citi George Friedman – Citibank Domingos Falavina – J.P. Morgan Alonso Garcia – Credit Suisse Andres Duarte – Corficolombiana
Operator
Good morning, ladies and gentlemen, and welcome to Bancolombia's Fourth Quarter 2017 Earnings Conference Call. My name is Sophia, and I will 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.
Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements including changes in general, economic and business conditions, changes in currency exchange rate and interest rate, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy and various other factors that we describe in our reports filed with the SEC. With us today is Mr.
Juan Carlos Mora, Chief Executive Officer; Mr. Jaime Velásquez, Chief Strategy and Finance Officer; Mr.
José Humberto Acosta, Chief Financial Officer; Mr. 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 turn presentation over to Mr.
Mora, Chief Executive Officer of Bancolombia. Please proceed, sir.
Juan Carlos Mora
Good morning, everyone. I would like to thank you for attending this conference in which we will present our results for the fourth quarter of 2017.
And, I would like to start with the description of the main events that drove our business last year. First, I would like to highlight that the efforts we did in cost control permitted to have a real decline in the operating expenses.
I would like to highlight the decline in the labor cost and the positive impact of our strategy to rebalance the branch network. As a result, the cost-to-income ratio declined below 50%, which was the goal that we set for the year.
We were also able to grow fees not only in real terms but also faster than the net interest income despite the adverse effect of the higher value risk factors in Colombia, which was a drag for growth, in particular in the first half of the year. The efforts to enhance fee-generating services is a key component of Bancolombia's strategy to improve profitability and use the capital of the bank in a more efficient way.
We also were able to maintain the net interest margin despite the interest rate cuts conducted by the Colombian Central Bank during '17. Our strategy in this front was concentrated in managing the funding of the business, reducing the sensitivity of the balance sheet to interest rate cut and growing faster retail clients with higher risk adjusted returns.
On the front of cost of credit, in 2017 we had a performance that was above our estimate. This was 2.2 -- the cost of credit was 2.2.
In particular, the deterioration of corporate clients caused significant provision charges. SME clients were also affected by the economic slowdown and the depreciation of the peso.
Therefore, we accelerated provision charges to cover them and protect the book. On the other hand, consumer loans behaved in line with our expectations.
And towards the end of the year, we saw a stability on the quality of the portfolio. Moving to the digital front, we continue making progress by growing faster in mobile and internet banking.
As we have shared with you, our goal is to migrate more transactions to low cost channels and release pressure from the branch network. I would like to highlight some aspects of this strategy.
Now, 2.5 million regular -- we now have 2.5 million regular user of Bancolombia's mobile platform. We have 300,000 [ph] users of digital bank making Colombian, and 22,000 [ph] in Panama just 12 months after its launch.
Digital sales have grown steadily. And today, we open 40,000 products online every month increasing e-credit cards, CDs, savings accounts among others.
The capacity to open savings accounts completely online has permitted bring 45,000 new clients to the bank via these channels during the last year. We continue introducing several products and services in our Central American operations, particularly in Banistmo, where we see more upside.
This strategy might possible to fees 13% during '17 and complements the portfolio while using the bank's capabilities in a more efficient way. Similarly, in Banco Agrícola insurance distribution became the largest fee generator and the credit card fees grew, the reduction in cost to income in Banistmo was also an important achievement that it came down from 58% to 52% in 2017.
We continued strengthening the origination process by using data analytics and order in order to predict our clients indebtedness capacity and behavior. This is a key element that permitted to growth consumer loans by more than 15% with moderated increasing the cost of risk at [indiscernible] to this segment.
Similarly, we have implemented robot process automation in several back office processes, this work typically labor intensive processes and as a result the gains inefficiency have been significant, especially in labor costs. After this review of the main drivers of 2017, now I would like to move to some the main aspects that will guide our strategy in '18.
We tend to continue managing the risk and credit cycle in order to reduce the cost of risk from current levels towards 2% for 2018. As I mentioned '17 was a year in which the cost of credit was above our expectations, so we will focus on managing credit risk during '18 and we don't expect dramatic reduction but we will work on having the cost of risk around 2% during '18 and particular we highlight the fact that it seems like NPL ratio have reached plateau and in our review we should improve towards the end of the year.
We will continue doing provisions related to large corporate clients. In the cost and efficiency front, we intend to continue our plans to bring down the capital income ratio towards 48% by growing cost below 5% and aim to high single digit to double digit growth in revenue.
