May 16, 2018
Executives
Juan Carlos Mora - CEO José Humberto Acosta - CFO Juan Pablo Espinosa - Chief Economist
Analysts
Ernesto Gabilondo - Bank of America Merrill Lynch Jason Mollin - Scotiabank Jorge Kuri - Morgan Stanley Philip Finch - UBS Carlos Macedo - Goldman Sachs George Friedman - Citibank Rodrigo Sánchez - Ultraserfinco Carlos Gómez - HSBC Andres Duarte - Corficolombiana Sebastián Gallego - Credicorp Capital Alonso Aramburu - BTG Pactual
Operator
Good morning, ladies and gentlemen, and welcome to Bancolombia’s First Quarter 2018 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, and press releases or verbally, address matters that involve risk 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 rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy and various other factors that we describe in our reports filed with the SEC. With us today is Mr.
Juan Carlos Mora, Chief Executive Officer; Mr. Jaime Velasquez, Chief Strategy and Finance Officer; Mr.
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 the presentation over to Mr.
Mora, Chief Executive Officer of Bancolombia. Please proceed, sir.
Juan Carlos Mora
Good morning, everybody. Welcome to our first quarter conference call.
I wish to begin this call, giving you an update of some relevant aspects that materialized our strategy. First, in line with the credit cycle that we are going through, we have done some adjustments and improvements to the collection process.
The goal is to avoid loans reaching the state of delinquency and maximize the recovery of past due loans. Also, we continue improving our underwriting standards to assure that we grow the loan portfolio without further deterioration.
So far, the vintages [ph] show us that we are going on the right direction. In the digital payments front, we have grown the number of transactions more than 13 times and reached $100 million in contactless purchases over the last 12 months.
Our [Indiscernible] our cornerstone channel for operating a simple transaction platform continues growing exponentially. We already have 900,000 active accounts, which performed more than 12 million transactions last year.
This is a very efficient tool to allow us to expand the capacity to perform transactions to people who do not have a formal relation with the financial sector. Also, digital sales continue growing.
Two of the most relevant products are savings accounts and credit cards. At this point, I would like to share with you some trends of this beginning of the year.
First, let’s remember that the next 27th of May, the first round of Presidential Elections will take place in Colombia. The results will set the mood of private sector investment programs going forward.
On the economic front, I would like to highlight that inflation is converging towards the 3% target set by the Central Bank. During the first months of the year, we have seen some improvements in consumer and private sector companies.
Unemployment rate has been stable and consumption has left behind the negative impact of increase of the VAT. The Central Bank has adopted a more expansive policy.
Last April, the repo rate reached 4.25%. This should create conditions for activity acceleration in 2018 towards 2.5%.
Credit demand has evolved according to our forecasts. In Colombia, we observed a trend in new originations that led us to reaffirm that we will reach a consolidated growth of around 8%.
In Central America, the growth has been in line with our expectations in both corporate and retail banking. The appreciation of the peso during the first quarter caused growth in pesos to be negative during the quarter.
Year-over-year, the loan portfolio grew 4.1%, despite a 3.6% appreciation of the peso over that period. Credit quality will continue being one of the most relevant topics for 2018.
And we have concentrated our efforts on three aspects, as I mentioned, origination, increasing coverage for certain corporate clients, and the collection process. We believe that we are near the pick of deterioration and charged COP 875 billion in provisions during the quarter, which represents a 2.2% cost of risk.
We expect to have a charge of around 3.4 trillion in provisions during the year. As you may recall, starting January 1, 2018, we must adjust our provisioning models under IFRS 9, which means to use expected loss provisions instead of the current incurred loss approach.
As a consequence of this adjustment, we increased allowances by COP 600 billion or around 8%. We also started recognizing interest on delinquent loans, with very low probability of recovery.
Those classified as Bucket 3 loans. Later, during this call, José Humberto will provide a more detailed explanation on these IFRS 9 implementations.
