Aug 5, 2018
Executives
Juan Carlos Mora Uribe - Chief Executive Officer Juan Pablo Espinosa - Chief Economist José Humberto Acosta Martin - Chief Financial Officer
Analysts
Ernesto Gabilondo - Bank of America Merrill Lynch Jason Mollin - Scotiabank Thiago Bovolenta Batista - ITAÚ BBA Andrés Soto - Santander Investment Securities Alonso García - Credit Suisse Sebastián Gallego Betancur - CrediCorp Capital Carlos Gómez López - HSBC Yuri Fernandes - JPMorgan Natalia Corfield - JPMorgan German Cristancho - Davivienda Corredores Jorge Umana - BNP Paribas
Operator
Good morning, ladies and gentlemen, and welcome to Bancolombia Second Quarter 2018 Earnings Conference Call My Name is Silda, and I will be your operator for today’s call. At this time, all that participants are in a listen-only mode.
Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded.
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 will now turn the call over I to Mr.
Juan Carlos Mora, Chief Executive Officer of Bancolombia. Mr.
Juan Carlos, you may begin.
Juan Carlos Mora Uribe
Good morning, everybody, and welcome to the conference call for the second quarter 2018. I want to start this call making reference to the main aspects that are affecting our business.
We are going through a challenging credit cycle and we have experienced an additional deterioration in the loan portfolio. The level of new past due loans is mainly explained by corporate loans, including troubled clients that we have shared with you in previous calls.
In the SME front, we perceive an improvement of this situation, even though we still have some way to go, which is line with the economic recovery that Colombia is going through. This trend, though, confirms our assessment regarding where we are in the credit cycle.
We have elements to believe that we are reaching a turning point and we expect a normalization in the coming quarters. Over the last year, we have accelerated the pace of provisioning, acting early to reach coverage ratios that permit to protect the book.
As a matter of fact, some of the loans that are becoming delinquent today have been provisioned already, and that means that we do not expect a significant increase in the cost of risk – in the future cost of risk despite potential new past due loans. This situation with the credit portfolio contrasts with a good performance on margins.
Thanks to the management of the funding costs, also with a solid and improving capital position and with a good performance of costs thanks to the efforts made to lean the bank in several aspects. Having said this, let me elaborate a little bit more on the macro and some other relevant aspects that are driving our business.
After the elections for Congress and President held in the first-half of the year, the political landscape seems to be more constructive. The macro conditions in Colombia are stable and favorable for growth over the next 24 months.
We want to highlight that inflation has been within the range set by the central bank during several months in a row. The outlook for GDP growth has been positive, and this second-half of the year the pace of economic activity should accelerate as both the public and private sectors resume investment problems.
Also, the external front and the trade balance seems to be quite benign for the FX and the current account deficits. Because of this favorable market forecast, we will see more activity across the segments that the bank targets, and we expect an improvement in credit quality, especially in the corporate and SME segments.
On the loan volumes and credit demand front, the pace of growth has been slower than our expectations. This is partially explained by the slow first-half of the year when corporates behaved in a cautious way while they had more certainty in the political front.
As of June, the loan portfolio grew 3.2% year-on-year and most of this growth is explained by the consumer book. As you know, our consumer segment has been growing faster and to balance the composition of the book.
This is something that we target and we deliberately intended to grow the consumer book on a higher pace. Consequently, we have became the first player in retail banking in Colombia, as we went from 13% to 17% of market share.
Let’s remember that consumer loan growth in 2017 was 15%, and the year-on-year growth as of June was 10%. In the commercial front, our main efforts have been concentrated in the management of large corporate issues and the normalization of troubled clients, especially SMEs.
This is the segment where demand has been weaker and where the collection efforts are focused. Given the slow growth of the portfolio, we have concentrated our efforts into defense of the NIM.
Our strategy here has been to reduce the cost of funding as fast as possible, especially time deposits. The level of liquidity in the economy permits us to avoid significant pressure on the funding side.
In this sense, margins have evolved better than we had forecasted at the beginning of the year. The 5.9% posted in this quarter reflects better margins in dollar-denominated portfolio and the reduction of funding costs in Colombia.
We forecast stability in the interest rates in Colombia for the rest of the year, and therefore, net interest income will grow in line with the loan portfolio expansion. In line with the economic cycle and the situation with certain corporate clients, we continue having a high pace of provision charges.
Regarding the quality of the portfolio, we must highlight that in the origination process newer vintages involving commercial and consumer loans are behaving in line with our forecast. The growth in provision charges has been driven by the deterioriations of some corporate clients, not necessarily past due and the runoffs of SMEs clients.