We will focus on maintaining the efficiency ratio on to issue that the achievements we had during '17 will be sustainable during the '18. In Central America in particular Banistmo bond we intend to increase profitability by promoting the fee generating and more efficient low mix.
Across Central America, we are conducting a program to cut costs that we estimate will save $100 million per year. This includes optimization of the branch network automation of processes among others.
Similarly revenue initiatives, one particular point of attention right now is the optimization of the processes where we interact directly with customers. Our goal here is to reduce the time of our client spend at the branch and moved more transactions to digital reference on banking agents.
The ultimate goal here is to continue turning the branch into sales points point rather than a transaction point and eventually increase the cross-selling ratio from the current 2.3 per client to 3.5. Finally on regarding the use of the network, we continue rebalancing it in order to reach the right coverage in case capillarity.
As I mentioned, we're progressing Colombia last year and today our efforts will be concentrated mainly in Guatemala. Now let me turn the presentation over to our Chief Economist Juan Pablo Espinosa who will elaborate on the main economic problems.
Juan Pablo?
Juan Pablo Espinosa
Thank you, Juan Carlos. Now I'll ask you to go to slide number four in the presentation.
During the fourth quarter of 2017, GDP grew 1.6% 10 basis points below our forecast. This result reflects a poor performance of the sectors such as agriculture, retail and manufacturing.
Incorporating upper revisions to previous quarters in 2017 the Colombian economy grew 1.8% below its rating in almost a decade. Going forward, we reaffirm that growth will accelerate to 2.5% in 2018.
Recently, we have seen that also some leading indicators to stop deteriorating that we can mean that characterize last year has persisted. However, some of the factors that will lead to de minis in economic activity related this year have emerged.
These factors include a Sanguine global context are recovering in the terms of trade recovery of income and softer monetary policy. As a result, we anticipate that growth will accelerate by the second half of this year.
Regarding prices, we have reduced our year and inflation forecast to 3.4% during the past few months, inflection risk have moderated while the inflation the VAT rate at the beginning of last year has currently generated a favorable base effect in the second half of the year this quarter corrections in inflation will be limited due to the persistence of core inflation and the right support prices. In terms of monetary policy, despite the fact that the Central Bank's board just stated in its last meeting that with available information the cycle of rate cuts has finished we think that there will be room for an extra 25 basis points cut in the second quarter.
The good inflation ratings during the next few months in the context offers still negative outlook will allow the Central Bank to take this step. Therefore, we maintain our previous basis scenario in which the repo rate will reach 4.25% and will remain that level for the remainder of the year.
On the external front, we expect that the current account deficit will adjust from 3.6% last year to 3.5% of GDP this year as a result of higher experts thus the countries external imbalance will be closer to its sustainable levels although it will remain above the average of [indiscernible]. Finally, recently reinforce our expectations that this year the Central Bank, the Central Government will meet its deficit target of 3.1% of GDP.
However, and despite higher oil prices, we think that additionally austerity measures will be necessary in order to comply with next year's fiscal target. after this overview of the economic environment, let me turn the presentation to José Humberto Acosta who will discuss the bank's results.
José Humberto Acosta
Thank you, Juan Pablo. As usual, I would like to give you a brief overview of the status of our operations across the region.
Please go to slide number five where we can see the snapshot of our main operations. 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 December of 16 and 17. I would like to highlight two points in particular, in Banistmo a significant improvement in return on equity.
Cost of income reached 51% as a result of debt to cost control. Cost declined 4.5% and fees grew 13%, thanks to the introduction of new products and services, also in 2017 there was a recovery of provisions associated with the Visa assets that were finally sold and dropdown the cost of credit.
In Banco Agrícola in El Salvador, fee growth was 9% as a result of introduction of bank assurance. We maintained a low level of loans of 1.7% with the strong coverage ratio of 208% in a strategy to protect the balance sheet.
And finally, cost control programs caused expenses to decline 2%. Now I would like to move to slide five of the presentation where we can see the evolution of assets and their composition.
The loan structure of the bank reflects the newest strategy to change the mix. During the last years, we have strategic growth of consumer loans, which went from 14% of the loan portfolio in 2016 to more than 17% today.
As a result of these efforts, the composition of the loan book today is cooperates an SME 69%, consumer loans 17% and mortgage 13%. We highlight the consumer loan growth leverage in our large base of clients focusing on those with neat and high income and using better analytical tools.