Finally, I wish to emphasize the efforts that we are putting on cost control, a strategy that put us in a cost to income of 49% last year and we believe to be between 48% and 49% this year. The optimization of the distribution channels, headcount reduction and automation are the elements that will permit us to achieve that goal.
With these elements in mind, I want to ask Juan Pablo Espinosa, our Chief Economist, to give you an overview of the main macroeconomic topics to consider. Juan Pablo?
Juan Pablo Espinosa
Thank you, Juan Carlos. Now, I’ll ask you to go through slide number three in the presentation.
Recent [ph] indicators reveal a gradual pick-up in activity and a more balanced macro framework for Colombia this year. During the first quarter of 2018, GDP grew 2.2%.
This result was in line with our estimate and 0.7% higher than 1Q ‘17’s reading. In this period, 9 out of 12 sectors had a positive valuation.
The most dynamic were financial activities, public administration and research. In contracts, there were constructions of 8.2% in construction, 3.6% in mining and 1.2% in manufacturing.
We believe that the most sanguine performance of the economy this year is the result of our rebounding private spending, which is due to a positive variable and real disposable income, as well as low and stable interest rates. In addition, more constructive macroeconomic and financial conditions should lead to our recovery of private investment.
At the same time, the country is enjoying from global tailwinds such as increasing terms of trade and a higher growth of its trading partners. As a result, we confirm our 2.5% growth forecast for this year.
We expect that after elections, the recovery will take full force. Thus, by the end of this year, growth will have accelerated to 3%.
In terms of prices, it is worth noting that headline inflation has moderated sharply from 4.1% last December to 3.1% last month. This correction has been widespread as both food, and core inflation have been trending downwards.
Going forward, we expect that in coming months headline [ph] inflation will even fall below 3%. However, an acceleration of food prices will lead to a moderate increase of inflation in the segment half of the year.
So, it will close at around 3.3% this year. Regarding monetary policy, we anticipate that after the 25 basis points cuts in January and April, the reference rate will remain at 4.25% for the remainder of the year.
Only until 1Q ‘19, economic conditions will lead the Central Bank to start a mild tightening cycle. On the external front, we expect the current account deficit to remain at 3.3% of GDP.
This figure implies that the external imbalance is now similar to the level seen before the full [ph] annual prices. Finally, we reinforce our view that this year the central government will meet the deficit target of 3.1% and that the additional effort required to comply with 2019 new target of 2.4% is now less pronounced.
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. Before starting with the discussion of the results, I would like to call your attention to the fact that this quarter Bancolombia started reporting numbers under IFRS 9.
On slide four, we summarize this impact. In the balance sheet, there is reallocation of COP 599 billion from the line of accumulated other comprehensive income in the equity to the line of allowances for loan in the asset side.
This is one-off impact effectively on January the 1st of this year. On the income statement, there is a reduction in net interest income by COP 102 billion due to the non-recognition of interest attributable to loans in Bucket 3, which have a very low probability of recovery.
Similarly, there is a reduction also by COP 102 billion in the provision charges. The net impact in the net income is zero.
Because of this impact, some metrics and ratios are affected as well. Reported NIM will be lower as a result of loans in Bucket 3, which will not accrue interest.
The efficiency level will be affected due to the reduction of net interest income. Fee income as a percentage of revenues will increase because of lower NII revenues.
It is important to highlight the fact that during 2018, we continue modeling and fine tuning this impact during the year. We might have change to the metrics, I just mentioned.
Now, moving on, 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 four main businesses.
I would like to highlight in our operation in Panama, Banistmo, a significant improvement of efficiency due to cost control programs and introduction of our new products and services. Also Banistmo has today the capacity to sell product through a digital channel.
In Banco Agrícola operation, the coverage ratio has increased to 226% and the NIM has also expanded as a result of better allocation of assets and more efficient strategy in the funding side. We have also performed very well for this operation and have grown 13% year-over-year.
In BAM, in Guatemala, the increase in coverage ratio and NIM expansion are the two most important metrics. Nonetheless, efforts in digital banking are also paying off and having a very relevant role.
