Bancolombia S.A. (NYSE:CIB) Q1 2024 Earnings Call Transcript

Bancolombia S.A. (NYSE:CIB) Q1 2024 Earnings Call Transcript May 10, 2024

Bancolombia S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to Bancolombia’s First Quarter 2024 Earnings Conference Call. My name is Daryl, 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 and future filings and press releases or verbally address matters that involve risks and uncertainties.

Consequently, these 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 described in our reports filed with the SEC. With us today are Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Julian Mora, Chief Corporate Officer; Mr. Jose Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mrs. Catalina Toba, Investor Relations and Capital Markets Director; and Mrs.

Laura Clavijo, 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 Bancolombia’s first quarter results conference call. Please turn to slide 2. During the first quarter of the year, Colombia encounter economic challenges marked by elevated interest rates and reduced consumer confidence. Despite subsequent declines in inflation and interest rates, consumer demand and investments remain restrained. Nevertheless, by utilizing our commercial expertise and conducting comprehensive risk assessments, we accomplished a not notable 2.5% quarterly loan growth. However, this growth is offset by a 2.6% annual contraction resulting from the substantial appreciation of the peso by 17.3% during the quarter. Efforts to reduce credit deterioration resulted in a notable 24% decrease in provision expenses compared to the previous quarter.

Consequently, the cost of risks for the reporting period was recorded at 2%. Additionally, an 8% quarter-over-quarter reduction in operating expenses contributed to achieve a net income of COP1.7 trillion, representing an approximate 15% increase compared to the preceding quarter. However, it is worth noting that these figures still reflects a 3% decline year-over-year. Furthermore, the efficiency ratio decreased to 46%. ROE rebounded to 17%, and our capital position remains robust with a total solvency ratio of 12.3% and a core equity Tier 1 ratio of 10.4%. The Central American banks and offshore operations sustained their positive performance, contributing to the overall group’s results and diversification strategy. On the other hand, we believe that the declining trend on inflation in Colombia will solidify in the coming months.

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Q&A Session

Facilitating a gradual reduction in interest rates. This should stimulate a recovery in credit demand and alleviate the pressure on asset quality. We expect that there will be opportunities for credit growth in agribusiness, mining and public administration sectors because of the government’s advancement on public policy programs. This growth is expected to partially offset the slowdown that is being experienced in the construction, manufacturing and retail sectors. However, it is important to note that there are still concerns regarding the progress of regulatory changes in the health sector as well as the performance of the energy sector, which is currently facing challenges due to the El Nino phenomenon. It is important to acknowledge that our involvement in the health care industry is relatively small with our services reaching over 11,400 clients which constitutes only 1.6% of Bancolombian’s independent loan portfolio.

On the business development front, we are pleased to share the recent launch of Wenia, a Bancolombia’s investment in a digital asset company. Wenia is registered in Bermuda and has been granted a Class F license by the Bermuda Monetary Authority. By utilizing innovative technology, Wenia serves as a bridge between traditional financial system and the expanding digital economy. Initially Colombian residents will be able to engage in the buying, selling, converting, receiving and sending of digital assets such as Bitcoin, Ether and USBC in a swift and secure manner. This initiative aims to empower individuals, with an interest in the digital assets real to confidently diversify the investment portfolios. This innovative solution is framed within rigorous compliance, with regulatory standards and internal country policies including, know your customer, know your transaction and travel rule, ensuring comprehensive stewardship in confidence among all parties involved.

After these highlights of our first quarter results, I am pleased to introduce our Chief Economist, Laura Clavijo, who will provide further insights into the macroeconomic landscape. Laura?

Laura Clavijo: Thank you, Juan Carlos. Please go to Slide 3. Economic activity in Colombia is going through a phase of substantial weakness, that will continue for much of 2024, due to stagnated consumer demand and a significant fall in fixed investments. Consequently, our updated forecast incorporates a slight downward provision for some key macro variables. For 2024, we anticipate economic growth of just 0.6% in line with the previous year’s overall economic results. Inflation is expected to close at 5.7%, leading more margins for Central Bank interest rate cuts for an end of year repo rate of 8.75%. Indeed first quarter results suggest that even though the economy as a whole is still sluggish, as in the case of construction, retail and manufacturing, some sectors have managed to outperform a — uncertainty.

