Aug 12, 2021
Operator
Good morning, ladies and gentlemen, and welcome to Bancolombia’s Second Quarter 2021 Earnings Conference Call. My name is Ariel, and I’ll 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 and future filings and press releases or verbally, address matters that involve risks and uncertainty. Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general economic and business conditions, changes in currency, exchange 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 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 second quarter of 2021. I hope all of you and your families are safe and healthy.
Despite a challenging context during the quarter due to the national strike on the third wave of the pandemic in Columbia, the economy continued to perform well. The Colombian economic activity has benefited from both external and internal factors.
The expected improvement of the global economy has consolidated accelerating external demand on supporting the increase in commodity prices. Locally, both monetary and fiscal policies in expensive territory and the country has adapted to operate in this unusual context of the pandemic.
Finally, in recent weeks, the progress in the vaccination plan has materially improved. Before getting to the details of the results, I want to highlight some key topics.
The loan book grew more than 3% compared with the previous quarter. Deposits grew almost 3% during the quarter, and we continue lowering the funding cost.
Core equity Tier 1 on the full Basel III was 11.5% and the net income was COP1.2 trillion. Provision charges for the quarter were COP626 billion, down 51% when compared with the first quarter of 2021, mainly driven by a better economic forecast and the fine tuning of our risk model as we have gathered more and better information on the situation of our clients with reliefs.
Our client base continues growing. In the last five years, it has grown over 10% per year.
During the first semester of this year, we added more than 2.5 million new clients. After seven months of successful operations, our housing and mobility marketplaces are already positioned as one of the most relevant in the country with more than 2.5 million visits generating loans for COP0.6 billion.
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 I will ask you to go to Slide number 3 in the presentation.
After starting this year at a solid pace during the second quarter of 2021, economic activity in Columbia continued to perform well, despite the disruptions caused by the national strike that took place in May. We expect that this positive trend will consolidate during the second half of the year.
Therefore, we forecast that GDP growth of 8% in 2021. This is due to both external and local factors.
Global tailwinds include higher terms of freight and a stronger demand for Colombian Exports. Internally monetary and fiscal policies are in expansionary territory, and will remain there for a while.
But more importantly, economic cadence have adapted to operate amid unusual circumstances of the pandemic. Moreover, in recent weeks, the progress of the vaccination plan has accelerated, which reduces the likelihood of the strict lockdowns in the coming months.
The growth that we’re experiencing is being supported by a rebound in consumption, which will close this year about pre-COVID levels. We also anticipate that double-digit advance in capital formation.
Meanwhile, we foresee that the largest sectorial contributors to growth in 2021 will be retail, construction and manufacturing. After the sharp recovery, we anticipate that from 2022 onwards our economy will advance at a moderate pace of around 3% per year.
These will reflect the stabilization of global growth and commodity prices, as well as a gradual reduction of economic stimulus and the effects of the pandemic on potential growth. Regarding, urban unemployment, we project our yearly average of 16.4% in 2021 and 14.2% in 2022 at the pace of job creation lacks the expected increase in labor participation.
Thus leading unemployment will remain higher than pre-COVID levels. Meanwhile, we predict that inflation will grows 2021 at 3.6% and then will moderate to 3.3% by December 2022.
Furthermore, we expect that the Central Bank will start its move hiking cycle next September. Specifically, we pencil in two rate hikes of 25 basis points in the second half of the year.
In terms of the FX rate, we expect that from its current lows the Colombian peso will gain some ground and will go back to the range between 3,600 to 3,700 by the end of the year. Finally, we expect that the revised fiscal reform that the government submitted to Congress last month will be approved during this semester.
Even though this reform is a necessary step in the fiscal conciliation process after the pandemic in order to reduce public debt, we think that further increases in tax collection will be required in the coming years. Now let me turn the presentation back to Juan Carlos.
Juan Carlos Mora
Thank you, Juan Pablo. Moving to Slide 4, I want to continue this presentation by explaining our business strategy.