We could say that the loan portfolio starts a new cycle with better levels. Nonetheless, there are some corporate cases that will become past due but will not require additional provisions, because we have made some in advance.
Regarding the cost of credit for 2018, it will be above our initial forecast. It will be around 2.2%, which is higher than the 2% we forecasted at the beginning of the year.
It is important to note here that some of the loans that became past due in the quarter had been partially provisioned with charges in previous periods. That means that we have moved in advance to protect the balance sheet, and to some extent we have already covered a significant portion of loans that are just appearing as trouble.
Efficiency and cost control remains a key topic for 2018. We are keeping our goal of growing expenses below 5%.
This year and so far the results has been quite positive. Operating expenses for the first six months of the year have declined 1.4%.
The structural gains in efficiencies have been a combination of factors. As we shared with you in previous calls, the headcount of the bank has been reduced.
Also, we have reduced the number of branches in Colombia and Guatemala to optimize costs. We continue gaining efficiencies and involving technology and automation in several processes across the bank.
Today, we have more than 160 processes that involve robotics and artificial intelligence and the productivity gains have been significant. 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. I will ask you to go to Slide #2 in the presentation.
Let me start by saying that during the past few months global conditions have remained positive for the Colombian economy. The rise in the prices of oil and other commodities have led to a surge in the country’s terms of trade, which are now 63% above the lowest reading recorded at the start of 2016.
Moreover, at the end of May, the year-on-year growth of this indicator is 14%. This performance of external prices, as well as the solid growth of Colombian main trading partners has led to a two-digit increasing of exports, which will lead to a further narrowing of the current account deficit to 3% of GDP for the full-year.
Due to all these factors, year-to-date Colombian peso has been one of the best performing currencies of the region. Our base scenario is that this performance of external variables will continue to be positive through the second-half of the year.
With respect to economic activity, recent indicators have shown a moderate improvement. According to our estimates, during the second quarter, GDP expanded 2.6% year-on-year, which is 0.4% higher than first quarter’s print.
Meanwhile, job creation is accelerating, retail sales have recovered and after a long period of weakness industrial production is growing again. All this has been complemented by the steady increase of both consumer and business confidence.
Based on this evidence, we have revised upwards our full-year growth forecast to 2.6%, slightly above market consensus. This means during the second-half of the year, the economy will expand close to 2.9%, thus confirming the pace of gradual pickup in activity that Juan Carlos mentioned that at the start of the call.
In terms of prices, after accelerating just 6 basis points in the second quarter to 3.2%, we slightly adjusted our year-end inflation forecast from 3.3% to 3.4%. This will mainly reflect an acceleration in food prices during the four quarter of the year.
There is also an increase in probability of a moderate El Nino phenomenon by the end of the year, which can affect prices upwards. Regarding monetary policy, we forecast that the central bank’s reference rate will remain at 4.25% for the remainder of the year.
We believe that rate of stability will be most appropriate response for an economy that will still grow below potential, but it’s at the same time exposed to higher interest rates in developed economies. After this overview of the economic environment, let me turn the presentation to José Humberto Acosta, who will discuss the bank’s results.
José?
José Humberto Acosta Martin
Thank you, Juan Pablo. Before starting with a discussion of the consolidated results, I would like to highlight the main aspects of each geography.
Please go to Slide #4. In our operation in Banco Agricola in El Salvador, this operation presents growth, signals an improvement in yields.
Growth has come from both commercial and consumer loans, and that has permitted to expand the NIMs from 5.9% to 6.9%. In the fee front, the implementation of new products has permitted to grow these revenues 7.1% on an annual basis.
Cost control programs have permitted to improve efficiency levels coming from 56% to 51%. In our operation in Panama, Banistmo, the growth of the loan portfolio has been slower than expected, impacted by the deceleration of the Panamanian economy, which we believe will grow 4% this year.
Also, the implementation of IFRS 9 has permitted to increase the coverage ratio to 123%. Finally, in our operation in Guatemala, BAM, the coverage ratio has increased also to 160%.
In general terms, the main goals for Central America is to grow the loan portfolio and to continue gaining efficiencies. Since Colombia is the main company of our consolidated operations, we want to zoom in that geography.
Please go to Slide #5. Note that these metrics are for our standalone operation in Colombia.
We must highlight two facts that drove the business over the last year. First, we maintain a very strong competitive position in commercial, corporate and SMEs.
Banking more than one-third of the total market share reaffirms the capacity of Bancolombia to share clients with comprehensive solutions. I want to point your attention to the evolution of market share in consumer loans, which has gone from 13% to almost 17% in two years.
Most of this growth has been within our own customer base, which we know better since they typically have a relation with us in the deposit side. The use of predictive tools allows us to estimate the payment capacity with higher accuracy and, therefore, originated loans more efficiently.