Today, 35% of the consumer loan portfolio has been originated with pre-approval loans. We thought of this analytical process.
Loan growth for 2017 was 6% certainly confirming that we had seen during the first three quarters. Nevertheless, there was a significant difference between growth in commercial and retail loans.
Commercial loans grew 3.4% for the tier, where consumer loans grew 15%. Our strategy is to balance the portfolio towards consumer loans in order to improve the overall profitability of the lending business.
Loans denominated in dollars accounts for 34% of the total loan portfolio. The dynamics of loan growth is reflected in Colombia, who have the loan portfolio view 8%.
On the other hand, we saw consistent demand for product eliminated loans in particular in our operation in Panama. The securities portfolio remains around 7% of the assets and in the fourth quarter in particular consolidate with our good performance of the NII, regarding the outlook of the rest of the here and according to the macroeconomic environment, we believe that the loans will be facet in the second half of 2018.
Our expectation is to grow at around 9% to 10%. Moving onto slide seven, we present the situation of the credit quality as of December.
30-day past due loans presented a slight improvement in the last quarter mainly due to the reduction of corporate past due loans. Nevertheless, 90-day past due loans posted a deterioration due to run-off of clients who were already past due.
Here we highlight the fact that the peso deterioration seems to be slowing down due to measures taken to curve this process. We remain cautious about evolution and that the writing is standard due to seasonal effects we might see some deterioration in the first months of this year.
The coverage ratio of 90-days past due loan was a 164% in line with our targets and we expect to keep it around that during this gear. The next slide number eight, presents the provision charges of the quarter.
We continue having high provision charges during the quarter, most of them related to commercial loans. One goal for 2018 is to reach the optimal level of coverage of large corporate clients are maintaining a solid coverage ratio.
During the quarter, we saw an improvement in the peso deterioration of the loan portfolio. New past due loans totally 622 Colombian billion pesos and in particular we saw an improvement in the corporate book.
We remained cautious with the quality of the loan portfolio and in the next months we expect to have provisions similar to the ones we have had in the second half of last year. Our forecast for cost of risk for this year will be at around 2% based on the assumption that they loan growth will be 9% to 10%, which will dilute the charge.
Moving onto to slide number nine, we saw the evolution of the net interest income and the funding cost. Net interest income projected a positive performance during the quarter and during the year.
It viewed 8% during the whole year while the growth loan portfolio view of 6%. The performance of the NII is explained by three conditions.
First; 6% loan growth during the year, second; the change of mix in the loan portfolio growing faster in retail and third; the efforts to bring down the cost of funding in an environment of interest rate cut. Regarding the cost of funding, our strategy has been focused on reduce a cost of long-term debt by rolling over the bonds.
For more to savings account, which grew 11.5% versus growing 2.4% in time deposit. Producing the 7.8% the stock of funding with international banks and finally perhaps the most important one, the reduction in the duration and cost of certificates of deposits in Colombia.
The combination of these factors have permitted to bring down the loan to a positive ratio to 115%. In the next slide number 10, we present the NIM.
In 2017, we offset the NIM compression despite the 300 basis points in the interest rate. For the whole year, NIM went from 5.96% to 6.07%.
On the other hand, securities had a good performance during this year. Although with some volatility in the portfolio Colombian government securities appreciated due to the reduction of interest rates and contributed to 2.6% NIM.
We expect the reference rate in Colombia to come down 25 basis points and an improvement in dollar margins as a result of higher U.S. rates.
As a result, we estimate the NIM for 2018 to come down at around 20 basis points and we will reach the level of 5.8%. On slide 11, we consider evolution of net fees.
Due to seasonal factors and more economic activity in the last months of the year, we saw a positive performance of fees in the last quarter of last year. Fee growth was 8% for 2017 adding value to the results.
This growth was driven by credit tax, asset management and Bancassurance. Fee evolution in Colombia has been impacted by the deceleration of the economy and also the increase of the value-added tax, the VAT.
On the other hand, the Central America, the growth of fees has been a double-digit pace. Management with clear fees 13% had a very positive performance in banking fees and credit card.
Banco Agricola, which grew fees 9% continue making progress in Bancassurance and today that is the largest fee generator for the bank in Salvador. Our forecast for fee growth for - in 2018 will be 12%.