Our business continue moving forward supporting our clients in the different segments where we operate under our mobility solution during this first semester of the year, we have already disbursed COP2.7 trillion, almost the same amount disbursed during the full year 2020 when it total COP 2.9 trillion. Our real state solution is also performing much better than last year, reaching COP 4.2 trillion disbursed during the first six months of the year versus COP 6.2 trillion during 2020.
Although it has been a challenging year for Bancassurance due to the slow growth of the loan book and the increase in the claims ratio. I want to highlight a new channel of insurance sales, our ATM network.
We have now more than 1,000 ATMs enabled to sell insurance, reaching almost 250,000 clients. In Investment Solutions, we have advanced in our digital offer.
Our E-trading platform has increased 385% the trading volume since 2019, and we have 49% of market share in online trading in Colombia. We have implemented Investbot, a virtual investment adviser and Inversi, a virtual managed funds tool in which we have the goal of reaching 35,000 clients and COP 1 trillion under management for 2023.
Moving to Slide 5. I’m going to elaborate in the evolution of our payment services.
One of the bank’s strengths is the level of processed transactions. As you can observe on the slide, credit and debit cards transaction volume is almost reaching pre-COVID levels, while the net fees have already exceeded pre-COVID figures.
Despite, our standard credit cards have decreased in line with the market and due to new credit criteria, and standard debit cards have increased in recent quarters with very positive results in purchase volume and POS adoptions, and among others, due to the release of debit card used for e-commerce. I want to highlight that Bancolombia continues to have a higher market share in credit card volume of transactions than outstanding cards, which translate into higher generation of fees and reflects the quality of our clients.
Moving to Slide 6. I’m going to elaborate in our digital platforms.
The total volume of transactions with Bancolombia’s QR code is over COP 1.5 trillion through more than 840,000 businesses distributed throughout the country, having 100% coverage of Colombian municipalities. During the quarter, Nequi and Bancolombia A La Mano continued to grow and maintained a strong positive trend.
Having both, they reached 12.5 million clients, up 33% when compared with 2020 closing figures. Activity levels continue growing and the churn rate is low, less than 4% for both platforms.
Deposits, including the two platforms, reached COP 1.2 trillion. Moving to Slide 7, you can see some relevant figures of Nequi and Bancolombia A La Mano.
These two platforms complement each other by targeting their niche markets. Nequi targets young people among Colombia A La Mano low-income individuals.
Both platforms are showing very positive trends. Volume of transactions continue growing at a steady pace and fee income continues to grow quarter-by-quarter.
Nequi cards are growing fast. We have more than doubled the number reported 12 months ago, and first opportunity loans disbursed by A La Mano grew 66% when compared with the first quarter.
I want to highlight the high level of NPS, 80% of Nequi and 69% for A La Mano and the low customer acquisition cost for both platforms, around $30 difference. On Slide 8, we present our ESG framework.
We have disbursed more than COP 12 trillion in sustainable agriculture and gender lines. From the liability side, we have issued the market bonds from Colombia and Panama operations and we have negotiated a special credit lines with sustainable use of funds for Guatemala and El Salvador.
In the asset management front, we plan to close the year with almost COP 2 trillion on their ESG criteria and will continue growing until reaching 90% of assets for 2021. Finally, I want to highlight that this year, we have disbursed more than COP 1 trillion in sustainable loans linked with climate change, gender, cybersecurity and water consumption.
Now I want to turn the presentation to José Humberto Acosta. Jose?
José Humberto Acosta
Thank you, Juan Carlos. Now turning to Slide 9.
I want to walk you through the evolution of the relief program. Trade reliefs continued decreasing, reaching 7% of the consolidated loan book.
It is important to note that these – that of this percentage, all are structural solutions, except for the reliefs we still have in Panama. In Colombia, 4.4% of the loans are under that program that was extended by the regulator until August.
Considering the geographies where the bank operates, our focus is Panama. The percentage of the lease is decreasing gradually, but the relief program was also extended until September, which implies that the uncertainty regarding the loan book is going to continue.
In addition, we kept 26% of the total loan book under relief, coming down from 35% in the previous quarter. Despite this high percentage of the reliefs, [indiscernible] coverage, which is evidenced with a 50% increase in allowances between June of 2020 and June of 2021, reaching a level of 228%.