The agriculture sector for instance managed to grow 1.9% year-over-year during January, and 2.5% in February according to a leading economic indicator ISE. As farmers anticipated the drought season in the wake of an unpredictable El Nino to crops such as coffee, and cacao drives in the earlier months of the year Also the services sector, which includes public administration and entertainment, showed favorable activity expanding close to 5% during the first quarter. Furthermore, the economy has continued to benefit from receding inflation, which has managed to maintain a consistent downward trend closing at an annual rate of 7.36%, during March. This trend has been mainly led by declining food prices, registering just under 2% year-over-year and goods prices around 3% especially, imported goods that have eased thanks to the appreciation of the exchange rate.

Given the scenario, the Central Bank accelerated the pace of interest rate cuts to 50 basis points during March and April. Thus far, policy interest rates have declined 150 basis points from its 2023 peak enabling the retail rate to defend to its current level of 11.75%. Going forward, we expect the Central Bank to continue a cautionary approach to monetary easing, given the upside risks that still prevail in bringing inflation back towards the target range of 3%. Indexation effects are tangible and potential hikes in gas and diesel prices are still on the table. Finally, in recent months much attention has been drawn to the fiscal outlook. Underwhelming economic activity has significantly impacted tax collection and other sources of revenue have suffered setbacks such as, those expected from lawsuit windfall gains and mining sector royalties.

Declining sources of revenue contrasts sharply the high levels of planned expenditure that the government has set out to meet social policy goals. As a result, the government expects to expand its fiscal deficit to 5.3% of GDP in 2024 from 4.3% in 2023, which implies testing the limits of compliance to the fiscal rule. In sum, the Colombian economy faces growth challenges but macro financial conditions are slowly improving and should help alleviate household budgets and lead to an uptick in demand during the second half of the year. Now please let me turn the presentation back to Juan Carlos, who will present Bancolombia’s quarterly performance

Juan Carlos Mora: Thank you, Laura. Before we move into the detailed quarterly results, I would like to present an overview of some initiatives aligned with our four value driving pillars. Through these pillars, we developed innovative solutions and develop exceptional capabilities that not only reinforce our market leadership but also laid the groundwork for sustained growth and profitability. Please proceed to Slide 4. As a part of our first and second strategic pillars that cover our integrated and client-centric solutions approach and our digital capabilities under a multichannel platform, I would like to share the recent launch of our enhanced value proposition to address SME’s merchant cash management and collection needs under a simple and innovative acquiring app operating by 1P, a payment platform subsidiary fully owned by Bancolombia.

We consider 1P a strategic channel due to its substantial market share potential in payment flows. Small and medium-sized enterprises are approximately 90% of Colombia’s total productive sector and lack of formal and cost effective cash management and acquiring services to facilitate their in-store and online sales. These services are inherently recurring and scalable, generating fee-based revenues that aims in diluting fixed cost and IT investments. With the introduction of a novel capabilities such as tap to phone and tailored solutions wont be fixed to complement rather than compete with the traditional acquiring and cash management services offered by the bank. Moreover, from a channel ecosystem perspective, it leveraged Neck’s substantial customer base, as these customers represent the end users of acquiring services provided by 1P to merchant.

In fact, 1P experienced an impressive growth of approximately 30% year-over-year in terms of clients, 33% in terms of revenues and 7% in terms of the number of transactions. We anticipate this positive trend to be further enhanced by the new value proposition, thereby contributing to the consolidated group performance. Furthermore, we envision 1P as a vehicle to capitalize on the open banking opportunities through an API connectivity, leveraging the bank’s progress in this domain. On Slide 5, under our fair value driving pillar of structural capabilities that create distinctive market advantages, I would like to examine the key factors behind the net interest margin performance in Colombia. These factors largely explain the bank’s superior results compared to its peers over the past almost two years and will provide tools to defend the margin in the current descending interest rate cycle.

Firstly, we offer a comprehensive portfolio of assets and liabilities with a range of diverse and complementary products that provide greater flexibility to manage rate and index gaps. Secondly, the diverse sources of counterparties of time deposits including retail, commercial and institutional clients facilitate the diversification of turners and indexes, thereby enabling the construction of an efficient pricing curve. Thirdly, the substantial volume of low cost and stable deposits which exceed a low sensitivity interest rate fluctuations serve as a reliable anchor ensuring the maintenance of highly competitive funding costs across buying interest rate cycles. Lastly, we have developed [indiscernible] model [ph] an experienced team that effectively utilizes comprehensive transactional data and market insights to strategically adjust the tenure and rate gaps of assets and liability.