The evolution of NIM has been quite positive. Thanks to our efforts to bring down the cost of funding.
Please note that while the reference rate in Colombia came down 325 basis points over the last years, the NIM came down only 120 basis points. Over the last six months, it seems to have stabilized around 6.2%.
This comparison is the outcome of a strong franchise in deposits that Bancolombia has, especially in retail funds, which provide stability and competitive costs. On Slide 6, we see the evolution of the loan portfolio.
As we shared with you at the beginning, trade demand has been weak during the first-half of 2018. The loan portfolio in pesos grew 8.7% year-on-year, and the loans in dollars decreased 2.7% in dollar terms for a combined effect of 3% year-on-year growth.
It is important to highlight that the reduction of the loan portfolio is U.S. dollars took place in the local operation in Colombia.
The impact of the appreciation of the peso versus the dollar during that period was at about 1.2%. The most important trend to highlight regarding growth is the relevance that consumer loans have gained in our portfolio.
Today, this segment accounts for more than 17%, and that strategy has contributed to improve margins and returns. On the other hand, the market share of mortgages has remained stable at around 13% over the last two years, and we intend to keep it around that.
As Juan Pablo mentioned at the beginning of his presentation, we expect a faster growth of the economic activity during the second-half of the year, and this will help the credit demand. Based on this, we have changed the estimated forecast of loan growth for the full year.
That will be on the area of 6% to 8% and maybe at the level of 7%. Moving on to Slide 7, we present the situation of the credit quality as of June.
We continue experiencing the effects of the credit cycle on non-performing loans ratios for 30 and 90 days. This trend is exclusively explained by corporate loans, because SME, consumer and mortgage seems to be reaching the turning point in the quality metrics, as Juan mentioned at the beginning of his presentation.
Regarding corporates, we need to mention that the increase in the non-performing loans ratios is largely explained by the delinquency of clients that has been in the watch list but were not yet delinquent. To some extent, there were expected cases that had not impacted the delinquency ratios in March.
Nevertheless, we have done provisions for them in advance. In consumer and mortgages, we perceive a change in trends in the 90-day nonperforming loans ratio, which suggests a change in the cycle, whereas in corporates we still see a deterioration.
A similar effect occur in the 90-day non-performing loans ratio, which increased in the quarter, because of the loans are running off and reaching that threshold. That’s why the 90-day non-performing loans ratio goes up faster than the 30-day ratio.
There is a lag effect. We must highlight that we maintain coverage ratio levels enough to operate due to higher provision levels related to corporate clients and the implementation of IFRS 9, which increased the allowances by COP 600 billion.
Slide #9 helps to understand what’s happening with the credit cycle. During the quarter, COP 1.15 trillion became delinquent 30 or more days.
Almost COP 160 billion of those are corporate loans related to Electricaribe and the mass transportation system that were not delinquent yet. So taking out these large issues, the new past loans seems to be moderating, especially compared to the first quarter of this year.
We continue experiencing deterioration in midsize corporations, but on the other hand the trend in SMEs is reaching a turning point. And after having significant defaults in the last quarter of last year and the first quarter of this year, we are back to the levels that we have last year and a half of 2017.
We do not associate any particular sector to these new delinquencies. But certainly, the last 12 months of the economy have contributed to this trend.
Regarding consumer loans, we are focusing our origination in the best clients from a risk perspective. This is the segment where we don’t have any major concern, because it has behaved in line with our expectations.
We maintain cautious approach to disbursements, but we are positive regarding the general condition of Colombian consumer debt and in particular, Bancolombia’s clients. Right now, we continue the process of derisking the loan portfolio, replacing old vintages with the new ones under more stringent standards.
The environment is also in our favor. Households are reducing their leverage.
This is a trend that began about 18 months ago and leading indicators like unemployment is moving downwards. Now we can argue that we are back to the same levels of deterioration of mid-2017, and as the second-half recovery occurs, we could continue seeing an improving trend.
We perceive the current situation of the cycle as a transition period towards a better performance of the loan book. Equally important is to mention that we have accelerated the pace of charge-offs.
This has been only possible thanks to the provisions made over the last year. It should continue for the next coming quarters.
Finally, I would like to mention some actions that we are continuing to – in order to manage the credit cycle. In the early delinquency and collection process, we have enhanced our collection teams in order to concentrate efforts that prevent clients to become delinquent and in the case they are past due in a few days to avoid them reaching the 30 days.
Also, we are working with troubled clients. Since most of the clients have delinquents due to involuntary circumstances, we have been working with them to restructure some of their obligations, offering solutions that are more convenient.
