Feb 28, 2021
Operator
Good morning, ladies and gentlemen, and welcome to Bancolombia's Fourth Quarter 2020 Earnings Conference Call. My name is Hector and I will be your operator for today's call.
At this time, all 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, in 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.
Mauricio Rosillo, Chief Corporate Officer; Mr. José Humberto Acosta, Chief Financial Officer; Mr.
Rodrigo Prieto, Chief Risk Officer; Mr. Carlos Raad, Investor Relations Director; and Mr.
Juan Pablo Espinosa, Chief Economist. I will now turn the call over to Mr.
Juan Carlos Mora, Chief Executive Officer. Mr.
Juan Carlos, you may begin.
Juan Carlos Mora
Good morning and welcome to our conference call for the fourth quarter of 2020. I hope all of you and your families are safe and healthy.
The fourth quarter confirmed that the Colombian economy is moving forward. It has rebounded from the lows observed in April and May of 2020.
The fourth quarter GDP posted an annual negative variation of 3.6% and a full year contraction of 6.8%. This result shows that economic activity underwent a process of clear improvement with better-than-expected results.
As we look at 2021, these results confirm that the worst of the impact generated by COVID-19 has been overcome, but also reveal that the recovery is very sensitive to the evolution of the pandemic. After a very challenging year, the net income for 2020 was COP 276 billion.
Before getting to the details of the results, I want to highlight some key topics. During 2020, Bancolombia became stronger.
We remained closer to our clients during the pandemic, offering them better safer and more reliable digital solutions. We improved our transactional portfolio with new digital services tailored to our clients' needs, leveraging in self-managed options.
We have a strong balance sheet with our diversified funding base, driven by the growth of retail deposits. Allowances for loans for the year-end were COP 16.6 trillion, growing 52% when compared to 2019, representing 8.1% of total loans.
We made an early adoption of a full Basel III capital standards, reporting a Tier 1 level of 11.24% that represents an increase of 167 basis points when compared with the Tier 1 reported at the end of 2019. This is aligned with the guidance we have been giving in the last couple of years.
Finally, despite high provision charges during the year due to COVID-19, the Bancolombia continues to have a resilient result. The provisioning level takes the bank to a coverage ratio of 213% for the quarter.
We expect cost of risk to slow down in 2021, but returning to normalized levels shouldn't only take place in the upcoming years. At this point, I want to turn the presentation to Juan Pablo Espinosa, who will further elaborate on the performance of the Colombian economy.
Juan Pablo?
Juan Pablo Espinosa
Thank you, Juan Carlos. Now please go to slide number three in the presentation.
At the end of 2020, the Colombian economy continued to rebound. In fact, in year-on-year terms, GDP decreased from minus 15.8% in the second quarter to minus 8.5% in the third quarter and minus 3.6% in the fourth quarter.
As a result, full year GDP variation was minus 6.8%. This result not only beat our expectations, but also implies that almost 8% of the decrease in economic activity that took place during the lockdown was reversed in the second half of the year.
Despite this positive trend, at the start of 2021, the economy took a hit as a result of the second wave of COVID contagions and the restrictions that local authorities imposed. Consistent with this our real-time data point to a 5% year-on-year decrease in economic activity in January.
However, this negative trend has resided quickly in the first weeks of February. Taking this into account, we estimate that during the first quarter year-on-year GDP variation will be around minus 3%.
For the remainder of the year, there is a risk regarding the evolution of the pandemic and the effectiveness of the vaccination plan. However, we expect GDP to grow 4.7% in 2021 due to the combination of several factors.
Globally, we expect higher oil prices in terms of trade, as well as a stronger recovery of export demand. Locally, low interest rates will combine with the stimulus program executed by the government in sectors such as infrastructure and housing.
Regarding inflation, after an historic low print of 1.6% in December 2020, we anticipate that in the short term to have – CPI change will remain below 2%, these expectations relies on the fact that the economy is still running well below potential and risks arising from supply shocks are contained. The end of temporary relief measures taken at the start of the pandemic and the mild increase in the core component will take overall inflation to close 2021 around 2.5%.
Against this backdrop, we continue to predict that for a long period of low-end and stable interest rates. We anticipate that reference rate in Colombia will be at its current level of 1.75% at least until the second half of 2021, when the Central Bank will do some upward fine-tuning in order to keep inflation expectations on check.
Finally, it is important to mention that in 2021 the implementation of initiatives related to fiscal adjustment will be key to rating agencies decisions regarding Colombia. Officials have stated recently that, this semester the government will submit to Congress a tax – revenue so far around 1.5% of GDP starting in 2022.
In addition, legal amendments to allow spending reductions could also be proposed. In our opinion, adjustments to the fiscal rule are also necessary to allow its reinstatement next year.
After this economic overview, I will turn the presentation to Juan Carlos and José Humberto Acosta.
Juan Carlos Mora
Thank you, Juan Pablo. Moving to slide 4, I want to continue this presentation by explaining our digital strategy.
It is basing three pillars: new digital business development, digital experiences and process digitalization. These pillars aim to increase income generation, reach new market opportunities, improve the digital experience of our clients, and accomplish a greater efficiency.
These goals are achieved through digital enablers, such as analytics and big data, accelerated adoption of cloud technologies, artificial intelligence, strengthening, cybersecurity among others. In digital business, we highlight Nequi and Bancolombia a la Mano.
During 2020, we reached 9.4 million clients between both, more than doubling the number of users of 2019. Nequi with 4 point million clients averaged deposits over COP400 billion, and 186,000 Visa card users had excellent results last year.