These enable us to effectively manage duration risk and optimize the net interest margin throughout diverse interest rate cycles. For instance, as illustrated in the initial two upper pie charts, in 2021, when the interest rate hike cycle had recently started, we strategically adjusted our assets and liability structure to enhance our asset-sensitive position. These involve increasing the proportion of floating loans relative to flooring rate deposits with the objective of expanding our net interest margin, which subsequently materialized. However, in the current environment characterized by an interest rate cut cycle, we have been implementing adjustments to our liability structure to mitigate our asset-sensitive position. This involves a three-element strike.

Firstly, reducing the proportion of non-rate-sensitive liabilities; secondly, as relating the repricing of time deposits by increasing the share of time deposits with maturity occurring within the next 12 months; and thirdly, increasing the proportion of floating rate time deposits to capitalize on the interest rate reductions. The duration of assets and liabilities has changed significantly as reflected in the lower backhand side chart. In 2021, assets were repriced much faster than liabilities. However, currently the duration of liabilities has decreased to accelerate the repricing of time deposits while the duration of assets has increased to maintain higher billing loans for a longer period. As we progress throughout the current monetary expansionary cycle, we will continue to adjust the gaps between our assets and liabilities to mitigate our margin sensitivity to rate cuts.

However, we will remain vigilant and consider the potential impact of the next cycle. Finally on slide 6, under our four-value driving pillar, which is the culture of efficiency and productivity, I will review the expense control strategy we implemented at the beginning of the year. This strategy seeks to identify opportunities for efficiency enhancement and reduce recurring expenditures. The plan has a short, medium and long-term approach and covers an in-depth assessment in six key areas: technology, fixed assets, pre expenses, operational risk results, realignment and regulatory expense management. Each area has a dedicated team led by a senior management and a centralized governance oversight and control mechanism ensures alignment with our objective.

By way of illustration, we are presently evaluating the potential avenues to optimize cloud-based services, minimizing expenditure on credit and debit card fees, terminate real estate leases capitalize on resource realignment facilities by IT tools and implement comprehensive fraud mitigation measures. We will provide a periodic update on the progress made in each of these areas as we believe that the above-mentioned strategy will show yield the desired outcomes thereby ensuring engagement operational efficiency. Now, I would like to invite Jose Humberto Acosta to provide further information on our first quarter 2024 results. Jose?

Jose Humberto Acosta: Thank you, Juan Carlos. Please go to slide 7 to discuss results of our Central American operation. During the first quarter, the share of all banks in Central America grew quarter-over-quarter with respect to Colombia, driven mainly by a couple of large corporate loans. However, when analyzed on an annual basis such growth is offset by a 17% base appreciation. Banco Agricola and under strong quarter on the back of payrolls and commercial loans growth that increased its NII whereas Banistmo and Banco Agricola growth was mainly focused on commercial loans as consumer remains to do it so the NIMs contracted. Regarding asset quality, all banks are tending towards a slower pace of deterioration but posted MIC results in terms of cost of risk as Banistmo Hara provision release related to a parameter update whereas BancoAgricola returned to a normalized cost of risk after one-off accrued last quarter.

On the other hand, Agromercantil recorded a lower provision expense quarter-over-quarter, partially explained by seasonal effect and a lower growth on consumer loans. Banco Agricola recorded a return on equity of almost 18%, Banistmo of 9.5%, whereas, Banco Agromercantil returned to 10% annually. Despite the overall positive results of all banks, the net income contribution decreased year-over-year compared to that of Colombia also due to the peso appreciation. We remain cautious regarding the economic and political outlook of all three geographies, particularly with respect to Panama due to the more challenging fiscal performance and expectations around the new government recently elected. Please go to slide 8. Driven by an almost 4% quarter-over-quarter growth on commercial loans, the consolidated loan book resumed its growth but with a 2.5% quarter-over-quarter increase, despite still recording a 2.6% year-over-year contraction explained by the 17% peso appreciation that reduced the contribution of the loans denominated in US dollars.

Absent of the FX impact, the loan book would have grown 3.8% on a yearly basis. The growth on commercial loan is in part attributable to the good performance of the subsidiaries in Central America that originated a couple of large copper loans coupled with the delivery strategy to save market share growth on this segment in Colombia as lower interest expense incentivized demand. Also, it is worth to mention positive performance of the mortgage segment that accomplished a 1.9% growth in the quarter, signaling a slight recovery after several months of subdued demand and driven by social housing as per the establishment of the government subsidy program at the beginning of the year. On the flip side consumer segment continues contracted in a combination of reduced appetite and low demand given still high rates for these unsecured type loans.