Now moving to Slide 12, we present evolution of expenses, which decline 13% during the quarter. As we have mentioned in previous conference calls, we have normalized operating expenses during the year in order to avoid seasonal variations that typically affect the four quarters of previous years.
For 2017, we are pleased to highlight an OpEx growth of 3.5%, which is below inflation and below our initial estimations. In particular three aspects contributed to the reduction in expenses during the quarter.
First, the reduction in personal expenses, second; the adjustment to the calculation of bonuses based on the final results of the year and third the profit evaluation towers, low cost channels and reduction of the network of branches. As a result of this trading is implemented, they have a level of efficiency which are level of 49.2%.
For 2018, we expected to grow operating expenses between 4% to 5% and the cost of income ratio will be at around 48%. In slide 13, we present evolution of the main channels.
As we have mentioned during the year, one of our main goals in client experience and efficiency is to promote the digital channels that have little marginal cost. The part in the bottom right shows how mobile and internet will present the largest portion of total transactions in Bancolombia.
Similarly, the growth in capillarity through banking agents permits to optimize the role of the fiscal branch and which inclines with the channel that has buyable cost instead of fixed cost. In 2017, we had 16, 18 agents which is more than 10,000, and shutdown a 1070 branches.
We will continue enhancing the offer of digital services to our clients maintain a street cost control, continue rebalancing the existing network and focusing in optimization. Now let's move to Slide 14, where we present the evolution of the capital position of the bank.
In line with the trend that we have seen during the year, the bank has separated about 10% tier one and introducing the process of accumulating capital. As we have shared with you, we feel comfortable with the current levels of capital 10.2% Tier-1 and consider them optimal for the business plant we have set for the bank in the next coming years.
Let's remember that this level of capital does not include the earnings generated in 2017, which will be prepared in the annual general meeting next month. That should put our Tier 1 ratio at around 10.7%.
Finally, we would like to mention some seasonal effects on the income statement that impacted the fourth quarter. We had other operating income gains related to the return of COP86 billion of income taxes from previous periods, and COP88 billion related to gains of the real estate assets that we have through our [indiscernible] Colombia and other kind of assets.
We posted a higher equity method contribution due to income from our investments in Tuya and other non-controlling subsidiaries. We have a COP173 billion impairment of our stake in Tuya to the annual appraisal of this vehicle.
The net impact of the gains on investments was upset by this impairment, reducing the volatility of the results for the whole year. Finally, we present a return on equity for the period which was 16%, for the full-year it was 12%.
Our forecast is to gradually improve the return on equity towards the 16% target that we have set for 2020. In particular, we estimated that in 2018 we should be in the range between 13% to 14% return on equity.
After these positive results in 2017, I would like to highlight that at 2018 we expect a recovery in the loan growth toward 9% to 10%, a small compression of the NIM reaching the level of 5.8%, growth in operating expenses between 4% to 5%, and cost to income reaching 48%, a 12% fee growth across all geographies, cost of risk around 2% with the same amount of provisions in nominal terms, and finally, an effective tax rate of 33%. After presenting these slides and discussing our fourth quarter results, I would like to invite you, our audience, to ask any questions.
Thank you.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] And our first question comes from Tito Labarta from Deutsche Bank.
Tito Labarta
Hi, good morning everyone. Thank you for the call.
My question I guess is on expenses, given the sharp improvements that we saw this quarter, and I understand your guidance of 4% to 5%. But I guess how should we think about it on a quarterly basis?
We saw a lot of movements there. Should we always expect either a jump or a decline every fourth quarter, so trying to understand that.
And if you could also just give some more color on how you were able to reduce it? I understand lower bonuses and less expenses, but maybe you can give a little bit more clarity on that on why they saw a reduction as well.
Thank you.
Jaime Velasquez
Thank you, Tito. Yes, the reason why you see high volatility during the 2017 were basically because we tried to normalize the level of expenses quarterly.
What when you will see in 2018 that will be up a very stable line in terms of expenses. Again, 4% to 5% will be the expenses growth.
We are expected to maintain our headcount under control. We are expected to continue processing the new products and services through digital channels reducing cost.
So you don't expect a high level of volatility. The reason why we reduced the provision for bonds were because our original budget were impacted by the high level of provisions, so that was the reason why in the last quarter we reduced that provisions.
But it's not a one-off, it's a normalization of the level of provisions that we design annually.