On the other hand, Bancolombia a la Mano exceeded expectations with 4.6 million clients, and 123% growth in fees. We improved materially the digital experience of our clients, getting closer to them reaching 8.4 million digitally active clients among retail SMEs and corporate apps; 71% of digital adoption; 44% digital sales over total sales; and 63,000 new personal loans digitally disbursed in 2020.
We built up strategic alliances to escalate results. Wompi our payments getaway registered more than 38,000 merchants.
And Tributi that offers online tax preparations to our clients processed more than 27,000 tax forms. Using robotics and artificial intelligence, we automated 29 different processes to support the credit relief programs for our clients and the distribution of government subsidies to attend the pandemic.
The branch networks want a – 16 processes have been automated during 2020. This allow us to serve out almost one million requests from our clients increasing productivity, improving service and customer experience.
I want to share with you, a very important news for Bancolombia. The consolidation – that consolidated the bank's digital and innovation strategy.
We have decided to migrate our applications to the cloud with our strategic partner Amazon Web Services. This is going to allow us to take advantage of other value-added services that AWS offers, and provide the business with the tools to be able to transform and innovate at the speed that the market requires.
Moving to slide 5. I'm going to elaborate on – in our value proposition.
Ecosystems is a fundamental component of the evolution of our digital strategy. Through this, we are solving end-to-end needs of our clients.
We have decided to be relevant in mobility and housing. Think of Bancolombia as an orchestrator of financial and nonfinancial solutions.
For example, in the housing and mobility ecosystems, we connect the supply and demand for housing and vehicles through our marketplace. And at the same time, we offer credit leasing and rental solutions across an integrated digital experience.
On the other hand, we are transforming financial inclusion using QR codes where we connect more than nine million of our digital clients through Bancolombia a la Mano, Nequi and the Bancolombia app with more than 400,000 small businesses, reaching 10 million transactions. Ecosystem solutions are interconnected with each other and complemented by third-party capabilities, allowing us to develop a value proposal beyond our industry to solve our clients' needs.
On slide 6, we present our ESG framework. First, I want to share with you something that make us very proud in Bancolombia.
We recognized with the gold medal of the Sustainability Yearbook 2021 developed by S&P Global, which highlights the companies with the best sustainability performance around the world. As the most sustainable bank of all the organizations analyzed, our purpose is to promote sustainable economic development to achieve well-being for everyone.
We reached this purpose by developing four key points; financial inclusion, more than nine million people financially empowered by Nequi and Bancolombia a la Mano; and more than 137,000 small amount loans disbursed by these digital platforms. Second, sustainability finance.
COP1.3 trillion issued in sustainable bonds and COP1 trillion disbursed under sustainable credit line in 2020. Third, gender equality.
In 2020 for the first time we have a woman as a Board member and we designed a special credit line to support women with disbursement of COP23 billion during the year. Finally, climate change.
26% of used energy in the year was auto-generated with renewable energy. We invested during 2020, COP225 million in energy efficiency projects for our internal carbon travel tax.
Now, I want to turn the presentation to José Humberto. José?
José Humberto Acosta
Thank you, Juan Carlos. Now turning to slide 7, I want to walk you through the evolution of the relief program.
Credit reliefs have decreased throughout 2020, reaching the peak in the second quarter with 44% of the consolidated loan book under relief, and closing the year with 15% level. It is important to highlight that this 15% includes structural solutions that we are giving to our clients in Colombia and in El Salvador.
This figure is lower than expected due to the less structural solutions in SMEs and corporate clients. In Colombia, 12% of the loans are still under relief, out of which 11% are under PAD program.
Remember that PAD program began in August and initially was meant to end in December 2020 but it was extended by the regulator until June of this year. Our operation in Panama, Banistmo, we kept 45% of the total loan book under relief.
This proportion may maintain high until June because of the extension of the moratorium laws in Panama. In slide 8, we present the breakdown of provisions during the quarter.
Provision charges for the fourth quarter were COP2 trillion. As we did in previous quarters, we want to explain the breakdown.
Provisions associated to the update of macro scenarios and COVID-19 explained most of the quarter charges, 82%. We want to highlight that the expectations for macro variables deteriorated from the third to the fourth quarter of the year especially in Central America.
Just to give you an example, the GDP for Panama went from minus 3.3% in the third quarter to minus 15.2% in the fourth, reflecting the still uncertain economic environment in which the bank operates. Moving to slide 9.
We give you a snapshot of the composition by stages and their coverage. During the quarter, we can see there was an important increase in Stages 2 and 3.
This increase was explained by three aspects; first, clients for whom the relief ended at the final part of the third quarter and during the fourth quarter. Some of these clients did not get a structural solution and did not have the capacity to pay yet.
So they reached 30-day past due. Second, some of the clients that became 30 days past due since the third quarter deteriorated further and ended up 90 days past due.
And third, the output of the risk assessment resulted in higher risk and the number of clients in watch list increased. At the right side of the slide, you can observe the total balance in Stage 2 and 3 and the percentage covered by the allowances.
This shows that depending how the pandemic and economic recovery evolves there is still a space for provision charges in 2021. In slide 10, we present provision charges and allowances.
Cost of risk for the quarter was 4.2% and for the last 12 months was 3.9%. Cost of risk without COVID-19 effect was 0.7% for the quarter and 2% for the last 12 months.
As a result of our provisioning models, the level of allowances has increased as a proportion of the total loan portfolio, protecting the balance sheet in an environment that is still uncertain. By the end of 2020 allowances for loan losses represented 8.1% of total loans.