For instance, a client that has an obligation in U.S. dollars is able to change it to pesos, and therefore, the cash flow volatility improves.
Having said that, we are changing our guidance of cost of risk, as Juan mentioned at the beginning, from 2% to 2.2% at the end of the year. Moving on to Slide #8, we can see the evolution of net interest income and the funding cost.
The most important fact to highlight regarding NII is the effort have made to bring down the cost of funding. In an environment where credit demand is not as strong, defending the NIM takes more relevance.
The actions taken to bring down the cost include, we took advantage of the ample global liquidity to take deposits in dollars through our offshore subsidiary in Panama, hedge it and monetize them and then use the proceeds to originate loans in local currency. During the first-half of this year, we monetized $1 billion, and the total cost paid for those results was 160 basis points lower than the comparable CD cost in pesos.
Also, we issued COP 300 billion in Green Bonds, which permitted to have – to take midterm funding at a very competitive cost. We reduced lines of credit from international banks by at around $400 million during that period.
All included, we could reduce the total funding cost of the bank by 48 basis points in the last year, but most importantly, the cost of deposits in pesos came down 99 basis points in the same period. To reach that reduction, we promoted also savings and checking accounts over CDs, taking advantage of the client base in Colombia.
It is also remarkable that despite the Fed interest rate hikes the cost of dollar-denominated deposit has gone up marginally over the last year. In Banco Agricola and Banistmo, we promoted savings and checking accounts as well.
As a result of these efforts, the margins remain stable. In the following slide, we can appreciate the trend in the net interest income.
NIM of the loan portfolio was stable during the quarter as a result of the parity between reduction of the average yield on the loan portfolio and the funding cost. Two actions helped the stability in the lending NIM.
First, we have grown in consumer loans at around 17% in Colombia, and these assets have a higher margin. And second, in the funding side, as we just mentioned, we have optimized the funding cost.
On the other hand, there was an improvement in the NIM of securities, as volatility was reduced after the Congress election in March and government securities have appreciated. The combined effect was a slight improvement in the overall NIM, which was 5.9% during the quarter.
In line with our expectations, we are getting closer to lending NIM of at around 6% and total NIM at around 5.8% by year-end. On Slide 11, we can see the evolution of fees.
Fees presented a mixed trend in the second quarter. Revenues evolved very well, mainly impacted by the promotional programs of of credit cards related to the World Cup.
But at the same time, we have higher expenses related to distribution channels such as banking agents and call centers. Asset management and bancassurance behaved in line with the trends seen in the first months of the year.
In order to isolate seasonal effects, it is useful to see the cumulative performance of fees. They have grown 6.8% in 2015.
This pace of growth is in line with the slow economic activity observed in the first-half of the year and we expect to accelerate the third quarter as the economy gains traction. Our forecast for fee growth for 2018 will be of the range to 8% to 10%.
Now moving to Slide 12, we present the evolution of expenses. The results in efficiency have two rationales.
From the revenue side, net interest income is not growing as expected, basically due to the low growth in volumes and the non-accrual of around COP 106 billion this quarter of interest of clients classified as a bucket 3. On the OpEx side, we have declined 1.4% due to the programs that we put in place during the year.
As Juan mentioned, we put special programs for managing the headcount to maintain an optimal level of branches and to maintain a strict cost control. Based on the evolution, we forecast an OpEx growth at the end of the year at around 4.5%.
In the tax front, the reduction on effective tax rate is explained by two reasons. In the second quarter, we recalculate the deferred taxes using the forecast statutory rate of 32% for 2019 based on the last tax reform.
In the second Q also, the earnings of the subsidiaries in Central America are bigger. Since the tax rate is lower, this effect reduces the overall consolidated tax rate.
Just to give you an idea, the statutory tax in our operations in El Salvador, Guatemala and Panama is 25%, and the statutory tax for our offshore operation is 0%. So if you combined, the number would be – at the end of the year the tax rate would be at around 30% to 32%.
Now let’s move to Slide 13, where we present the evolution of the capital position of the bank and the Tier 1, which ended at a level of 10%. We have not seen a significant change in the capital ratios over the last year due to the stable size of the balance sheet and despite the adoption of IFRS 9, which reduced shareholders equity.
For the rest of the year, we should operate with total capital ratio of 13% to 14%. Finally, on Slide 14, we present the return on equity for the period, which was 10.6%, and for the last 12 months, it was 11%.
In summary, the economic cycle indicates us that the level of provision charges is currently reaching the peak. For the second-half of the year, we have had potential faster growth on the loan book, a funding structure that could maintain the lending margin at around 6%, the growth in expenses under control and we are expecting to close this year at around 4.5%.