Today, insurance distribution through the online platform is a fastest growing product. Finally, in Bancolombia, Colombia, the efficiency continues improving due to diversification of channels and cost control.
In general terms, the international operations are providing an upside to the consolidated numbers. Now, I’d like to move to slide six of the presentation, where we can see the evolution of assets and their composition.
The composition of the loan portfolio by type of client remained relatively stable during the first quarter. Nevertheless, the 7% appreciation of the peso against the dollar caused the peso denominated portfolio to represent a greater proportion that was represented in December.
Today, pesos accounts for 68% of the total loans. This appreciation caused by the growth of loans in the regional currencies to look smaller when converted to pesos.
The year-on-year growth as of March is 4%. Regarding credit demand, we have seen corporations acting in a cautious way, when undertaking new projects and demanding credit.
This is the natural outcome of the uncertainty associated with the election -- associated to the election process and this time we have forecasted in our budget. In March, we saw some signals of recovery after a slow start of the year.
We anticipate that this sluggish demand and growth will continue until mid year when we finally know the outcome of the elections. We continue seeing a greater growth in consumer loans, although at a slower pace.
Today we confirm our estimation of loan growth for 2018 will be at around 8%. Moving on to slide seven, we present the situation of the credit quality as of March.
In line with our expectations for every first quarter, 30-day past due loans percentage has increased due to the higher formation of new past due loans. This is a seasonal effect that we experience every March, and this year in particular this low economic growth and the Presidential Elections are [indiscernible] the trend.
90-day past due loans also posted a slight increase due to runoff of already deteriorated vintages. Nevertheless, the coverage ratio for these loans reached a level of 174%.
We intend to keep it at around that level. As we mentioned earlier, the adoption of IFRS 9 increased the coverage levels because we reclassified COP 599 billion from equity to allowances.
This is a main reason for the change in coverage in the first quarter of this year. Connecting with this and slide number eight, we present the provision charges for the quarter, which totaled COP 875 billion.
In general provision charges maintain a high level as we continue protecting the balance sheet from the new past due loans. These charges are mainly explained by commercial loans, mainly large corporate, which represent 40% of the new past due loans.
SMEs that are increasing the number of days in arrears, which represent 23% of the new past due loans. A very important metric in this slide is a new past due loans of the quarter which reflects the seasonal effect of the first months of this year.
Again, we had an impact of IFRS 9, loans classified in bucket with a very low probability of recovery do not require provisions. They do not accrue either.
The new IFRS 9 methodology requires Bancolombia to estimate provisions based on expected losses, which tend to be more conservative, which in a cost of trade offer around 2% at the end of this year. Moving on to slide number nine, we see revolution of net interest income and the funding cost.
NII declined 4% compared with the first quarter of last year impacted by the re-pricing of the loan portfolio due to lower interest rates of the Central Bank, to some extent by the appreciation of the Colombia peso against the dollar in the same period. Additionally, the IFRS 9 adoption impacted NII by COP 102 billion due to the non-accrual of loans classified in Bucket 3.
Our main strategy to defend NIMs and NII is to reduce the funding costs as fast as possible. We have concentrated the efforts on reduce the cost on long-term debt by rolling over the bonds and expiration of approximately COP 200 billion denominated bonds during the quarter, for more savings accounts which grew 11.5% versus growth of 2.4% in time deposits, reducing almost 8%, the stock of funding with international banks, and finally, the reduction of the duration and cost of the certificates of deposits in Colombia.
The combination of these factors has permitted to maintain the loan to deposit ratio at a level of 115%. For the rest of the year, probably we’ll see another reduction of interest rate in case inflation continues declining.
The re-pricing of the loan portfolio will continue and the reduction in the funding costs will be marginal. In the next slide, number 10, we present the net interest margin.
We estimate the impact of IFRS 9 was the reason for the 10 basis-point compression lending NIM during the quarter. So, isolating this effect of this, lending NIM would have been stable during the quarter.
So far, we have contained the impact of the interest rate cuts in Colombia on the lending activities of the Bank. These have been combined effects of the change in mix to our consumer loans and the reduction of the funding costs.