As we mentioned before, the recovery path is going to be slow. Returning to normalized level of cost of risk will take us until the end of 2022.
This is going to be a transition year. Still with a lot of uncertainty, we expect to close 2021 with a cost of risk in the 3% area moving closer to the 2% area at the end of 2022.
Slide 11 shows the past due loan formation and coverage. New past due loans during the quarter decreased because of the reliefs and the structural solutions offered to those clients whose reliefs ended.
We expect charge-offs to increase during the first half of the year, as clients continue to deteriorate after the end of the reliefs. As reliefs continue to expire, asset quality metrics will continue to deteriorate at a faster pace.
During the quarter, 90-day past due loans began showing deterioration because of clients that became 30-day past due during the third quarter and deteriorated furthermore. The coverage ratio dropped to 213%, but remains high because of the increased provisions based in COVID-19 provision strategies, clients in watch list and past due loans requirements.
On Slide 12, we present the capital adequacy for Bancolombia. In December 2020, Bancolombia adopted the Basel -- capital Basel III standard for the capital adequacy.
This was done in advance of a compulsory date of adoption. Remember that by regulation, all Colombian banks must comply with the new rules since January of this year, but we reported 2020 Tier and solvency ratios under Basel III.
Total solvency ratio on the Basel III stands at a level of 14.7%, while CET1 at a level of 11.24% well above the minimum regulatory requirements. Keep in mind that even though we have a phasing period of four years to fulfill with the new levels and buffers of Basel III, we almost comply with the total solvency ratio with just our Tier 1 current ratio.
We did serve the adoption in two steps; first, the reclassification of existing resource in the occasional reserves to the bank's legal reserve approved by the extraordinary shareholders' meeting last July. And second, during this last quarter, complying with the new regulation regarding risk-weighted assets, goodwill deduction, operational risk among others.
As we have been saying in the last couple of years, the impact of the adoption of Basel III is positive for Bancolombia showing an increase of 167 basis points year-to-year. On Slide 13, we present the liquidity position of the bank.
In a consolidated basis, we are expecting liquidity levels to maintain at least for the first half of this year and stable interest rates at least until the third quarter. The material increase during the year of deposits was driven by savings accounts, especially in retail and SMEs clients whose balance increased in COP 13 trillion.
As of December of 2020, savings accounts represented 40% of the total deposits mainly from retail clients. This has -- makes our deposit base more stable and granular and it has also boosted the decrease in the funding cost reducing 92 basis points in the last 12 months.
On Slide 14, we present a snapshot of our standalone operations. In general terms, the trend throughout the different geographies operated by Bancolombia during 2020 was similar.
Margins under pressure. Fees recovering as the economies started to reactivate, gliding growth of the loan book, positive evolution of efficiency and a solid position in terms of capital and liquidity.
I want to give you a quick overview of each of the Central American countries, which we -- where we operate. Let's start with BAM in Guatemala.
The provision charges for the quarter were negative, because of some change in the expected loss models with respect to the macro variables as the new economic forecast for the country is better than the previous one. Banco Agrícola in El Salvador had a good performance over the year with positive operational metrics.
During the quarter provision charges increased due to the update of macro variables and because of the model recognized that the gradual termination of the reliefs will reflect an increase in the loan book deterioration. Finally, Banistmo on mid-October, the bank regulator modified the moratorium law.
So that bank told -- extended this program up until June 2021. This time banks are in the position to decide how and until when will provide these reliefs.
The objective of this extension is to find solutions to clients that are still being affected somehow by the pandemic. So in this sense, financial reliefs could go from extending loan maturities to partial payments to grace periods according to the client's current situation.
These results observed in the third quarter significantly deteriorated, which implied updating the expected loss model generating a higher requirement for provisions. Provision charges grew 211% when compared with the third quarter explained by three points; macro variables update, increasing coverage of personal loans, and the deterioration in corporate loans.
On Slide 15, we see the evolution of margins and net interest income. In line with the trends observed with the first three quarters, the net interest margin compressed for the full year figures.
The reference rate cuts by the Colombian Central Bank continued to hit the lending margin in the second half of the year. The longer tenors granted on credit relief programs implied a reduction of in charges, and therefore a lower interest affecting this way the revenues and the lending margin.
Coupled with that the increase of bucket three clients as a result of deterioration in asset quality had an impact on their consolidated margins. As a positive outcome, we highlight the sustained reduction of cost of funding attributed to the growth in deposits and efficient liability management transaction offsetting the compression of margins.
For 2021 in all four geographies where we operate, we expect to continue reducing the funding cost in time deposits, repriced at a lower rate. In 2021, the group's net interest margin is expected to remain relatively stable within the 5% area, foreseeing an environment of low interest rate in the local financial system and an increase in stage 3.
Slide 16 shows the evolution of expenses and efficiency. Facing a difficult year, the bank shows a contraction rate at that 3% during 2020.
Personnel expenses which represent almost 40% of the whole operational burden had nearly an important contribution to the positive performance, mainly explained by the cut of employees bonus plans. On the administrative side, a growth of 1% is more remarkable when analyzing a variety of challenges experienced during the pandemic.
Among them increased expenses related to insurance policies and the depreciation of the local currency, which impacts several components of the bank's cost structure. In the same way, we must highlight the decrease in expenses associated with the daily operation of the business such as our cash transportation, payment methods and the distribution network.
For 2021, we must expect a higher growth in expenses in line with our greater dynamism of the business and a faster economic activity added with a low base effect. Investments in digital transformation will continue to be an important element of our structure understanding the business environment and the market opportunities ahead.