As we mentioned at the beginning, the international operations will help us to gain efficiencies and loan growth. And finally, the capital structure is optimal to face the new economic cycle.
After presenting these slides and discussing our second quarter results, I would like to invite our audience to ask any questions you might have. Thank you.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] We have a question from Mr. Ernesto Gabilondo from Bank of America.
Ernesto Gabilondo
Hi. Good morning, Juan Carlos, José Humberto and good morning, everyone.
Three questions from my side. First one, we saw modest economic recovery and that explains the limited loan growth.
However, can you share with us which are the tangible programs or projects of the new administration that are making you to become more optimistic in terms of loan growth in the second-half? We saw that almost all of the segments of the portfolio experienced a slower pace of growth on a yearly basis.
So I just want to know again, which is making you to be more comfortable, not only related to the economic activity but projects or any other indicator that could help us to be expecting faster growth should be very helpful? Then my second question is in terms of asset quality.
We continue to see that the large troubled corporates are the ones affecting the provision charges. And I think, that’s the reason why you increased the cost of risk guidance to 2.1%.
But can you share with us how much provisions have you already created on these large corporate loams? Are they already provisioned at 100%, or how much is still pending?
And finally, can you repeat how do you see the ROE for the year? Thank you.
Juan Carlos Mora Uribe
Ernesto, thank you for your questions. Let me start with the recovery aspect.
We have seen that the economy in Colombia is picking up already. You mentioned that the growth of our portfolio has been slow and that’s true.
But I would like to highlight that we have been gaining market share. Looking forward, we see that the consumer confidence is increasing, economic activity is improving.
So we will see more economic activity. And on that front, we will forecast a bigger demand.
On the government side, the new government will be taking office next week, but still the infrastructure program is in place and will demand additional finance. And also we see an increased activity from the enterprises evaluating new projects, and we will see additional demand coming to finance these new projects that are going to create additional capacity for the economy.
Also I would like to highlight that we are – we keep moving on the direction of pre-approving line of credits for our customers, for our retail business and this is a big improvement. So we are not reacting to the demand.
We are moving ahead and evaluating the customers, defining the line of credit, and that is creating additional demand for us with a very good credit quality. So we were optimistic that the recovery is coming and the demand will improve moving forward.
In terms of asset quality, we have mentioned that we have been moving on provisioning the big customers, bigger clients, corporate clients. Already we have provisioned the Electricaribe loans at around 65%, which is sufficient due to the current situation of that customer.
And on the SATP front, which is the mass transportation systems, we are at around 46%, which we also consider sufficient coverage. So we will keep moving and analyzing the development of these customers.
But as of today we think that the level of provisions that we have with those customers it’s enough. Regarding your third question about ROE forecast.
We forecast that our ROE will be at around 12% for this year, and we are confident that ROE will improve significantly for next year.
Operator
The next question comes from Jason Mollin from Scotiabank.
Jason Mollin
Hi, thank you for the opportunity to ask questions. My first question is a follow-up on the outlook for profitability.
I think, with the higher provisions, it seems like it might be hard even to reach the 12%, which I believe is down from the 13% that you were talking about after the last quarter at the beginning of the year. What do you think the upside or downside risk is for 2018 for the second-half?
Is it that – is this 12% on the upside as this – as the economy recovers as you expect? Is there no more?
What kind of volatility you’re expecting for the FX, et cetera? And second question is more of a detailed question on the cost of funding that’s been really an impressive trend bringing that down.
What are you seeing there in terms of competition? And can that downward trend continue, or do you think as the economy grows, there’ll be more competition for funding and low-cost deposits and actually that trend could reverse?
Thank you.
Juan Carlos Mora Uribe
Thank you, Jason. Let me elaborate a little bit on the ROE forecast.
We believe that, that 12% ROE for this year is something reachable. I mean, it’s not on the optimistic side.
What are the factors that could affect negative or positive that 12%? Obviously, cost of credit.
How the provisions behave is key. And as we mentioned, we think that we are reaching the peak of the credit cycle, and the customer clients that we mentioned before we are managing those customers.
So we believe that the next semester, the second-half of the year is going to be a better performance and will allow us to grow a little bit faster our portfolios. Consumer credits are going to grow and are going to give us additional income and the pace of deterioration is going to be slower.
So we think that, that forecast of 12% ROE is reachable and is reasonable due to the current situation of the economy and the bank. The other fronts, the efficiency fronts, the fees, all of them we will keep working.
And there it will be, we think, in line of our expectations. Regarding the cost of fundings, let me pass that question to José Humberto.