In the securities front, we experienced more volatility during the quarter. And as a result, NIM came down to 0.5%.
We expect the reference rate in Colombia to come down 25 basis points and an improvement in dollar margins due to the higher U.S. rates.
As a result of interest rate reduction in Colombia and the impact of IFRS 9 adoption, we estimate the NIM for 2018 to end at around 5.6%, and that is explained basically for 20 bps due to the interest rate cuts and 20 bps due to the IFRS 9. On slide 11, we can see the evolution of fees.
Fees continue presenting a good evolution, despite the seasonal effect of the first quarter, comparing them with the first quarter of last year, the 9% growth indicates a good trend. In particular, credit card fee posted a solid performance due to the promotion of plastic as a method of payment and the marketing campaigns for the first months of the year.
The work and the fact that the Bancolombia is sponsor of Colombian national teams contributed to this strategy. In Central America, we’re also posting positive results, in particular, Banco Agrícola in El Salvador, with fees growing at a pace of 13% year-on-year.
Bancassurance and asset management are also relevant components of this strategy. Our forecast for fee growth in 2018 is to be around 10% to 12%.
Now, moving to slide 12, we present evolution of expenses. We must keep in mind that expenses for the fourth quarter last year were unusually low due to the certain adjustments for the full-year 2017.
Here, it is important to focus on the year-on-year growth in expenses, which declined 2% as compared to the first quarter of last year. For 2018, we expect to grow operating expenses between 4% and 5% and the cost-to-income ratio to be at around 49%.
Let’s remember that this new guidance is a result of lower net interest income due to non-performing loans classified as Bucket 3. In slide 13, we present evolution of the main channels.
We continue increasing the share of online and mobile transactions as a way to gain efficiencies in distribution. As you can see at the bottom right pie, interaction with clients has diversified to several channels.
Today, through the app and the online, clients can open savings accounts without needing to go to the branch. We are launching and specially design online platform for SMEs.
This platform would allow us to reach more than 1.3 million clients who would benefit from several developments implemented by Bancolombia. Through banking agents, we process more than 0.5 million transactions on a daily basis.
We will enhance in the offer of digital services to our clients, maintaining a strict cost control, continue rebalancing the existing network and focusing in optimization. For international operations, for example, we’ve reduced the number of branches in Guatemala and we are using more the digital channels.
In Banistmo we launched the mobile platform, which today processes more than 200,000 transactions on a daily basis and in Banco Agrícola, the network of agents reached 670. Now, let’s move to slide 14 where we present the evolution of the capital position of the Bank, which ended at a level of 10.2%.
As soon as we have more clarity on the Basel III implementation, we’ll be providing you with the estimations of the additional capital buffers and the treatment of risk-weighted assets that regulator -- is contemplated for this year. Finally, we present the return on equity for the period which was 9.2% for the first quarter.
For the last 12 months, it was 11.4%. Our forecast is to gradually improve return on equity towards the 16% target that we have focused for 2020.
In particular, we estimate that in 2018 we should be in the range of 12% to 13%. In summary, the economic cycle in Colombia suggests low interest rate, inflation under control, stable unemployment levels, and the second half of this year with a faster economy activity.
This in combination of factors will impact our business with a growth of the loan portfolio according to our expectations. The Bank will be focused on maintaining the cost of funding under control in a low rate environment.
We maintain our estimation share during this call, NIM compression towards 5.6%, cost of risk at around 2%, and return on equity between 12% and 13%. The main efforts will be concentrated, as Juan Carlos mentioned at the beginning of the presentation, in risk management, basically in origination and enhancing the collection process in order to reduce the stock of past due loans.
After presenting these slides and discussion of our first quarter results, I would like to invite you, audience, to ask any questions.
Operator
Thank you. [Operator Instructions] And our first question comes from Ernesto Gabilondo from Bank of America Merrill Lynch.
Ernesto Gabilondo
Hi. Good morning and thanks for taking my call, a couple of questions from my side.