The slide 17 shows the evolution of fees. Net fees were one of the most receiving lines during 2020.
In the first half of the year, fees were impacted by the lockdown measures, but since September with the end of these, they quickly recovered to pre-COVID levels posting a year-to-year increase of 0.4% and 3.8% during the quarter. We expect fees to have a better performance for 2021 with a growth between 5% and 8% driven by a higher volume of transactions.
Lines such as debit and credit cards trust will lead the growth during the year. Finally side number 18 shows, the profitability metrics.
2020 was a year of low profitability. We expect the bank to gradually recover.
2021 will be a transition period. Our guidance suggests a return on equity in between 4% to 5% for the present year below pre-pandemic levels to eventually reach a target area in between 12% to 14% for 2023.
Several factors would support this goal such as a loan growth, returning to cost of risk levels at around 2% area, better cost-to-income ratios maintaining the cost strategy, digital business higher payments due to a different interest rate environment and the continuous recovery of the fee income. Now, I want to turn the presentation to Juan Carlos for the closing remarks.
Juan Carlos?
Juan Carlos Mora
Thank you, José Humberto. 2020 was the most challenging years in the recent history.
But it was a year where we also learned a lot. At Bancolombia, we are creating the bank of the future.
We have a strong balance a better cost structure, a more diversified portfolio of products and services leveraged by a robust digital strategy with a positive evolution of digital platforms. 2021 began with uncertainty.
The main challenges that we will have to face during the year will be; first, a demanding scenario from a risk management perspective; and second, relevant investments in digital and modernization projects to stay ahead in a highly competitive environment. After elaborating on these key topics, we want to open the line for questions.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] Your first question comes from the line of Ernesto Gabilondo with Bank of America. Please proceed with your question.
Ernesto Gabilondo
Hi. Good morning, Juan Carlos and José Humberto, and good morning to all of your team and to everyone.
Thanks for the opportunity. I have a couple of questions.
The first one is on asset quality. Can you share with us what is the percentage of deferred loans as of fourth quarter at a consolidated level?
And how much is delayed with 30 days? And what was the amount of additional provisions built in 2020?
And then so my second question is on operating expenses. Considering that you have been doing important efforts to control expenses in the last years, how much additional room do you see to maintain low OpEx growth, or do you think that digital transformation should make OpEx to grow above mid single-digit this year?
Thank you.
Juan Carlos Mora
Thank you, Ernesto. Let me give you some color on your two questions and then I will pass to José Humberto to elaborate a little bit more.
Your first point about asset quality. When the pandemic began, there was a lot of uncertainty.
At that point, we took the decision to release some credits or mainly consumer credits. Then when the year moved on, we started to see more clear what's the situation.
And then we started to kind of normalize the situation. So we ended the year with a total of 15% of the total loan portfolio under some kind of relief or restructuring process.
But now it's much more different. In Colombia, almost all of the portfolio is under a program of restructuration.
Still in Panama there is an important portion of the loan book under relief and that will be the situation until mid -- the middle of the year. But now that we have a clear picture -- clearer picture of the portfolio, we kind of assess asset quality in a better way and have a better understanding of the current situation.
Related to your second point about operating expenses, we think that 2021 is a year in which we need to invest in digital transformation, enhancing our capabilities. We will continue our program of digitalization and also improving our capabilities.
Also, as I mentioned, we are moving aggressively to the cloud that will require some investments, that will have a very good payoff. So to answer directly your questions, your question 2021 will be a year of investments.
The comparison base with 2020 is going to affect us. That means that growth -- expenses growth is going to be definitely above inflation.
And as I mentioned, we will keep investing. So we will keep our programs of cost control.
We are working on our branch network. We are also keep working on efficiency.
But 2021 as in any -- in other aspects is going to be a transition year. Let me pass your questions to José Humberto for additional comments.
José Humberto Acosta
Thank you, Juan. Ernesto, good morning.
Regarding your first question, yes, in terms of the deterioration, we are foreseeing a combination of several factors. The first one is, deteriorations of 30 and 90-day past due, you're all going to see a pickup maybe in the first half of the year.
Remember that when the reliefs ended at the end of the third quarter last year, we are seeing an increase in payday past due. And now we are going to see a deterioration and increase in 90-day past due.
So as a result, we probably will see provisions coming in May and most relevant on the first half of the year. The second element is regarding commercial loans.
In terms of consumer because of their model in a certain way is covering that level of provisions, we are foreseeing maybe a deterioration in certain corporate cases that suggest that also deterioration will pick up. Just to give you an idea to-date, we have 30 days past due at around 5%.
We are expecting to the number reach a peak at around 6% for 30 days and 90 days, which currently is 3.8%. We are expecting maybe to reach the level of at least or at around 5%.
So this is -- at the end of the day, we are naming as a transition year, which means that in terms of provisions, we are going to reach the normalization of cost of risk in 2022. Meanwhile, this year would be a transition period in which probably the cost of risk will be at a level of 3% area.
And the second question was fully answered by Juan. Thank you.
Ernesto Gabilondo
Thank you very much, Juan Carlos and José Humberto. I appreciate it.
Juan Carlos Mora
Thank you, Ernesto.
Operator
Your next question comes from the line of Jason Mollin with Scotiabank. Please proceed with your question.
Jason Mollin
Hello, everyone. Thanks for the opportunity.
My question is related I think in big picture terms to the impact of the 11% depreciation of the Colombian peso versus the US dollar in the fourth quarter itself on the results because given your business in Central America about 30% of the business on the assets, liabilities, equities side is denominated in US dollars. We see these big movements.