In Slide 10, we present the breakdown of provisions during the quarter. Provision charges for the second quarter were COP 626 billion.
As we did in previous quarters, we want to explain the breakdown. This quarter has the lowest provision charges since the pandemic began, confirming the trend we observed in the first quarter of this year.
The main drivers behind these results are; first, a better forecast of macro variables; second, improvements in the models and methodologies under which we built provisions; and third, less portfolio deterioration in Colombia. Moving to Slide 11.
We give you a snapshot of provisions and asset quality. Cost of risk for the quarter was 1.2%, and for the last 12 months was 2.8%.
Allowances for loan losses represented 8% of total loans. 90-day past due loan ratios increased during the quarter when compared with the previous one.
Charge-offs during the quarter are explained mainly by weighted clients. As per these reliefs, continue facing down, we expect these metrics to reach their higher levels during the second half of this year.
The coverage ratio increased to 227%. but should start decreasing as credit release ends.
On Slide 12, we present the consolidated and standalone capital adequacy. Consolidated total solvency ratio stands at a level of 15% while CET1 at a level of 11.5% and the full Basel III for the second quarter.
These ratios are well above the minimum regulatory requirements, not only in a consolidated basis, but also in the standalone operations. We consider that the leverage of the bank is in optimal levels given the current balance sheet risk and asset growth expectations.
On Slide 13, we present the liquidity position of the bank. In a consolidated basis, we continue operating with sufficient levels of liquidity.
We have also reduced the balance of time deposits and credits with corresponding banks. And these have been compensated with an increasing saving and checking accounts.
This has allowed us to keep reducing the funding cost. As the loan book begins growing at a better pace, we expect that the balance in time deposits will rise again.
On Slide 14, we present a snapshot for our standalone operations. In general terms, the trend throughout the different geographies operated by Bancolombia was similar, stable margins, moderate growth of the loan book, positive evolution of efficiency and a solid position in terms of capital and liquidity.
Over the last few years, the trend in the [indiscernible] of the standalone operations is positive. The Central American operations represent 29% of the total assets, but 33% of the total net income.
Now I want to give you a quick overview of each of the Central American countries where we operate. Let’s start with Banco Agromercantil de in Guatemala.
This quarter, the pace of the disbursement in the recent scheduling was positive, replacing the strong economic recovery of the country. This, together with the reduction of the funding cost, have helped maintain the margin, even in a total competitive landscape.
The process of the macro variables have improved, and this, combined with the fact that Guatemala was one of the least impacted countries in the region during the pandemic, has had a positive impact in provision charges for the period. Banco Agricola in El Salvador has managed to capitalize on its leading position in the system, recovering loan growth, moderating excess liquidity and as a result increasing NII.
It has also increased the transaction volume that is reflected in the increase in fee income, exceeding the level seen in 2019. I want to refer to the Salvadorian government announcement regarding the law that enables Bitcoin as a legal currency.
The first point I want to clarify is that the accounting system will be kept in dollars, and the government will create a trust to guarantee automatic and instant compatibility when Bitcoin is received. For the corporate offices, we are planning out the necessary implementations to comply with the provisions of the law, which implies a hefty payments from our clients to the obligations [indiscernible], which we will immediately convert to dollars.
So we don’t have any exposure in Bitcoin. It is important to mention that the opening of client accounts or deposits in Bitcoin has not been enabled.
In addition, we are waiting for the details of implementation of the law issued by the regulators. Finally, Banistmo.
We still have high levels of uncertainty due to the extension of the relief program until September on the high percentage of the loan book that is still under relief. The trend and the growth of the loan portfolio in the recent segment are very positive so far in 2021, exceeding the performance of the financial system, gaining market share.
Even though the corporate segment is decreasing in absence of infrastructure projects in Panama, Banistmo’s fall is less than the one of its peers, also gaining market share in this segment. On Slide 15, we see the evolution of margins and net interest income.
Net interest margin remained stable in the 5% area as we were expecting. We are expecting today’s hikes of 25 basis points for the semester, but this will be reflected in margins until next year in 2022.