The first one is on the elections. Can you share with us any insight on the candidates leading polls?
And if you see it could be a possibility to have only one round, also, if you can share any relevant proposals among the candidates? My second question is on your NII.
As you mentioned, it was affected by IFRS implementation. So, should we continue to see NII affected by COP 100 billion per quarter for the rest of the year?
Thank you.
José Humberto Acosta
Thank you, Ernesto. Let me answer first your second question regarding NII.
Yes, correct. You have to take in consideration that every quarter you see a decrease of a COP 102 billion on NII.
The other side of story is that we are doing our efforts to reduce at the same pace the cost of funding, focusing our efforts on savings accounts and try to reduce more from the lending business activities for international banks. But yes, you see very often 102 every quarter.
Juan Carlos Mora
Ernesto, regarding your question about elections, this has been a very competitive process. Polls of this time shows one leading candidate and others follow by a margin of around 10 points, the percentage points.
So, with the results of the polls that we have seen in the last years, it is high probability there is going to be a second round that will take place in June.
Operator
Our next question comes from Jason Mollin with Scotiabank.
Jason Mollin
Hi. Thank you.
My question is about the profitability outlook that -- the return on equity outlook in the 12% to 13% range for this year. Maybe you can comment more in the long-term.
But, with this quarter, obviously there were seasonal weaknesses. I guess, if we isolate the impact of IFRS 9 looking at both the net interest income and the provisions, as you suggested, there was no impact on net income.
Your book value however was negatively impacted from the one-time adjustment, so that actually would help the ROE expectation going forward. So, it seems like by maintaining the ROE expectation and having a lower book value with no impact on net income from IFRS 9 that actually the ROE should look better, if we just make the denominator adjustments.
But, I also wanted to understand better what you just said about net interest income. Because yes, it was negatively impacted, you suggested by COP 100 billion and that that will continue going forward, because you won’t be accruing interest for the Bucket 3.
But should we expect provisions going forward also? I mean, is it like a recurring event that provisions should also be a 100 million lower or was that just a one-time income statement impact that we saw now?
So, main question is ROE outlook 12% to 13% in longer term and you did have this -- I guess, it was COP 500 billion impact on book value.
José Humberto Acosta
Thank you, Jason. Yes.
Let me put it on a nominal terms. Originally, our plans were to set COP 3.4 billion total in provisions.
As you said, having in consideration IFRS 9, the Bucket 3, we will reduce COP 400 billion at the number. So, in regular terms, the final provision that will be COP 3 billion at the end of this year.
That is correct and your perception is right. But what happened is the marginal provisions for the next coming quarters are tough, because the requirements of provisions under expected losses is higher.
So, we have to increase another COP 400 billion in provisions on the provision side. So, if you do the math, yes, you have to deduct the 400 because of IFRS 9, but you have to adapt again the 400 because the standard for the next coming quarters will be increasing that number.
So, that’s the reason why at the end of the day, the cost of credit is the same, 4%, because it’s a function of the asset of the loan portfolio. But, the NII will drop.
So, as you said, the net income assuming the next coming quarters that will be reduced because of that. I don’t know if it is clear Jason.
And in this opportunity, I have to permit them to do another question or to see if it is clear for you.
Operator
Next question comes from Jorge Kuri from Morgan Stanley.
Jorge Kuri
Can you give us an update on the efficiency program? You delivered very strong year-on-year decline in expenses in nominal and obviously in real terms.
Where are we in that process? How much more can we see expenses improve over the next 12 months?
Are we mostly done, are we half the way. I just wanted to get a little bit more clarity on this year and maybe on a multi-year basis, how much more can efficiency improve?
Thank you.
Juan Carlos Mora
Let’s allow us one minute to answer Jason one topic of the question that he had, before we answer your question.
José Humberto Acosta
Okay. Jason, just to clarify, we were talking about what happened this year?
How we are going to get the 16% that we’re planning for the next three years? Assume that the real cost of credit of the Bank based on the better economic cycle will be 1.8%.