And I think it would be helpful to have you confirm my view that the depressed level of net interest income which was down 19% quarter-on-quarter and you showed it very clearly that it's related to the debt investments, the loss on the debt investments. But you have in -- the way you showed other operating income we put it in trading, but there's a mark-to-market, I guess it's a net foreign exchange gain that's very large just to give it in that some of the numbers that I see here is the loss in the net interest income was COP152 trillion.
And I see net foreign exchange gains of COP670 trillion. So if you kind of net that against each other the impact of treasury looks quite strong.
And then maybe from a strategic perspective, I think this represents the fact that with that business in US dollars that you don't hedge that is my understanding. So you're going to face that volatility.
So my thought is just can you share with us if there is some decision that could change that, or will -- is this just a position that will remain in dollars and that's part of the strategy, or could there be some hedging implemented in the future? Thank you.
Juan Carlos Mora
Thank you, Jason. Yes, Jason, three questions in your speech.
The first one is regarding the big picture. Yes, there were an appreciation of the currency in the fourth quarter and it is affecting in several lines.
And let me elaborate. First on the asset side, you are seeing a drop in the loan portfolio.
And this is as you mentioned one-third of our loan profit is denominated in US dollars. The second effect you are seeing is on equity side, which is from our point of view, a positive thing in terms of our equity structure because again 30% of our equities is denominated in US dollars, so also you see coming down the number in COP1 billion.
I have to highlight Jason that we are fully matched in terms of our structure of US dollar business, which means that for example in Colombia, our exposure in US dollar is very, very limited and we don't have more than 3% of our loan portfolio in US dollars. The rest of our international operation is fully matched.
So no matter what happens with FX, at the end of the day we are able to sustain our solvency ratio and we are not having any imbalances. But there are a third element regarding this particular quarter, which is what you are seeing on debt investments, which is true that investment shows a negative number and decline as a result of debt investment corresponding to the short-term portfolio invested in US treasuries.
That as a result of the FX appreciation shows the negative numbers. However, Jason, this is a hedging of other balances position that we are having and those are reflecting in other operational income and the net effect is positive.
So at the end of the day, when you see a change of the FX rate, in our balance sheet, we don't have a big change. We don't have a big impact.
We are seeing that impact as a result of the hedging. So this is a particular situation that happens in the fourth quarter.
Regarding the NIM, the reason why the NIM is compressed in the fourth quarter is not because of FX. It is because of combination of three factors.
The first one, you see -- you know that the interest rates in Colombia have been dropping. We are asset sensitive.
So the repricing of those loans is affecting and compressing the NIM. The second one as you see, stage three is growing up.
And as a consequence of the big portion of our loan, 8.9% of our loan is stage three also we are affected. And the third element is the relief program because you are changing the interest rates so you have to register the net present value -- the new net present value and it is affecting the NIM.
Regarding NII, NII in terms of the FX, moved both sides of the equation. NII has impacted the interest rate coming from the loan portfolio in US dollar, but also it has impacted the interest rates coming from the debt that we are having in time deposits, saving accounts and checking accounts.
So at the end of the day, NII, it is compensated because of the two parts of the equation. What we expect NII in 2021 that will be lower than the loan growth.
And there is one specific reason why? We are expecting that the loan growth for this year will appear.
So we'd consolidate in the second half of the year. So again, the big picture is we are pretty much -- we are not having any particular exposure in US dollars.
So the consequence is the managing of the hedge.
Jason Mollin
Thank you very much.
Juan Carlos Mora
My pleasure.
Operator
Your next question comes from the line of Sebastián Gallego with CrediCorp Capital. Please proceed with your question.
Sebastián Gallego
Hello, good morning. Thank you for the presentation and opportunity.
I have three questions today. The first one maybe a follow-up on asset quality, I would like to understand a little bit better, how should we expect on a sequential basis, during the upcoming quarters the evolution of provision expenses?
You mentioned that we could see that peak on, on NPLs and PDLs in the first half, but I just want to get a sense on how much we could see an improvement or how much can improve provisions on a sequential or on a quarterly basis? Second question is regarding actually dividends.
You released yesterday your proposal as well. I just want to understand first, the material differences between the net income between full IFRS and the local individual net income?
And also, what was your rationale behind the payout ratio in this proposal? And finally, my third question would be on Panama.
How should we think about what could happen on provisions once the moratorium law is over? Thank you.
Juan Carlos Mora
Thank you, Sebastián. Regarding your first question about asset quality, definitely, as we mentioned, we think that the second semester is going to be better than the first one.
And regarding quarters, we think that this first quarter, we still will need to assess what is going to be the economic situation. Our expectations are on the positive side meaning that we are optimistic that economic conditions, particularly in Colombia are going to improve.
We have a first month of the year January with some issues related to second peak of the pandemic, but we see some vigorous economic activity that allow us to be optimistic on the economic performance. But, what we have in our models is that we introduced that macro parameters and we run the provisions - the provision models.
So if we see that economic activity is improving, we will be incorporating those results in our models. So we think that the first quarter, we still will see some provision levels in line with our forecast or our guidance but we will see further improvements in the second quarter and further on.
Regarding dividends. Basically we have international norms of accounting, and it's the ones that we used to report and run the bank.
And we have local Colombian GAAP in which we report to the superintendents in Colombia. The differences are mainly related to provisions and how provisions are incorporated in the local way of accounting.
So we reported on an individual basis meaning, our Colombian operation, a net income of COP 900 billion in net income compared to what we reported on a consolidated basis. But the way we are -- or the way this works is, we are proposing dividends based on the local accounting rules and that is 28% payout ratio.