José Humberto Acosta Martin
Thank you, Juan. I want to complement just one additional point of the answer of Juan regarding the NII and how we will reach the return on equity.
Just a number. We are expecting to close in terms of provisions the year at a level of COP 2.5 billion.
That will help you to calculate how we are going to reach that return on equity and that increase of NII. Regarding cost of funding, yes, we made extra efforts not only this semester.
We began that process a year ago, trying to moving to funding cost – achieving cost of funding. Today, we are expecting almost a flat cost during the second-half of the year.
We are not expecting a reduction on the cost of funding, because interest rates right now is a kind of plateau, maintaining the same level. As you heard Juan Pablo, we don’t expect a change in the central bank interest rates.
So that’s the reason why we expect that the NIM will compress at the end of the year 20 basis points, and that is because the repricing of the assets. But we will maintain the cost of funding at the same level with the same composition, 75%% from retail and 25% for other sources of funding.
Operator
Thank you. The next question comes from Thiago Batista from ITAÚ.
Thiago Bovolenta Batista
Yes. Hi, guys.
Good morning and thanks for the opportunity. I have basically two questions.
The first one is a follow-up on the cost of risk. Can you indicating to us how much you were expecting for next year?
With this big jump in the cost of risk for this year, probably we will see a material decline next year. But what is the level that you believe is feasible for the cost of risk for next year?
And the second question is about the banking fees. Looking to the numbers in the press release, it seems that the banking fee declined a lot this quarter about 20% Q-over-Q and also 20% year-over-year.
What exactly caused this drop? There is any accounting change in this line to explain this big drop in banking fees?
José Humberto Acosta Martin
Thank you, Thiago. Regarding your first question, we are foreseeing a cost of risk next year in between 1.9% to 2.0%.
we have to highlight that five or seven years ago, our cost of risk were around 1.5%. But now when we are moving more towards to have more consumer loans, the new standard for the bank of cost of risk for the long – for the medium term will be to be in the range of 1.7% to 1.8%.
That means that next year will be dropping, but not at a level that we’re supposed to have as a standard, but maybe we will reach that level in 2020. Regarding bank fees, we have basically a huge level of transactions in our call centers, and also we increased the level of corresponding agents.
That explains that we increased almost 17% our cost of maintaining those channels, but we don’t see immediately on the income side, that explains. But as we mentioned on the speech, you have to take in consideration that the number right now 7% an annual basis and we expect to close 7% to 8% or 8% to 10% at the end of the year.
But the explanation is basically, because we had two items in which increase: again, call centers and the bank agents.
Operator
Thank you. The next question comes from Andrés Soto from Santander.
Andrés Soto
Good morning, everyone. Thank you for your presentation and the opportunity to ask questions.
My question is related again with cost of risk and your guidance for 2018. This, in my view, is the main difference between the guidance that you provided in the first quarter results with the one that we – you are giving now.
And what I would like to understand is, what changed over the past three months that make you so much more conservative in terms of either provisioning expenses that you will need to make in 2018? Is it related to the large corporate cases?
It’s something else in your structural portfolio? What are the downside risks to this number to achieve even a higher level in 2018?
Thank you.
José Humberto Acosta Martin
Thank you, Andrés. What happened is – and let me explain in four different buckets.
In consumer, you see an improvement, so we don’t expect an increase. In SMEs, you see the numbers we thought that were below that level that we are having today.
So that is the first deviation that we see in terms of provisions, but we are not foreseeing in terms of quality of the loan portfolio. So we foresee better vintages, behave of vintages, but we see the bunch or the level of provisioning will maintain on SMEs.
In terms of large corporates, as Juan mentioned, we expect a slight increase of provisions. What happened is with the rest of corporates, in which we saw a slight deterioration that impacted in our terms of provisions.
So short is, basically, on the corporate side, we saw a deviation in terms of the corporate of loans. And SMEs, we thought that it would improve, but nothing of that happened.
So we – the process of recovering on SMEs will take more than the expected time at the beginning.
Juan Carlos Mora Uribe
Andrés, and let me complement José Humberto’s answer with something. The loan growth has been slower than we expected.
So the cost of credit or the relative cost of credit increases because of that. And since we expect a better pace during the second-half of the year, that will probably – or improve the cost of credit because of volume is going to have a better performance during the second-half.
Operator
Thank you. Our next question comes from Alonso García from Credit Suisse.
Alonso García
Hello. Good morning, everyone.
Thanks for taking my question. My question is regarding loan growth.
As you mentioned, you have been gaining some decent market share over the past couple of years. My question is how sustainable is this loan growth outperforming the system in the coming years?
And for how long do you think you can continue growing strongly within your existing client base? And my second question is regarding OpEx.