Juan Carlos Mora
And Tito, one more. Even though we tried to normalize the effects of accounting, the fourth quarter is the one in which we account for all the adjustments, even because we know the results of the year.
So we work to normalize and to have the expenses distributed to the quarters. But fourth quarter usually is the one that in which we do all the accounting adjustments.
And in this case were reduction on expenses. We will try hard to normalize as much as we can the expenses through the year so it can be forecast easily, the expenses.
But let me tell you that our focus now is to work on one aspect, is to grow the expenses between 4% and 5% so we can cost control. And let me emphasize that we have been working very hard on these cost control project.
And the efforts during '18, it's to make them sustainable through the different periods, not one-offs of one effect that this is in one point, but to make then in a structural the bank operates.
José Humberto Acosta
We have to highlight another factor that is reflecting in the fourth quarter, Tito, which is the provisions for long-term benefit ends. We have also to reduce those provisions because the headcount has dropped 1,000 employees.
So you can imagine that in terms of provisions for [indiscernible] different aspects, so we will use also that level of provisions.
Operator
Our next question comes from Philippe Icari [ph] from Itaú BBA.
Unidentified Analyst
Hi, good morning. Thank you for taking my questions.
I have a question regarding 2018 expectations. You indicated a 12% expansion in fees for 2018.
In the fourth quarter we saw an outstanding expansion in Bancassurance fees of by more than 20%. Do you expect this line to be the one driving fee growth for 2018?
And you also mentioned earlier today that expects to increase the products per client to 2.5. Could you give us a little bit more color on what are the initiatives being taken to increase cross selling?
Thank you.
Jaime Velasquez
Regarding fee income growth, yes, Bancassurance is showing a very solid trend in the last three years, and they grow their CAGR will be at around 25%, we are expecting the same. The reason why the number drops in the Colombia operation during 2017 was because of the activity.
The activity reduced, you see that the GDP growth were only 1.7%, so that has impacted the transactional level of the operation. But how we will do it, the 10% to 12% now we are putting as a guidance, because the economic activity will be much better in 2018.
The second-half of this year will be improved after elections, so we perceive that the number will be achievable.
Juan Carlos Mora
Philippe, let me add something. Definitely Bancassurance is one focus, and we will continue driving the fee growth during '18 in Colombia and particularly in Central America.
It's a new line of business for those banks, and it's improvement is very good. But it's not just Bancassurance.
Our focus on having new products to have a different offer for our customers on [indiscernible] products is going to drive the growth of fees during '18. So it's not just Bancassurance, even though it's going to be a leader on fee growth, but it's all the products that we are presenting to our customers.
And related to your question about the cross selling index. We have a customer base of around 10.5 million customers.
And we have a large base of customers with just one products basically -- or two products, basically one savings account and a debit card. What we are doing is that we are designing new products for this large base of customers who transact with us on a very basic way to offer them products that can help them in their everyday lives, microloans, different offers in cards that are just designed for these kinds of customers.
So that is going to be the driver of the growth on cross selling in our base clients.
Operator
Our next question comes from Ernesto Gabilondo from Bank of America Merrill Lynch.
Ernesto Gabilondo
Hi, good morning, Juan Carlos and José Humberto. Congrats on your results and thanks for taking questions.
I have three from my side. The first one is how do you see the economy evolving in the political environment?
How is government expenditure and internal demand in a presidential year? Can you share with us who are the candidates leading the boards?
And what are key proposals differentiating them? Secondly, how do you see the net interest income grow in 2018 with loan growth of 9%-10% and NIM pressure of 10 basis points?
And finally, we have seen cost of risk continues to be high. But as you mentioned there are expectations it could come down in 2018.
So, I want to know how much of the large corporates that were facing some problems are ready provision? Thank you.
Juan Carlos Mora
Well, regarding the performance of the economy, we think that as we mentioned at the start of the call, we are expecting a higher growth rate based firstly on the global conditions and the performance of the external sector, which we think that will add positively to growth. And most importantly, I think is a recovery in internal demand which has been lagging over the past few years.
Why is that? Because we are expecting a more dynamic private investment on one hand and we also think that private consumption is going to recover.
This is will be in a context in which the central government is reducing expenses, but at the same time we are seeing a higher activity of local government. So, overall, we think that the combination of private and public demand will add up to growth this year.
And regarding the election process, well, I think that the impact of elections on the economy is mainly a confidence issue. So, we think that once the electoral process is finished by mid this year, we are going to have a much positive confident environment and that will lead that recovery in internal demand to take a full force.