What is key for us is how the solvency ratio is going to behave, and we are sure -- or we are comfortable very comfortable that the levels the capital levels that we have after this dividend proposal it's fine. So that's mainly the reason about dividends and regarding your third question Panama.
Panama as I mentioned, it's under a moratorium until the middle of the year but we are not waiting for that moratorium to end. We are doing the provisions.
We have a healthy coverage ratio. After the moratorium ends and the second half of the year, we will start working with our clients on restructuring them and working doing the things that we need to do to manage the situation.
I don't know if José Humberto would like to add something to my comments. José?
José Humberto Acosta
Thank you Juan Carlos. Just to complement the rationale why we are paying dividend remember that 47% of our shares are preferred and we have a dividend that we have to pay.
That was the rationale. But the dividend payout as you can see in terms of yield is very low compared to what we paid last year.
That's all Juan Carlos.
Juan Carlos Mora
Just to complement that last comment is we have preferred shares that one of the preference is to have a dividend equal to 1% of the issue price. So what we are doing is we are compliant with that dividend.
Sebastián Gallego
Very clear. Thank you very much.
Operator
The next question comes from the line of Tito Labarta with Goldman Sachs. Please proceed with your question.
Tito Labarta
Hi, good morning everyone. Thank you for the call.
A couple of questions also. I guess first to get to that 12% to 13% longer-term ROE target.
Just to understand the drivers to be able to get there. You showed this slide on your margins at 4.9% in 2020 down from 5.7%, 5.8% in prior years.
Do you need to get back to that 5.7%, 5.8% level of margin? Is that dependent on higher interest rates?
What could be the drivers of improving your margins going forward back to the historical levels? And sort of related to that in terms of efficiency, I understand you're investing in just the digitalization of the platform and moving to the cloud.
But also like in Slide 16 you showed expenses to interest-earning assets fell to like 3.6% from a historical level like 4.2%. Is this 3.6% sustainable given the investments you're making?
Is the 4.2% more reasonable to get to that 12% to 13% ROE? Where should that level of expenses to assets be?
If you can help with those 2 it would be very helpful? Thank you.
Juan Carlos Mora
Thank you, Tito. Let me elaborate on your two questions.
12% to 13% ROEs and your question is dependent on margins. Clearly we are at a low point of interest rates globally.
I mean that's the case in the geographies that we operate particularly in Colombia. We are a very -- on a very low rates interest rate environment.
So what we expect and I think is -- general expectations is that interest rates are going to raise in the probably not 2001 but 2002. And since we are asset sensitive that is going to give us some push on the NIM.
But the ROE of -- the 13% ROE, it's going to depend basically on cost of credit. That's the main driver of our results.
We keep working on interest rates how the mix of our loan book is going to be that it's going to help. We will continue working on fees and we have a big strategy on fees as we mentioned.
We are moving aggressively to offer different alternatives to our customers that's going to help also. We will recover some margin.
I don't expect to return to the levels we have before, but we will keep working on that and that will come. And then expenses that is your second question is another driver that we need to work on for achieving the ROE target.
As I mentioned 2021, will be a year of transition. You mentioned this 2.4%, 3.6%.
I think we will target midterm, the 3.6%. But it will be -- it will take us some time.
This year, definitely is going to be a year, we will have, as I mentioned before, our efficiency programs in place and we will keep working, but expenses are going to be higher. I don't know, José Humberto, if you want to elaborate on the second question -- on the Tito's second question.
José Humberto
No, that's very clear, Juan Carlos. Thank you.
Tito Labarta
Okay. Thank you, Juan Carlos.
Just one quick follow-up I guess, I understand yes, it definitely depends on the cost of credit. And you probably don't get there till 2022, but even if you get to that cost of credit like 2%, it still seems you would need some margin expansion.
And I guess, just to try to take out, whether interest rates increase or not, which is probably out of your control. What can you do to improve the margin?
Is it, grow the consumer loan portfolio, improve your funding costs? I mean, we have seen some improvements on your funding costs.
But what kind of like self-help can you do to get that margin up to help also boost profitability?
Juan Carlos Mora
Yes Tito. All of the above.
As I mentioned, some recovery of the margin will come from interest rates that are raising. The mix is going to help.
We are going to grow a little bit more on consumer loans that will give us a better margin. And cost -- funding cost also, is going to help.
And let me add some color. We are growing our savings accounts on a very healthy pace and granularity is there.
So -- and we -- and our digital platforms that now have close to 10 million customers are giving us that granularity and are helping with the funding cost. So, that also will help.
So, we will have some better margins, because of increase in interest rates, the mix that we are going to work on adding more consumer loans, starting in 2020. we were very careful about the risk.
And then funding cost, I think during this pandemic, we showed how strong is our franchise, how our capillarity to get deposits and our digital platforms are going to help a lot with the funding cost, so all of the above, Tito.
Tito Labarta
Okay. Thank you, Juan Carlos.
Operator
The next question comes from the line of Carlos Rodríguez with Porvenir. Please proceed with your question.
Carlos Rodríguez
Good morning, everyone. Thank you for the conference call and taking my question.
I have two questions. My first one is, what will be the strategy for the 2021 and onwards to tackle the new and coming banks, both digital and traditional banks and to defend your market share in Colombia?
And my second question is regarding your guidance, in efficiency and ROE for the coming quarters and for the year in 2021 and going forward? Thank you.
José Humberto
Carlos, good morning, let me begin with your second question.
Juan Carlos Mora
José, I'm here. Let me -- I'm sorry.
Okay. I am here sorry.