Net interest income showed a better performance as we continue reducing funding costs. I want to highlight that one of the positive impacts during the quarter on the NII was the good performance of the interest generating assets, which allowed us to make a more efficient use of the liquidity.
The net interest income has had a good performance over the year due to the results of the sales and trading team. Slide 16 shows the evolution of expenses and efficiency.
We continue our focus in cost control. The operating expenses of the full semester showed a positive performance when compared with the full semester of the past year, growing 2%.
On the other hand, the expenses of the second quarter of 2021 increased when compared with the same quarter of last year, mainly due to the provisions of the employees’ compensation plan, which, as you may recall, was canceled during the second quarter of last year. We expect expenses to grow over inflation this year as we continue expanding digital transformation to keep the bank competitive and to support our more than 20 million clients and of course our employees’ compensation plan as we expect better results for this year.
Slide 17 shows the evolution of fees. Net fees continue to be one of the most receiving lines of the P&L, overcoming challenging events of the national strike and the peak of inflations of the pandemic.
The high correlation between the fee income and the transaction levels continues, which is reported in the volume of fees from debit and credit cards transactions. Finally, Slide number 18 shows the profitability metrics.
Net income for the quarter was COP 1.2 trillion, up 130% when compared with the first quarter of 2021. This is mainly explained by lower provision charges, a stable net interest income, fee growth and controlled operational expenses.
The results of the first semester of the year was better than expected, reflecting that the strategy used by the bank to face the pandemic and the way it supported its clients is paying off. Now I want to turn the presentation to Juan Carlos for the closing remarks.
Juan?
Juan Carlos Mora
Despite a very challenging situation in the first half of this year [indiscernible] a positive surprise. The bank’s results closed better than we expected at the beginning of the year.
The reality exceeded the forecast. The environment of uncertainty persists due to the end of reliefs in Colombia and Panama, the evolution of the pandemic and the political situation.
I want to close the call by giving you an update of our guidance for the year-end figures. As you know the variable that is setting the volatility on results is provision charges.
After what we observed in the two first quarters of the year, we have updated our cost of risk guidance and we expect that to close the year in the 2.3% area. We are expecting the loan book to grow between 7% and 9%, fees around 7%, net interest margins should maintain in the 5% area.
And finally, the ROE aligned with the cost of risk should end the year between 8 and 10 percentage. 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] Andres Soto [Santander] is online with a question. Please go ahead.
Andres, your line is live.
Andres Soto
Thank you. Good morning, everybody.
Thanks for the presentation and congratulations on the results. My question is regarding expenses.
When I look at your numbers and I compare the expense in the second quarter of this year with your pre-pandemic levels, it is – I see a 5% increase in these two year period. And when I look at the drivers for this, I see that you’re – even though your branch network has been reduced by 7%, I still see that your headcount has remained virtually unchanged over this period, even as you have significantly increased in your digital penetration.
Can you please share with us, what are your targets in terms of efficiency, looking into a more medium-term perspective and if that efficiency can become a driver for an improved profitability over the medium-term?
Juan Carlos Mora
Thank you, Andres for your question. As you mentioned the right way to analyze expenses is taking a longer period because 2020 – 2020 is a year with a lot of issues around expenses, starting for bonuses.
So as you are analyzing that a two year period is a good way to see it. You are right.
We have reduced the number of branches and we will continue optimizing the branch network as we look forward because we think that’s important in terms of efficiency. What we are doing is that we are investing heavily on digital and also we are acquiring the clients, as we mentioned, in a very fast pace.
So, we keep investing on digital on providing new services and on services those clients that are coming that in the last year are more than 3 million. In terms of guidance, this year we are expecting due to comparison levels with this year to grow above inflation on – and that change is going to be, I think, relevant but we keep having a target to have to be on the 50% range of efficiency that could now happen broadly in 2021 due to these adjustments that we will have during this year, but I will keep focusing on being below and we target 46% in the three years ahead.
I don’t know José, if you want to complement me with something else.
José Humberto
Thank you, Juan Carlos. Andres, yes, in terms of – there are some specific items that will grow this year in a very important way which is the compensation plan.