José Humberto
Ernesto, regarding the NII growth, yes, you are right. We are expecting to loan growth 9%.
And assuming the compression of NIM 10 to 20 bps, the NII will grow at around 7%. How we are planning to maintain that growth?
Again, the loan expectation growth for consumer in 2018 will be 15%, meanwhile the loan expectation for corporate will be at around 7.5%. Probably, the economic activity of the second half will help up the corporate side.
And that's the way we are designing the NII structure. Regarding the third question, cost of risk at around 2%, how we are posted and how we are today beginning the year, I have to say that we have one of the highest level of provisioning for 90 days value.
You see that we have 164% beginning this year. What means for -- during 2018?
Maybe we have to increase our provisions for corporate. But at the same time, we will see a decrease in our provision on consumer side and SME side.
So, at the end of the day, when we talk about to maintain the same level of provisions in nominal terms we are assuming that. Assuming an increase on corporate, but decrease in retail and SMEs.
That's the reason why are talking about at the end of this year, 2% of cost of risk.
Operator
Our next question comes from Nicolas Riva from Citi.
Nicolas Riva
Yes, thanks José Humberto for taking my question. My question is on your profitability.
I mean, of course, you had a very good quarter 2017 with some special items like for example in your operating expenses, your reported ROE was about 16%. But again -- but you had the onetime tax refund of 86 billion peso.
So my question is for this year given the guidance that you provided for some line items like, for example, loan growth, interest margin and credit cost, what would be a realistic level of ROE for 2018? Thanks.
José Humberto
Okay. Thank you, Nicolas.
Yes, we have a good quarter. And I have to say that we have a good year because if you see the 12 months in a row that was a very positive.
The way we are reaching the optimal return on equity, then we talk about 16% in three - four years. The main driver will be efficiency level.
Our return on equity this year will be in between 13% to 14% assuming that we are optimizing the cost growing only 4.5% and reaching an efficiency level of 48%, although the one of the main driver to gain return on equity is the cost of credit. The cost credit for the medium term for Bancolombia will be at around 1.8 and that would be 1.8 because we are growing consumer more than corporate.
It used to be 1.5 five or six years ago because we were more focused on corporate. So, the new standard for Bancolombia's for three years cost of credit will be 1.8.
If you do the math, assuming 1.8 of cost of credit and assuming an efficiency level of 46%, you will get a level of 15% to 16% in the medium term range.
Operator
Our next question comes from George Friedman from Citibank.
George Friedman
Thank you very much for taking my questions. I have two followups.
One in terms of the equity income that we saw grew more than 400% in a quarter, more than 1700% year-over-year. I understand that it comprise among other things Éxito.
But, I was doing some research about Éxito's performance in the fourth quarter. And it seems that it was not right.
So, just wondering where is it coming from and what is the recurring level for the next quarters? And my second question is just to understand to drop in personnel expenses despite not accompanied by a reduction in personnel, particularly in this quarter.
So, I understand that could have some actuarial changes. Just wondering if those are also related to lower tax rates in Colombia, and if we could see further adjustments in those actuarial metrics going forward?
Thank you very much.
José Humberto
Okay. Regarding equity income I have to clarify that we are not talking about Éxito.
We are talking about JV that we have with them with the name of Tuya. Yes, on equity income, you see a positive number.
But again the impairment of the company was 170 billion pesos negative. So that is a reflection of the real momentum of the economy.
Remember that Tuya is a credit card business, so the positive increase, the level of consumption decreases, so the interest rates were high. So that was the reason where setting of the income statement from this impairment.
Regarding the expenses, yes, it's not a reduction of the headcount in the fourth quarter. The reduction of the headcount has been taking place since 18 months ago.
It is because the provisioning of this actual benefit you made a calculation in the last quarter. So you realized that you have to have less provision because you have 1000 less employees.
That was the reason why you see the drop of the number. We do understand the co-relation between this impact and the tax rate.
The tax rate that went up right now, it is 31%. We expect to have a tax rate for 2018 at around 32%.
The reason why the tax rate for the Colombia provision in 2017 where 31% is most the net income comes from other geographies in which the statutory tax is below that 25% for the banking operation and 0% from our offshore operation. So we expect this year a tax rate of at around 32%.
Operator
Our next question comes from Domingos Falavina from J.P. Morgan.