So, if you do the math and adjust the cost of credit for 2019 and 2020 at around 1.8%, that will be the best way to reach the 16% of return on equity. Thank you.
Juan Carlos Mora
Jorge, now going to your question, we keep in our program of efficiency and the program is based in reducing the cost associated with our distribution channels. So, now, we have a program of branch reduction in Guatemala.
We are consolidated some of the physical branches that we have in Colombia. So, we’ll keep moving on that direction.
Also, we’ll keep the program of efficiency around having the optimal headcount to run our operation. To answer your question directly, we expect this year, the expenses to grow around between 4% and 5%, which in real terms is around 1% growth.
So, we’ll benefit for the actions that we took last year but also we’ll have to do some investments on the programs that we are running this year, looking to have the benefits towards -- or in the years ‘19 and ‘20 in which we are looking for an efficiency ratio of 47%. So, this year, we will expect an improvement on the efficiency ratio and we are targeting a 48%.
And then, the programs will consolidate the effects. And that will lead us to the 46% that we are looking in the mid-term.
José Humberto Acosta
Complementing the Juan Carlos answer, I have to say, just to give you an example, the corresponding agents, we reached the level of almost 10,000. So that’s the best way to reduce our cost of operations and we have replicated the same experience in Panama and in El Salvador that will help us our loan.
The other good example is how to maintain the headcount under control, we are implementing in the last two years more than 200 robots that is helping to work 7/24 and it’ helping to be more efficient, try to operate in a faster way, in a more efficient way.
Operator
Our following question comes from Philip Finch from UBS.
Philip Finch
Good morning, gentlemen. Thank you for the presentation.
Couple of questions for me. First of all, just in terms of Q1 numbers, I mean, our first take of that was lower than what we’re looking for.
Given what you just presented, can we say Q1 was the worst quarter and it gets better from here, whether it’s in loan growth or in terms of provisions as you’re alluding to? And the second question is just a little bit more specific and that’s the tax rate, a little bit of volatility in the quarter.
What should we consider as a more sort of normalized level for tax rate for the course of this year? Thank you.
José Humberto Acosta
Okay, Philip. I have to say that usually, the first quarter of every year maintains some weak trending in loan growth; this year will be exactly the same.
Our expectation is to have a very solid third and fourth quarter, in order to reach the 8% loan growth that we are expecting. So, yes, as you mentioned, these numbers will be the lowest level of numbers, if you compare with the next quarters for this year.
Regarding the tax rate, we are -- for the year, the whole year, we maintain the guidance that the tax rate will be between 33% and 34% in total. Remember then, the statutory tax in Colombia is 37%, but the taxes in Salvador, Guatemala and Panama is 25% and the other offshore operations which is relevant, it has 0% of tax.
So if you combine those tax effects, the result is 33% to 34% at the end of this year.
Operator
Our following question comes from Carlos Macedo from Goldman Sachs.
Carlos Macedo
Hi. Thanks for taking my question.
My question is on your medium term guidance, 16% target for ROE 2020. You talked about, responding to Jason’s question, the cost of risk improving another 20 basis points from your target this year of 2% to 1.8%.
Is there a risk that maybe your margins also reflect a slightly lower number? I mean that’s really the question.
You’re targeting 5.6% this year, another 20 basis points down from where you are now. Is that the steady state margin, is that what we should expect going forward?
Is there a risk that that could be lower, if rates don’t go up or freights come down or mix changes? How should we think about the evolution of margins within the context of evolution of cost to risk?
Thanks.
José Humberto Acosta
Thank you, Carlos. There are many forces that help the return on equity, and yes the cost of credit will be one.
The second one will be efficiency level. We are foreseeing the future of the efficiency level reaching the level of 46% in 2020.
And the third, it is the NIM, as you are asking right now. Right now, we have a compression, maybe in 2019 that will be more stable NIM.