Remember that last year we removed that number because of the results and this year, because of the performance of the bank, we are going to see an increase in this compensation plan – this is one of the most relevant items that deviate the level of expenses increasing more than inflation as Juan Carlos mentioned.
Andres Soto
Thank you, Juan Carlos and José.
Juan Carlos Mora
Thank you Andres.
José Humberto
Thank you.
Operator
Our next question comes from Ernesto Gabilondo of Bank of America. Please go ahead.
Ernesto Gabilondo
Hi, good morning, Juan Carlos and José Humberto and good morning to all your team and thanks for the opportunity. My first question is on your new cost of risk guidance you were saying in the 2.3 average.
Would that be for the full year if that is right, should we expect the cost of risk to be around 2.6% on average during the second half of the year? And then my second question is on your effective tax rate.
I think you’re expecting 27%, is that for the full year or for the second half of the year? And my last question is on how should we think about the earnings evolution in the second half of the year?
So we should expect better revenue generation, but I don’t know maybe higher provision charges and effective tax rate. I’m just wondering how are you seeing earnings in the second half.
Do you think it could be lower when compared to the first half as you will not have the benefit of the lower provisions in the second quarter? Thank you.
Juan Carlos Mora
Thank you, Ernesto, for your questions. Regarding the cost of risk, as I mentioned during the introduction to this call, that’s the main driver of our results, and we updated our guidance to 2.3 for the full year.
So cost of risk is around 2.3% that could have the upside and downside risks. The upside risk comes, as we mentioned, from what – the benefit reliefs in Panama and Colombia, particularly in Panama, we will know how the loan book is going to perform after the end of the moratorium, so there are uncertainties there.
In Colombia still we have some relief and we are expecting to have also – to see how the second semester is going to perform. What could happen to those – that figure, the 2.3 cost of risk for the full year to be better.
It’s about loan book on the reliefs performed better than we expect and also the macro environment in the referring countries. So we still have a level of uncertainty.
We – you mentioned that we need to have – or to record at 2.6 level of – the cost of credit, that’s why. So still there are uncertainties, so there are upside risk and downside risk.
I want to remind you that the long-term cost of risk for Bancolombia is around 1.9%. So we are going towards our long-term cost of risk and particularly we are optimistic that the loan book is going to perform as we expect for better.
So that’s regarding your first question. Tax rates.
That’s a question that, as you know, there is a tax reform going through Congress at this moment in Columbia, as it was presented with a statutory tax rates for corporates of 35% and an extra freight for financial institutions of 3%. That is – that’s a total of 38% statutory rate for financial institutions that will take effect for the 2022 results.
So that’s the taxes that we would pay over the 2022 results, but there are some effects on the 2021 and it depends on how the reform finally ends in Congress, but the 27% could increase this year a little because of deferred taxes depending on what is the final statutory rate. So there are a little uncertainty regarding effective tax rate for Bancolombia during 2021 that could increase.
We expect down 2 points. And it depends on how the tax reform ends within – or in Congress.
For the next year, again, depends on the final statutory grade for financial institutions, but it will increase also probably to be around 30% to 31% in future years. And your third question regarding earnings, we will see a healthy economic dynamics in all countries, particularly in Colombia, it’s performing well.
We are seeing demand for credit for corporates, consumer loans also are on demand. And the non-performing loans are performing, as we mentioned already, in line or better than our projections.
So we are positive on the second semester earnings, and we think that we can end the year with results in line or better than we were expecting and with the guidance that we are giving you.
Ernesto Gabilondo
Great. Very helpful.
Thank you very much, Juan Carlos. Just a follow-up in this last point.
So you’re thinking that the second half of this year will be higher than the first half that included release of – well, you have lower provisions in the second quarter. So even including that, you can expect a higher second half of earnings this year.
Juan Carlos Mora
Ernesto, it is all related with your first question about cost of risk. You mentioned, and we agree with that number that you mentioned, the 2.6%.