How sustainable do you see the OpEx growing in the low single digits? And what is your target for the next two, three years in terms of efficiency ratio?
Thank you.
Juan Carlos Mora Uribe
Thank you, Alonso. We think that the loan growth it’s sustainable in the future.
As we mentioned already several times, the economic activity is going to be favorable and that helps a lot. But also we believe that we are in the condition of taking advantage of that economic activity.
The – on the commercial side, we have improved our origination process. Growing on our customers, as you mentioned, has been a strategy, a very successful strategy and we will keep moving in that direction since we have the largest customer base in Colombia, which is around close to 9 million customers and in the other countries for 2 million.
So we believe that we have target a small amount of those customer base and we are improving the products. We are understanding better the behavior of our customers.
So on the retail side, we think it’s achievable and we will keep moving on that direction. The commercial – on the commercial side, even though this could seem counterintuitive, SMEs for us is going to be a very good source of future growth.
Our customer base on that – on SMEs is big. Having reached the peak and taking into account that the cycle is going to be better, SMEs again will be a source of growth for us.
In terms of OpEx, your second question, we believe that we are able to grow expenses around inflation in the coming years. So we believe that we will be able to improve our efficiency ratios to reach our target of 46% in around 2020 to 2021.
And we believe that the programs and the structural gains that we are having on costs will allow us to reach that level.
José Humberto Acosta Martin
And complementing the answer of Juan, the rationale for reducing the efficiency ratio in the last five years were reducing cost. Today, we feel comfortable with that achievement.
And the rationale for the next three years to increase the efficiency or to have a better efficiency, that would be on the income side with a combination of better margins, better loan growth portfolio that will be achievable. And that’s the reason why we believe that we will get the level of 47% as or 46%, as Juan mentioned.
Juan Carlos Mora Uribe
Hello?
Operator
[Foreign Language]
Juan Carlos Mora Uribe
No we finished with that answer. We could – we can move to the next question.
Thank you.
Operator
Thank you. The next question comes with – from Sebastián Gallego from CrediCorp Capital.
Sebastián Gallego Betancur
Hi. Good morning, everyone.
Thanks for the presentation. I have actually three questions.
The first one is just a follow-up on OpEx. I know you talk about your targets, but can you provide a bit more color on the – on any targets regarding optimizing branches, headcount, what’s your expectation on that front?
The second question is regarding Panama. Can you provide a bit more color on the outlook on the operation of Panama?
How are you dealing with the slower pace of growth? And how do you expect to achieve better figures going forward?
And my final question is just a follow-up also on asset quality. You mentioned in the previous call that the effect on NII coming from the adoption of IFRS 9 was somewhat mitigated with lower provisions, and also IFRS with expected new – with provision expected model is supposed to take into account a better macro outlook.
Why is the provision expenses continue to go up? Thank you.
José Humberto Acosta Martin
Sebastián, regarding OpEx, we expect to – again, as we answered in the last question, the efficiency that will be a function of much better performance of the income. We are expecting to maintain again under inflation, the OpEx increase for the next coming years with a combination of different factors, not only labor costs, also operating expenses.
So we don’t have a specific view about that, only the expenses growth. Regarding your second question, in Panama, yes, we see right now a lower loan growth in Panama.
But the positive news there is they are doing big efforts to achieve a better efficiency level than actually they are getting with the cost controls, that helps. And the second front that Banistmo is helping us is with the fee income ratio.
It is a very good performance that they are reflecting. And obviously, we are replicating the same experience in Colombia with retail in Panama.
So that will be a matter of time. We expect that 2019, we will be able to reach that loan growth.
Regarding your third question, yes, IFRS 9, you saw impact through all the banks in Colombia. It was one-time impact on the balance sheet.
So we don’t foresee any particular deterioration because of IFRS 9. Right now it’s comparable.
We – again, the 2.2% is based on the assumption that IFRS 9 is contemplated at expected losses.
Operator
Thank you. The next question comes from Carlos Gómez from HSBC.
As a reminder, so that we may take as many questions as possible, we ask that you limit yourself to one question.
Carlos Gómez López
Hello, good morning. One question is about what a good cycle looks like.
So you are entering a period in which you think that things are going to improve. We’re going to see more loan growth.
How much is that? How much do you expect to grow over the next, let’s say, three to five years?
How good can this cycle be? And I ask because when one looks at asset quality, one gets the perception that perhaps there was a model average in the previous cycle than we anticipated, and therefore, perhaps the prospect for growth is now lower than it was in the past.
What do you expect for the next three to five years? Thank you.
José Humberto Acosta Martin
Thank you, Carlos. Regarding your first question, we believe on CAGR the next three, four years that the loan growth will be double-digit in the lowest end.