Let me take your first question on competence and the competition. Competition is increasing, both from traditional players', banks and other entrants to the market fintechs and nontraditional financial service companies.
What are we doing? And we mentioned we are investing.
We are investing on digital. By the way, we are getting market share.
We are at a pace in which we are acquiring clients is very healthy. We now have in all our platforms close to 17 million customers in Colombia, that's half of the -- half of any person that has had a relationship with a bank has a relationship with Bancolombia.
That's not market share in terms of loans or deposits, but we are acquiring clients. Our digital platforms are acquiring clients at a pace of 300 to 400 each month new customers.
So the activities there we have the platforms. We are adding new features.
Now, we have digital debit cards. We are -- given our ability to analyze the credit risk and provide line of credits through our digital platforms is already there.
So I think we are very well prepared for the competition that is coming. And by the way, we are growing.
The competition is there. We have a big opportunity to prove.
What we were doing in the past, during the last year, that accelerated a lot of our programs and we are growing very – on a very healthy pace. José could you take the second question – the second question, please?
José Humberto Acosta
Yes, sir. Carlos, regarding your first part, return on equity as Juan Carlos mentioned, our goal for midterm is to be between 12% to 14% and that will be a function mostly of cost of risk.
But going to the 2021 to your specific question, we are forecasting at the end of this year, mid-single-digit return on equity. And this is again, because probably we are assuming that we will come from 3.9% cost of risk, so 3% at the end of the year.
That will be the most relevant point that affects the return on equity. Regarding efficiency, as Juan Carlos mentioned in the previous question, digital will be the key investments during this year and that will be focused on maintaining the competitiveness to maintain the level of transactions that we are having today.
So our goal for mid-term is to reach the level of 45% 46% efficiency level. And that will be achievable once those investments that we are planning to do this year begins to show on the net income side.
Carlos Rodríguez
Thank you, Juan Carlos and José Humberto.
Juan Carlos Mora
My pleasure.
Operator
Your next question comes from the line of Alonso Garcia with Crédit Suisse. Please proceed with your question.
Alonso Garcia
Good morning, everyone. Thank you for taking my question.
My first question relates to taxes. I know it's – there's a lot of uncertainty, given the tax discussions in Colombia this year.
But what's your effective tax rate assumption for this year and for the years ahead? And my second question is a follow-up on provisions, where you mentioned that, if you see improvements in economic expectations later this year, you would update your models and that would probably result in a release of provisions like basically the opposite of what happened this quarter.
So I wanted to ask, if that's something embedded in your 3% cost of risk guidance, or if that would be upside to that number? Thank you.
Juan Carlos Mora
Thank you, Alonso. Let me start for your second question provisions.
Yes I mentioned that we will incorporate further information into our models, once we know how is going to be the economic performance. But that is not incorporated right now on the guidance that we are giving around provisions.
It's with the expectations that we have at the end of the year and the beginning of the year and it doesn't incorporate further improvements. That – if that improvement occurs, is it going to mean that we are going to release provisions?
I don't think so. I don't think that that is not going to be the case during this year.
That could affect the cost of risk is going to – could be lower, if those – that economic activity is healthy. And we see that the GDP forecasts are improving.
But I don't see provision releases during this year. That could occur more towards the next years.
Related to taxes, we expect a tax rate around 28% for this year. That is because of the mix of statutory rates and particularly – particularities around tax regulations in the different geographies in which we operate.
I don't know, José, if you want to elaborate more on taxes or provisions.
José Humberto Acosta
In tax, specifically Juan, yes, there will be as Alonso mentioned, very difficult to forecast taxation this year. But let me put it in perspective there will be three factors that will affect the taxation this year.
The first one is, you know that in our international operation the statutory tax is lower than the statutory tax that we have in Colombia that will give you a bit maybe the opportunity to reduce the taxation. The second element is we have other operations with zero taxation, as for example, Bancolombia Panamá also will help to maintain taxes at a level that Juan mentioned.
And the third element that is also relevant regarding the operations in Colombia is every time we have a mortgage social housing or investment in productive fixed assets, we have our exemptions. So if you combine those that would be – the number would be below 28% as Juan Carlos mentioned.
Alonso Garcia
Thank you.
Operator
Your next question comes from the line of Andres Soto with Santander. Please proceed with your question.
Andres Soto
Good morning Carlos and Humberto. Thank you for the presentation.
I have a couple of questions. The first one is a follow-up on your guidance on cost of risk.
When I look at your total allowances to total loans, the ratio is 8%, which is pretty high to me. But still you are expecting cost of risk to be significantly above your normalized level in 2021.
I would like to understand if you think about geographies to what extent this is driven by Colombia or rather by your Central American operation? That will be my first question.
My second question is related to expenses. You mentioned digital investments as a reason to expect a high expense growth in addition to hard comps in -- from 2021 to 2021 -- sorry from 2020 to 2021.
So, I would like to understand in terms of your digital investment cycle, what is the point we are now? How much you are expecting to invest in 2021?
And how much additional investment you will need for 2022? Thank you.
Juan Carlos Mora
Thank you, Andres. Cost of risk and we are -- currently, we are at -- 8.1% is the percentage of provisions that we have in our balance compared to our loan portfolio.
That number seems adequate. Again, we are giving that guidance that 2021 still we will have a high cost of risk depending on the economic performance of the economies, mainly Colombia.
And you mentioned Panama. Yes, Panama, it's probably the geography in which we have more questions about how it's going to perform.
Last year was the economy hit harder by the pandemic in terms of economic activity. Also we expect a rebound as in the other geographies.