So the commercial performance of the bank’s fee income, the net interest income, the demand, the loan books are growing and performing well. So it’s all related with cost of risk, with 2.6% because the earnings results of the bank will not be better for the second semester, will be within growth, but not higher than the first semester of this year.
José Humberto Acosta
And just to complement, Ernesto, the main driver of profitability in the second half is a combination of better loan portfolio, loan growth, sustained NIM, we are expecting to maintain the NIM at the same level and the third element is fee income growth. So you don’t expect the same amount of provisions that you are seeing in the first half of this year.
As Juan Carlos mentioned, the level will be higher because of values, because of deterioration and because of the volume. So the level of net income for the second half of this year will be lower than what you are seeing here in the first half of the year.
Ernesto Gabilondo
Excellent. Thank you very much, Juan Carlos, José Humberto.
Juan Carlos Mora
Thank you, Ernesto.
Operator
Our next question comes from Yuri Fernandes of JPMorgan. Please go ahead.
Yuri Fernandes
Hi, all. Thank you and congrats on the results.
I have a follow-up on asset quality. I understood that cost of risk will likely be higher in the second half.
You have Panama in reliefs, also charge-off in P&L, they may appear a little bit more. But what about 2022?
Because 2.3% cost of risk for the full year is not much different than the, I say, historical 1.82% you had on a pre-pandemic level. So my question, I know maybe it’s so early, but should we see 2022 already as a normal year for you guys, like economic recovery, like this should be like 2021, maybe a transition here?
So what is the message? Like you have a lot of provisions, high coverage, high allowances to loans.
So I think that’s okay, you are going to consume the coverage of 2021, but what about 2022? What should we expect here for your asset quality?
And I have a second question regarding your compensation plan. I understood this is the main difference on expenses, the bonus program.
And I guess we should compare versus 2019. But the results in 2021 still a bit below 2019, right, potentially the guidance you provide, the 8% to 10% ROE, they are below 2019.
So my question is regarding the bonus program. Should we expect a lower number as we are seeing now versus 2019, like still tracking 20% below 2019 or low?
Should we see in the second half an acceleration in the bonus program? Thank you.
Juan Carlos Mora
Thank you, Yuri. I want to complement the answer that I gave to Ernesto, and regarding your question, and I’m going to focus first on 2021.
We did an important adjustment on the models with the macro input, and that benefit provision charges during the second quarter. But that happened during that quarter.
That is not going to happen again unless there is a big change on macro forecast, what we don’t think is going to happen. So second semester will be more – the provisions will be tied to the performance of the loan books.
And we have, as we mentioned already, the end of relief in Panama and Colombia. And the loan books starts to normalize.
And then that will be the main driver of provision charges during the second semester. Regarding 2022, we expect the trends to continue to a normalized cost of risk, as I already mentioned, it’s around 1.9%, between 1.8% and 1.9%.
So we expect 2022 to be around 2% cost of risk. We already, as you mentioned, also are going to consume some of the provisions that we already have on our books.
So that will lead to that cost of risk around 2% for 2022. Regarding your second question, I want to pass that second question to José Humberto.
José Humberto Acosta
Thank you, Juan. Yuri, regarding the compensation plan, you’re right.
And the way it works is every single quarter we recalculate the bonus plan based on the new forecast. So this quarter, we are seeing a better performance of the bank.
So expect for the next coming two quarters, higher provisions for compensation plan because, again, we are recalculating based on the forecasting. So it is not going to be the same amount of money for provisions that we are having, that will be higher because of the performance of the guidance.
Yuri Fernandes
Okay. Thank you, guys.
Congrats on the results.
Juan Carlos Mora
Thank you, Yuri.
Operator
Our next question comes from Thiago Batista of UBS. Please go ahead.
Thiago Batista
Yes. Hi, guys.
Thanks for the opportunity and congrats for the strong earnings. I have two questions.
The first one, maybe it’s a little bit early to ask about 2020. But can you mention what is the level of loan growth that we can expect for next year?
And also, if profitability is possible to be in the low double-digit level next year? And my second question is about capital position.
The bank posted in this year, probably the highest level of cap in the last years. So my question is about the bank’s internal target.