But at the end, in the long-term view because of the competitiveness, because of many banks trying to reach and to gain market share, we expect the compression of the NIM in the long-term view. That would be the range of 5.2% to 5.5% in the next coming three years, again because of the competitive landscape and because -- obviously, the upside is we are moving through consumer loans that is helping to support the NIM.
So that’s the reason why since 2015 we changed and we’re trying to change our mix in between corporate and consumer loans. So, consumer would be one of the main drivers to sustain the NIM.
Operator
Our following question comes from George Friedman from Citibank.
George Friedman
Yes. Thank you very much for taking my questions.
Actually, I’d like to touch on two points. First, coming back to the short-term guidance of 12% to 13%, of course, we also understand that the equity base, as Jason mentioned in his question, has been coming down because of the IFRS.
Just wondering, if you believe that additional impact on the equity basis, due to the IFRS 9 could take place during the year or if the COP 600 billion impact was one-off? And I’m asking that question because if doesn’t have another impact, I see -- I know, for you to be able to get into the 12% to 13% target of ROE in 2018, you’ll have to see a significant acceleration of earnings throughout the year.
So, just wondering how comfortable you are with that or if we should expect additional hit on the equity? This was the first question.
And my second question is actually with regards to your credit card franchise. I noted in the release that you highlighted AmEx losing ground in the period, both in terms of credit card billings and also in terms of credit card issuance.
So, what is going on the AmEx? Are you incentivizing the issuance and usage of other labels or is this just natural competition?
Thank you.
José Humberto Acosta
Yes. Regarding the provisioning that is affecting the equity, it is a one-off.
And same happened when we implemented IFRS 5 years ago, it is happening exactly the same. This is a one-off situation and it’s not affecting more the equity level that we are having right now.
Regarding how we are going to get 12% to 13%? Yes.
One of the main drivers will be a loan growth that will take place, we hope in the third and the fourth quarter to help us, to increase NII in order to reach that level of 12% to 13%. But again, the COP 600 billion that is affecting equity, it is a one-off situation.
Juan Carlos Mora
Regarding your question about credit card. Credit card is a very important business for us, we keep growing and pushing the business.
We are not leaders in number of plastics, but in any other metric, we are the leaders in the usage of the cards. We represent or we sell the three main brands of credit cards, Visa, MasterCard and AmEx.
In the past, we had an exclusivity agreement with AmEx. And that agreement ended last year.
So, now, we are pushing the three brands or the three main brands in equal terms. So, that’s why you are seeing a lower growth on AmEx.
But, the credit card business is a very healthy, very dynamic business for us; it’s providing very good revenues, fees, and we keep pushing the business at this moment.
Operator
[Operator Instructions] Our following question comes from Rodrigo Sánchez from Ultraserfinco.
Rodrigo Sánchez
I just have a question. Could you please provide details and comments about exposure you have on the Colombian transportation system, including total exposure and coverage you have for the first quarter?
What provisions level are you expected to reach by the end of the year? And also, if you could please repeat the guidance on efficiencies for 2018?
Thanks.
José Humberto Acosta
The guidance for efficiency is to reach a level of 49%. But remember that we are impacted this year because of NII drop of COP 400 billion because of IFRS 9.
Regarding your first question in transportation system, we have exposure in several companies of transportation and we have a wide range of provisions in between 20% to 40%. And the reason why we are expecting the cost of credit of 2%, it’s assuming that probably in the next coming quarters we have to increase those provisions, basically in some of the companies.
But again, today, we have a very orthodox approach in terms of those provisions, they are 20% to 40% range of coverage.
Operator
Our next question comes from Carlos Gómez from HSBC.
Carlos Gómez
Yes. Hi, good morning.
First, in terms of transportation, I don’t think you gave the exposure that you have you, so it will be good to have. Second, a technical thing, the COP 599 billion charge to equity that’s presumably after tax, and if you could tell us which tax rate do you use, which is the corporate tax rate of 37%?
Finally, and this is not a repeat question, Basel III implementation, you said that you’re waiting to hear technicians. What exactly are you waiting to hear and will you be affected by the new regulations on capital for conglomerates -- financial conglomerates?