Consistently with the above, the share of consumer loans added to commercial loans during the quarter, down to a 20.8% share of the total portfolio versus 22.1% a year ago. Please go to slide number nine. Despite the commented growth of the loan book, total deposits decreased 1.2% quarter-over-quarter as we used excess liquidity and reports to fund the loan growth and to prepare medium-term bank loans, which fell almost 10% quarter-over-quarter. Year-over-year deposits recorded a 2.5% drop, whereas, loans with banks and debt instruments contracted by more than 25% and 24%, respectively consistent with a weaker credit demand. In terms of products, time deposits grew the most with 1.5% quarter-over-quarter growth exclusively on digital time deposits, whereas, savings fell 2.2% and current account 3.2% as clients shifted again towards higher yielding instruments after the preferred year and liquid position.

Year-over-year time deposits grew 2.8% where we are saving fell 4% and current account 10%. From the funding mix perspective, banks maintained its stake, whereas, current accounts and loans with banks due to time deposits that increased to 36%. Provided the central bank rate cut and the lower pressure to secured funding, the cost of funding dropped to 5.3% in the quarter. However, it’s important to highlight that with regards to time deposits we were able to cut the weighted average rate by 219 basis points, exceeding the accumulated sensor bank rate sort of 100 basis points as of March. A proof of our ability to adjust our time deposits maturing profile to secure a fast repricing as discussed earlier. Please go to slide 10. Total interest income on loans and financial leases contracted 4.1% quarter-over-quarter, driven by the lower rates applicable on credit originations and on the repricing of the loan book coupled with the reduction in the consumer loan share that yield higher than commercial loan.

Moreover there was a 5.7% quarter-over-quarter decrease in interest and valuations on financial instruments driven by lower income valuation on the test portfolio. Thus, total interest income and valuation of financial instruments fell 4% quarter-over-quarter and 3% year-over-year consistent with the interest rate sub and portfolio performance. Furthermore, interest expense fell 7.3% quarter-over-quarter and 2.1% year-over-year, given the contraction of deposits, the prepayment of medium-term loans, the reduction in debt instruments and the ability to growth rates, on time deposits to a larger extent when compared to the Central Bank’s policy. However, despite the effort on interest expense reduction, NII fell 1.5% quarter-over-quarter and 3.7% year-over-year, mainly attributable to the drop of interest and valuation of financial instruments.

Thus, NIM fell 14 basis points quarter-over-quarter to 7.1% on the back of the 77 basis points lower NIM of investments, whereas the lending NIM only contracted four basis points because of our margin protection strategies in place the SKUs earlier. Going forward, our NIM will benefit especially from the repricing dynamic of the 67% of total term deposits that will become due in the next 12 months. Please go to Slide 11. Net fee income decreased 2.4% quarter-over-quarter, due to seasonal effects as transactions increased on a year-end as a result. The income ratio fell to 18%. Year-over-year net fee income was flat, as the expenses growth outpaced fee income growth due to the higher third-party provider costs and processing charges. When breaking down by products credit and debit cards, payments and collections and banking service fee income fell quarter-over-quarter, as per lower volume of transactions in the first quarter, while posting roll rates year-over-year.

On the flip side, fee income related to Bancassurance fell 27% quarter-over-quarter and 2.3% year-over-year, driven by a smaller share of income as the claims ratio has increased coupled with a lower volume of policies issued hitting the contraction in personal loans. Regarding other sources of operating income the fleet leasing operation reduced 2.3% quarter-over-quarter, as per lower demand, but still cost, interesting 10% growth year-over-year. Please go to Slide 12, and an overview of the asset quality. Net provision expense for the quarter was COP 1.3 trillion an almost 24% drop quarter-over-quarter and 36% year-over-year. Consequently the quarterly cost of risk fell from 2.7% to 2% whereas the annual will drop to 2.6% cost of risk. The explanation of this sharp drop in net provisions is threefold.

First, there was a COP 213 billion reduction on consumer loans given the slower pace of deterioration in Colombia, as we will further elaborate. Second, an COP 198 billion release mainly attributable to the update of macroeconomic inputs which incorporate the downward part of the interest rate which is the main variable associated to consumer loans performance as well as a release related to a parameter update in Banistmo. And third, a COP 34.6 billion release on a large exposure segment, given prepayments of several past due loans. On the other hand, a COP 55 billion provision expense was accrued on SMEs due to an increase in past loans as expected. Thus, despite the better performance of consumer loans in Colombia, new past due loans increased quarter-over-quarter as shown on the upper left-hand side graph, related to commercial loans in Colombia and Banistmo, Personal loans in Banco Agromercantil and mortgages in Banistmo.