So what’s the level that you believe is the – these are internal targets? And if you see any area that an acquisition would make sense for Bancolombia in Colombia or abroad or if M&A is not in the radar right now?
So only to see if M&A is an opportunity when I compare with your capital? And so this is my second question.
Juan Carlos Mora
Thank you, Thiago. I want to start from your last point.
Acquisitions, as we see it, it’s now more regarding moving on a certain niche or acquiring certain capabilities, more than big acquisitions on new markets. Of course, we are always looking and analyzing where are our opportunities.
But at this point, we are focused on the geographies in which we operate and making those operations as profitable as possible. And regarding acquisitions and M&A activity, it’s going to be more what we see an opportunity is around fintech for investing in some type of technology or capabilities, as I mentioned, that could complement what we are doing.
And, I mean, pacing our – or improving our digital capabilities and how we can reach better the markets in which we operate. Those are going to be the focus.
And I’m just going to comment on capital. The level of capital, of course, or capital adequacy is related with how the loan growth is going to be.
Of course, we expect 2022 to perform better as the economies are going to – towards a more normalized way of behaving. And at this point, we feel very comfortable with the level of capital that we have.
We will generate capital. And it depends, again, on the level of growth of the loan book.
And also I want to emphasize that we have a very stable and long-term policy of dividend payout that we will stay there. And I’m going to pass to José Humberto to give you more details on those other topics that you mentioned.
José Humberto
Thank you, Juan. Thiago, loan growth this year, again, will be in the area of 7% to 9% based on the assumption that GDP growth this year will be – occur mostly in the second half of this year.
Next year, because of the GDP growth, our chief economist, as he mentioned during the speech, will be at around 2.7% area. We are expecting a loan growth at around 10% to 12% for 2022.
So for this year 7% to 9%, for next year 10% to 12% because the economy will be flattish the level of GDP growth. And regarding capital, as Juan mentioned, we feel comfortable, and our internal guidance is to maintain a Tier 1 ratio at around 11% area.
Obviously, all of this will be a function of the GDP growth, a function of the loan growth and a function of the cost of risk as well.
Thiago Batista
Very clear. Thanks for the answers.
Juan Carlos Mora
Thank you, Thiago.
José Humberto
Thank you, Thiago.
Operator
Our next question comes from Jason Mollin of Scotiabank. Please go ahead.
Jason Mollin
Hello. Thank you.
My question is a bigger picture term of the guidance and especially the outlook for return on equity that now given the strong first half you’re looking for 8% to 10% up from 5% to 6% previously. And I remember pre-COVID, I guess after the fourth quarter of last year that management was discussing longer – longer term ROEs, I guess for 2023 was a specific number of 12% to 14%.
How is the bank thinking about longer term ROE? I mean, we’ve seen, obviously even though rates are going up, they’re still at very low levels and you were just mentioning that we need to see details on taxes.
But it feels like banks will pay more taxes going forward. Do you still believe that this 12% to 14% for the longer term, I don’t know if this moves out to 23% to 24%, or if you can provide some color?
And my second question is on the impressive digital numbers that you’re showing, especially in terms of growth of clients, Bancolombia A La Mano and Nequi. I am trying to understand, and you do give us some details on the fee income.
Is that a gross fee income you’re giving us for these two entities, I guess would be around 47 billion in the combination Colombian pistols, and relative, can we compare that to the net fee income or that’s a gross number? So it would be even a smaller percentage and maybe some color on how you think this could start.
These businesses could start to impact the bottom line at the overall group? Thank you.
Juan Carlos Mora
Thank you, Jason. Regarding your first point about ROE, its keep point, you mentioned that we said at the end of last year that our guidance around between 12% and 14%.
We still believe that that’s the target I already for 2023. We have challenges as you mentioned, taxes are going to be higher, that’s going to happen.
We don’t know yet how, but as I mentioned, the low is going to be about, but are going to be higher for that point. Although it’s a level of capital, we will need to perform probably on a level of capital that is higher.
So that’s challenging also, but we are very confident that what we are doing on the digital, or on the detailed formation of the bank, the deficiencies that we are getting the numbers of clients that are coming to the bank are very important, and that’s creating dates also in our digital strategy on their own, ecosystem that we mention. We are very confident that that’s going to ask additional income to the bank.