Domingos Falavina
Thank you. I have actually also two questions.
The first one is just to get an update from you, I understand there is a large exposure on the mass transportation system, and I will just like to get an idea on how provision you work for those operators, and what's the total exposure, just to see how tracking, and then I will ask the second question.
Juan Carlos Mora
Thank you, Domingos. We have been working on the matter of provision system exposure meanwhile we have been doing provisions, our coverage on case of Bogota is around 35% and the case of Cali is around 65%.
So we will be as I mentioned working on solving helping to solve the situation on a more structural way meanwhile doing provisions. So we will keep coming on that way on let me tell you the forecast or the guidance that we're giving around the cost of credit includes the provisions that we estimate we will need to make to cover those risks on a level that we will feel comfortable.
So we won't expect any surprises from that front, it's included in the 2% guidance cost of credit that we are giving you.
Operator
Our next question comes from Alonso Garcia from Credit Suisse.
Alonso Garcia
Thank you. Good morning everyone.
My question is actually if you could provide some update on the competitive landscape in Colombia across segments and also in terms of America? And second related to that, how do you see your capacities compared to your competitors in Colombia?
Thank you.
Juan Carlos Mora
Regarding the landscape the competition in Colombia I have to say that is optional, the top five banks today accounts more than 50% the consumer market share and more than 70% in the corporate market share. I don't say that we are gaining market share consistently because one of the key elements in doing banking in Colombia is how you will maintain a very solid structure of funding.
In our case, we have made the lowest cost of funding in Colombia because we have been using different ways to get that funding, we are approaching the market on DCM not only in international also cost, we shift our funding structure from time deposits to savings accounts, so I would say that the competition will be focused right now in maintaining funding cost under control and to provide to clients the best options for maintaining the loan portfolio not only in corporate also in consumer.
Operator
Our next question comes from Ricardo [indiscernible].
Unidentified Analyst
Hi, thank you for the presentation. I have just two questions, one is what is the reason for the increasing the equity method income and the second is what boost increase in the other operational income that are my two questions?
Thank you.
Juan Carlos Mora
Thank you, Ricardo for your question. We have been answering both questions in the previous participation of the analyst and equity method is basically because one of our investment that we have in two, so we are adding a dividend from them and the other operational as I mentioned before it is also because we received from valuations from the companies in which we are invested in terms of real estate.
Those are the explanation that usually happens in the last quarter of every year. More than real estate it is investment on the real estate front called [indiscernible] Colombia, in which we have the majority stake.
Operator
Our following question comes from Rodrigo Sanchez from [indiscernible].
Unidentified Analyst
Good morning, and thank you for taking my call. My first question is weeks ago an article mentioned that the super financial is going to design and implement a new indicator to measure the liquidity of the banking system in Colombia and I understand that this indicator will measure the length of time that deposits grew mainly institution, so could you please comment on what you know about these, what is the minimum standard is where does Bancolombia stand in relation to this measure, my second question is expect national cuts on this for 2018 and my last question is a follow-up on the massive transportation system, could you tell us whether nominal exposure is and if you expected, if you could tell us something about what your expectations are in regarding provisions for the year.
Thank you.
Jaime Velasquez
Rodrigo, could you repeat the last part of your question and we didn't catch that the last part?
Unidentified Analyst
Yes, if you can tell us what your nominal exposure is for the massive transportation systems. And if you're expecting additional provisions for the year if you could give us a little bit more of color on that part please?
Juan Carlos Mora
Okay, regarding your second question regarding the stuff is not a plan to reduce the headcount. They planning to Bancolombia's to optimize the way we sell products.
The way we operate, maybe as a result the last year where a reduction of just about we are not contemplating as a goal reducing headcount or reduces branches again our goal is to maintain the high level of service will distort the time we're having, qualities here you see are very flat eleven in terms of the headcount. Unless the robotics or unless the digital banking replace them we don't need to use some areas of the Bank but again it's not that formal goal that we are having.
Regarding your first question about liquidity the way we've managed the liquidities, we managed the liquidity individually in each operation I mean we don't have that cash pool. We have every single operation that they have their own liquidity business.
Our pillars in bank are basically based on three pillars capital, risk and liquidity. Liquidity for us it's extremely important and we have to on average the capacity to maintain the bank of around 80 days with the comfort of a level of equity.
We don't have a clear seeing now how we'll be the new regulation, when we have the new regulation we will send you the message, how we'll manage that.