We are maybe thinking about 10% to 13% in the next coming years. Obviously, the base of this year is low, so you would see a very good performance on 2019, and you will be a more normalized performance on loan growth 2020.
But again, that double-digit loan growth and you know that we have capital and we have the source of funding to maintain that loan growth. And as Juan mentioned, that will dilute the cost of risk, because the level of provisioning will be different.
Regarding the second question, Carlos, can you repeat please your second question that one?
Carlos Gómez López
It is [indiscernible] to one, but actually since you offer me one, what’s the impact of Basel III?
José Humberto Acosta Martin
Okay. Regarding Basel III, the government is not releasing the final decree.
We are just assuming that, that will put in place the new II offers and they will put in place again a different calculation of the risk-weighted assets. So at the end of the day when we have the decree with the exact information, maybe we will go back with you.
But our perception is it’s not material the change in terms of the solvency ratio for Bancolombia, assuming part of the things that the regulator is saying regarding Basel III.
Juan Carlos Mora Uribe
Carlos, with the drafts that we have been discussing with the regulators, we don’t see any material impact on Bancolombia. We will need to wait for the final or the final regulation to come out.
But with the drafts that we have been discussing, no material effect.
Operator
Thank you. The next question comes from Yuri Fernandes from JPMorgan.
As a reminder, please limit yourself to one question.
Yuri Fernandes
Thank you very much for asking questions. I had a question on the effective tax rate for the quarter.
it was very below like previous quarters, and you mentioned a big proportion of Central America operations. But still when we look to Colombia standalone, we see like the effective tax rate in Colombia at 17%.
Can you provide more details on what has happened here, if there was any kind of tax credit? And what should be the tax rate for the rest of the year for you?
Thank you.
José Humberto Acosta Martin
Thank you, Yuri. What happened is remember, that we have a deferred taxes.
And at the beginning of the year we made all the calculations for 2019, our deferred taxes, based on the assumption that the 37% statutory taxes, which is the current statutory taxes in Colombia. But remember then a year ago was released a tax reform in which the statutory tax for 2019 will be 32%.
What we did in the second quarter was the recalculation and adjustment of all the deferred taxes with the new tax base, which is 33%. That was, you see, a big impact of 17%.
But the statutory tax or the tax for the 2018 as a whole would ne at around 30% to 32%. It is just an adjustment and where basically because of the provisioning that we had on the first quarter.
Operator
Thank you. The next question comes from Natalia Corfield from JPMorgan.
Natalia Corfield
Hey, good morning, all. So my question is with regards to your capitalization.
We saw that there was a decline this quarter. It was most explained by higher risk-weighted assets.
And your risk-weighted assets actually increased much more than the growth of your loan portfolio. So I’m wondering what’s behind the growth of risk-weighted assets?
That’s one. And within the same topic, there was also an increase in your regulatory capital and you did not capitalize earnings in this quarter.
So I’m wondering what drove the growth in regulatory capital, which was offset by the higher RWAs? Thank you.
José Humberto Acosta Martin
Regarding, Natalia, your first question, what happened with the risk-weighted assets is a combination of two factors. First, the loan the loan growth in consumer, which is higher.
You saw the numbers that was 17%. And the second, regarding our securities portfolio, the volatility increased.
So the DV01 increased, and that was the reason the risk-weighted increase. The VaR increased because of the volatility.
So that consumes more capital that is the explanation. Regarding the return on – your second question was focused on…
Juan Carlos Mora Uribe
Retained earnings.
José Humberto Acosta Martin
We – as you mentioned, the big impact was in the first quarter basically, because of IFRS 9. Our expectation is again to maintain the same capital level based on the assumption that one-third of our net income annual basis that will be a dividend and we will retain two-thirds.
That’s the reason why our guidance is to maintain that Tier 1 10% to 11% for the whole year.
Operator
The next question comes from German Cristancho from Davivienda Corredores.
German Cristancho
Good morning. Thank you.
My question was related to OpEx. So it has been answered.
Thank you.
Operator
Thank you. The next question comes from Jorge Umana from BNP Paribas.
Jorge Umana
It was already answered. Thank you.
Juan Carlos Mora Uribe
Okay. We will like to thank you for your participation on this conference call.
We are confident that the economic improvement in Colombia and the developments that are happening in Central America will improve the results of the bank during the second-half of the year. We expect that, that on average creates results in line with we just explained to you today.
So we will hope to see you on our conference call for the third quarter of 2018. Thank you, and have a good day.
Operator
Thank you. Ladies and gentlemen, this concludes today’s conference.
We thank you for participating. You may now disconnect.