So we are continue diluting which at level that you mention before. There are challenges we know, but we think we can – we can perform, as we mentioned before.
And that connects with your second question around digital, and particularly what is happening around the platforms – the digital platforms that you have at Bancolombia. We have two platforms; one, try to balance it by Bancolombia A La Mano, which is targeting low-income individuals, a need for performing very well.
I’m slowing, and so a new client, but also watch the different sections that they are doing with the platform, and we are starting to move on credit and the numbers start to show good results. And Nequi, it’s a platform targeting more young individuals performing very well.
We are adding significantly number of new customers every month, doing more transactions, the level of activities very well. So in line with that, if teams are growing in the numbers that we mention, which are very impressive, but still it’s – those two platforms are processing, they are developing and growing and we are investing them because they will have a positive impact in the total results of the bank, but that’s going to take some time.
They would be more relevant on the numbers of the bank. But I think that would take us a couple of more years for those numbers to be a significant on the numbers of Bancolombia as a whole.
But what we are doing is investing and we are ready now to move more aggressively in launch with those two platforms, which at the end it’s where numbers all the income – a significant income is going to come and adding other services also is going to be important. So we are very confident in numbers are performing very well.
Its feeds are growing, but still we need to move and to keep investing in these platforms to monetize that impressive number of clients that we already have. But it will take us some time to impact significantly the numbers of Bancolombia as a whole.
Jason Mollin
Thank you very much. Appreciate that.
Congratulations on the good quarter.
Juan Carlos Mora
Thank you, Jason.
Operator
Our next question comes from Alonso Garcia of Credit Suisse. Please go ahead.
Alonso Garcia
Hi. Good morning everyone, thank you for taking my question.
My question is on the margin side. I mean, despite having a much more normalized contribution from the securities portfolio, the overall mean was quite resilient at 5% given improvements in cost of funds, acceleration in loan growth.
So my question is what should we expect going forward? I mean looking to 2022, what should we expect in terms of margin as you expect loan growth to continue to be very healthy also interest rates going up starting this year.
So I don’t know if you could give us some color on your expectations for margin next year, and also in that sense, if you could provide your sensitivity of your name to higher interest rates in Colombia? Thank you.
Juan Carlos Mora
Thank you, Alonso. And as you mentioned our – our margin around 5% and we expect that margin to remain at that level.
We think that we are at the bottom of the margins. And as Juan Pablo was mentioning, it’s – we think that Colombian Central Bank, Banco de la Republica, probably will increase its reference rates at the end of the year, starting a path of interest rate increase and that will benefit our margin, as you know we are asset sensitive.
So those increase will improve our margin. We already incorporated all the interest rate to the margin.
So it’s already incorporated. So we don’t see further pressure on the margins.
So – but we’re – for the future, we will expect probably a better performance of the margin due to tax rates – I am sorry to interest rates that increases. José, you give, I want you all same taught of our sensitivity.
José Humberto Acosta
Yes, Juan. To announce our sensitivity, based on the structure of funding and the structure of loan portfolio we have.
It is for 100 basis points, I changed the interest rate. Our NIM will comprise or expand in 8 to 9 basis points.
Alonso Garcia
Very clear. Thank you.
Juan Carlos Mora
Thank you, Alonso.
José Humberto Acosta
Thank you, Alonso.
Operator
This concludes the question-and-answer session. I would like to hand the call back over to Mr.
Mora for any closing remarks.
Juan Carlos Mora
I would like to thank you all of you for participating on this conference call. We had a very good first semester.
We expect the bank to keep performing well. We already discussed the main points that are going to drive our results for 2021.
That, as I mentioned, so far are performing better than we expected. I mean, we think it will continue that way.
And for the years to come and we also expect the bank to keep – to reach level that we already mentioned. So again, thank you for participating on the call and we expect to see you on the conference call for the third quarter results.
Thank you very much and have a good day.
Operator
This concludes today’s conference call. Thank you for participating.
You may now disconnect.