Jaime Velasquez
And regarding master protection things as you know there are several in Colombia. We aren't some of them particularly as I mentioned in the case of Colleen, the improvement this clear and we have coverage there around 65% on provisions and we expect to do some additional but not much provisions.
In case with, we are concentrated in probably one or two of the operators in which we feel more comfortable with that operators. The solution it's advancing and we think that they are going to be improvements during this year.
Meanwhile as I mention, we have a cover of on 35% of the of our total exposure and we'll continue improving that exposure meanwhile working on health to have an instructor solution for the master protection system which has to come because is how at the end both our operation and moves all the receipts in so we are positive or we are confident that this was is going to pay out and meanwhile we will be covering on our very conservative way the exposure of, we have on those systems.
Operator
Our next question comes from Rodrigo Torres from [indiscernible] Analytics.
Unidentified Analyst
Thanks guys for the presentation. I've three questions.
The first, can you give us please little more color on the spending cuts in Central America, you mentioned $100 million, so I want to have more info about that. The second question is what other clients; corporate clients could affect the level operations this year.
And the third question is you said that you're going to concentrate on more consumer client's right. There are more than comp rates, so want to know if there could imply that you will not finance for example more projects like 4G or infrastructure project in Colombia.
Thank you, guys.
Juan Carlos Mora
Thank you, Rodrigo. Regarding any spending cost on the international operation or efficiency remember that efficiency is a function of two of the income and or their expenses at just beginning the year in our operation in Guatemala, we are expecting to optimize the level of branches, so in that book we will focus on expenses.
,
José Humberto Acosta
In the case of our exposure with corporate, we as I mentioned before we will keep working on the solution of those big corporates and the provisions we expect to make on those customers are already included in our guidance. In the case of increasing our mix on consumer loans, we are clear that that's going to help our name and we are very confident that it's not going to increase our risk profile.
So I think we are reaching a level which we feel comfortable. So now it's maintaining that mix which is going to help the developing of our strategy and the numbers that we are providing to you.
Juan Carlos Mora
Let me remind you, Rodrigo, that we are planning to grow this year on corporate 7.5%, which is [indiscernible] it's being on the business in the region, and in consumer 15%, that means also that we are not concentrated. We are diversificating the loan portfolio.
José Humberto Acosta
And regarding your question about our participation on infrastructure projects, I want to be very clear that we are analyzing every project we look in the -- on the numbers and see what are the risks and we will be participating in the projects that we consider that have a reasonable risk return. So we will keep analyzing projects, we will keep participating, but being clear that we will participate in the projects as we feel that the risk return equation is good for the bank.
Operator
The next question comes from Andres Duarte from Corficolombiana.
Andres Duarte
Good morning. Thank you for taking my questions.
I wanted to know do you have an estimate on the amount of loans whose conditions were modified without being restructured applying the regulation that was issued back in October? That's the first question and the second question is what's your forecast or what are you forecasting for the year's end in asset quality measures?
Thank you very much.
Juan Carlos Mora
Andres, the regulation regarding how are we restructuring clients was applied and the final result was an increase on provisions. So that is also one factor that formed part of the cause of risk increase in 2017.
So we applied that regulation and the final effect was an increase on provisions, and it was applied to around 28,000 customers.
José Humberto Acosta
It affects the Colombian balance sheet, but it doesn't apply for the consolidated basis balance sheet.
Juan Carlos Mora
That's an important remark, it affected the numbers we present under the Colombian regulation, but not on consolidated basis.
Operator
We have no further questions at this time. I'd like to turn the call over to CEO Mr.
Mora for final remarks.
Juan Carlos Mora
I would like to thank you for your interest on Bancolombia and for participating in this conference call. We saw ahead a year that is going to be the one in which we consolidate some of these strategies that will have been implemented during the last year.
There are going to be challenges related to the cost of risk. We are aware of that and we are working hard to really, really face the risk that the bank has and working on be sure that the risk profile that we have on our books is the one that we want to have.
So the focus will be continuing on the line of working on efficiency, which is key for us and is the base of our results and focusing on cost of risk. Again, thank you very much for your participation, and we hope to see you in the conference call in which we will present the results of the first quarter of '18.
Have a good day, thank you so much.
Operator
Thank you. Ladies and gentlemen, that concludes today's conference.
Thank you for participating. You may now disconnect.