But put it in perspective what is going to drive the cost of credit during 2001 is going to be Colombia. Since it's our main operation and represents three quarters of our assets.
So, Panama is going to have an effect. We have a lot of questions still to be answered around Panama's economic performance.
We are more optimistic about Colombia. We think that the economy could perform better than what we have in our models, but we need to wait and see.
And I think it's responsible for us to give you the guidance of 3% cost of credit that we have now with the variables that we are incorporating in our models and wait for the evolution. I remind you that we have a normalized cost of credit between 1.8% to 2% still three is pretty high.
And as I answered Tito's question that's the main driver of our results. I don't have to say this.
It's -- you know it but that's the key driver. Expenses, where are we on the digital cycle of expenses?
I mean it's difficult to know. We made a big effort -- we have been making a big effort since 2017 investing in digital or 2016.
We already have the platforms, but we will keep investing. And I can -- and I cannot say that this is going to end.
I mean we will keep investing. But what is going to happen is that those investments are going to start returning -- or they started returning last year and will -- will return this year and the year after.
So, probably we will need to keep investing to have the competitiveness of the bank in place but returns are going to be there. José I don't know if you want to elaborate on these two questions?
José Humberto Acosta
No, Juan. It is very clear.
Thank you.
Andres Soto
If I may just a follow-up. When you mentioned this migration to the cloud that is going to start this year.
What timeframe are we looking -- are you looking for these? And what is the specific investment for this in total and for 2021?
José Humberto Acosta
Andres, could you repeat please, we couldn't get you?
Andres Soto
Sure, José Humberto. I'm asking about, the cloud migration.
You mentioned in your initial remarks…
José Humberto Acosta
Yes.
Andres Soto
Juan Carlos mentioned, this investment -- this plan. I'm curious about the timeframe and total investment related to 2021?
José Humberto Acosta
Okay. Yes.
We are investing for three years the timeline is the implementation will take us three years moving to iCloud. And the investment is -- it is at around $15 -- 1-5 million the cost of migrated to iCloud.
Operator
That's perfect. Thank you, José Humberto and Juan Carlos.
José Humberto Acosta
My pleasure in this.
Operator
Your next question comes from the line of Carlos Gomez with HSBC. Please proceed with your question.
Carlos Gomez
Thank you very much. My first question is regarding, how confident are you about the guidance for 4%, 5% ROE for this year?
And in particular, how confident are you about the provisions in Panama which seems to be quite a fluid situation? The second question refers to, the difference between local accounting and IFRS and that is the basis for your dividend.
Since your earnings were higher in 2021, does that mean that as provisions catch-up in local accounting that you might have lower returns in 2022 in accounting terms and therefore you might -- you might have less than 4%, 5% ROE in local terms in 2022? Thank you so much.
Juan Carlos Mora
Thank you, Carlos. How confident are we with the guidance of 4% to 5% ROE?
We are confident, it's challenging in relation with loan growth. But it's achievable.
We are convinced that we can achieve those returns during this year around 4% to 5%. And that guidance is taking into account, how we believe Banistmo operation is going to behave.
So we are pretty confident that, we can achieve that returns during the 2021 year. Regarding your second question I will pass on to, José Humberto.
José Humberto Acosta
Thank you, Juan Carlos. Yes Carlos, as we mentioned before, the key difference is the level of provisioning that we are having in comparing our models with the local accounting system.
This is a particular year in 2020 which, it was the other way around. I mean, the IFRS provisioning level was higher than the Colombian regulation provisioning.
We are expecting Carlos, next year that will be aligned in order to reduce and to mitigate that difference in between the two level of net income.
Carlos Gomez
Sorry, when you say next year, you mean 2022, or do you mean 2021? And again, should we expect a reversal of the impact that we saw in 2020?
José Humberto Acosta
No. We are expecting for this year 2021, that the gap will reduce, if you compare both.
Again, we are not talking about reversing. We are talking about that, because of the mortgages, some provisions will reverse will be coming down.
But because of deterioration, you are going to see some provisions going up.
Juan Carlos Mora
Carlo, let me elaborate a little bit more. The main difference as I mentioned is, regarding provisions.
And during -- let me say normal times, those two accounting methods converge in general. But when we have these events the IFRS model incorporates further looking and incorporates macroeconomic variables into the models that's where the difference comes.
So we will expect those numbers to converge in the future. But during this year, that are not normal years those numbers are a part.
But we should converge, on these two accounting methods.
Carlos Gomez
No. I mean, that is clear, that they will converge in the end.
But, you have essentially anticipated some provisions because of what you said, they are forward-looking in IFRS? And you incorporated the macroeconomic variables.
So it stands to reason that, if that comes to pass in 2021 you will have to provision more locally than you will have to provision in IFRS since you already have your provisions, which means that your results locally could be lower than under IFRS. I want to understand, if there is any …
Juan Carlos Mora
That…
Carlos Gomez
…kind of confusion there?
Juan Carlos Mora
That could be the case, but it depends on how -- again, how the economic outlook or the economical behavior is going to be. Because, if the deterioration appears and we don't have that deterioration reflected on local accounting rules you are right, we need to incorporate additional provisions on local rules.
But it depends on how the variables behave. But your analysis is completely correct.
But we cannot conclude exactly, how it's going to be that behavior on local accounting.
Carlos Gomez
Thank you for the clarification. Thank you.
Juan Carlos Mora
Yeah. Thank you, Carlos.
Operator
Ladies and gentlemen, we have ended the question-and-answer session. And this concludes today's conference.
Thank you for your participation. You may now disconnect.