Thank you.
José Humberto Acosta
Okay. There are three questions.
I’m going to answer the second one, very quickly. The definition why we are saying that the range of COP 600 billion because we are adjusting the models still, we have -- right now we’re having conversation with leaders [ph] trying to receive from them the check in terms of those provisions.
We believe that the COP 600 billion that we are adjusting on the provisions and on the equity, it’s a 90% approach. We don’t believe that there will be a huge impact.
Regarding your first question, in transportation system, specifically in the company that you mentioned, our exposure is around $200 million exposure or even a little bit more, $220 million. And the provisions that we are having there, it is around 30% of that.
Conglomerates?
Juan Carlos Mora
Regarding the conglomerates regulation, that law was passed to Congress last year and now it’s in the implementation process. The process is going forward well.
We are having conservations and some comments on the proposed regulations coming from the government, and we don’t see any material impacts coming forward for Bancolombia related to that regulation.
Operator
Our following question comes from Daniel Duarte from Corficolombiana.
Andres Duarte
Hello. It’s Andres Duarte.
Thank you. There’s a significant decrease in the growth of the consumer loan portfolio.
With respect to 4Q, implies the Bank has reached its acceptable PDL level for the category or is this explained solely by seasonal effects? Thank you.
Juan Carlos Mora
Thank you, Andres. It’s the last part that you mentioned.
It’s just seasonal effect. The consumer loan portfolio is growing 11% year-on-year.
So, it’s healthy growth, the portfolio that is growing faster for us. So, it’s just seasonal effect.
José Humberto Acosta
And remember then, almost 30% of the consumer loans are represented in U.S. dollar.
And because of depreciation, it is reducing to the level of 11%.
Operator
Our following question comes from Sebastián Gallego from Credicorp Capital.
Sebastián Gallego
Hi. Good morning.
Thanks for the presentation. Just a quick question on Electricaribe.
Could you comment on the total coverage that you reach in first quarter 2018? Thank you.
Juan Carlos Mora
Thank you, Sebastián. We reached the coverage of 63% on Electricaribe during the quarter.
Operator
Our following question is from Alonso Aramburu from BTG Pactual.
Alonso Aramburu
Hi. Good morning.
Thank you for the call. A follow-up on the Electricaribe.
Can you tell us how much of that provisions this quarter were related to Electricaribe or [indiscernible] or just specific credit. And second, when you look at your ROE guidance for this year, can you just let us know, how you look at these by country?
First quarter, you had single digit ROE in every country except El Salvador. Do you expect a recovery in also in Panama and Guatemala, or the recovery should be mostly in Colombia?
Thank you.
José Humberto Acosta
The key driver of the return on equity, as you mentioned perfectly, will be Colombia and that will be focused on basically because of efficiency and the loan growth. And the second one recovery on return equity will be Banistmo because in Banistmo the loan growth is showing a strong path.
So we believe then we will be able to sustain the return equity of two digits in Banistmo. In the case of Banco Agrícola, there will be a slight recovery of the return on equity and there will be basically driver -- or the main driver will be the efficiency.
But again, Colombia will be the main driver and the second one will be Banistmo.
Juan Carlos Mora
Regarding the provisions and how much we -- as we presented the total provision we did during the quarter. These big corporates especially Electricaribe, were around COP 150 billion on provisions.
That’s what they mean on the total of provision we did during the quarter.
Operator
We have no further questions at this time. I would now like to turn the call over to Mr.
Mora, Chief Executive Officer of Bancolombia for final remarks.
Juan Carlos Mora
Thank you everybody for your interest in this conference call. We definitely think that Colombia especially will improve the economic performance through the year and that the second semester is going to be better for the economy and that will allow us to take advantage of that better economic environment.
So, we will expect the Bancolombia results to improve gradually during the year. Again, thank you for your interest.
And see you in our next conference call for the second quarter 2018. Thank you very much.
Operator
Thank you, ladies and gentlemen. This concludes today’s conference.
Thank you for participating. You may now disconnect.