Grupo Cibest S.A. Q1 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to Bancolombia's First-Quarter 2022 Earnings Conference Call. My name is Scha, 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. Please note that this conference is being recorded. Also, 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 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 target 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. Jose 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.

Good morning and welcome to our conference call for the first quarter, 2022. Thanks for joining our call. The first quarter results were both positive and maintained the momentum shown in the second half of 2021. This performance is supported by improving NII, strong loan growth, fee income, and low provision charges. Despite uncertainty over the presidential elections in Colombia and the Russia-Ukraine conflict and its impact on the disruption of the global supply chain, the Colombian economy began the year as one of the best performing economies in the region, mainly driven by exposure to commodity prices and domestic demand. The monetary adjustments continue to be guided by the need to offset the pressures on inflation driven by food prices. We expect the interest rate to close at 8.25% by year-end and while inflation is currently above 9%, we expect it to gradually decline in the second half of this year to around 7.6%. Let me give you another view of the bank's results from the first quarter of 2022. The loan book grew 1% compared with the previous quarter. Net fees declined 3% over the quarter due to seasonal factors but grew 15% in the last 12 months. Core equity in Q1 closed at 10.6%, below last quarter due to the dividend payment approved in our shareholders' meeting. Net income for the quarter was COP1.7 trillion. Provision charges for the quarter were COP267 billion, resulting in a cost of risk of 0.5%, explained by better macroeconomic forecasts and better performance of our customers. Our client base continues to grow, reaching more than 25 million this quarter. We have been adding clients at a good pace over the last two years. In fact, the pace of growth of purchases by new cardholders in our fold is four times larger than those of existing ones and already represent 15% of total purchases by individuals in both physical and online stores. This growth is reflected in the volume of transactions we are processing and in fee income. Finally, I want to give an update regarding Nequi. We have reached 11.5 million clients. The loan book continues to grow on a solid base, maintaining high NPS and activity indicators. The separation process continues to advance. We have already filed with the regulators for authorization to establish an operating new company. We expect to obtain the operating license in the second half of this year.

Thank you, Juan Carlos. Now, please go to Slide Number 3 in the presentation. During the start of 2022, economic activity in Colombia remains strong, thanks to a combination of resilient private demand and the tailwinds coming from higher commodity prices, particularly oil and coal. Based on our real-time data, we calculate that between January and April, the economy grew 8.3% year-on-year, which is well above consensus expectations. Despite this positive shorter performance, we still believe that as we move through the second half of the year, activity will gradually moderate. This will be the result of less supportive global conditions, as well as the removal of policy stimulus, stabilization of household spending, and high political uncertainty. As a result, we are currently forecasting that in 2022, GDP will expand 4.7%, which is lower than the 5.1% average market estimate. The negative note in this economic balance is the increasing inflation, which moved from 5.6% at the end of 2022 to 9.3% year-on-year last month. This is the highest print in more than two decades and reflects continued pressure in producer costs, which is translating with great intensity to food prices. It is also the result of an acceleration in core inflation due to recovery in aggregate demand, the annual increase of the minimum wage, and the operation of indexation mechanisms. Based on latest developments, we just revised our CPI forecast for the remainder of the year. For December 2022, we adjusted our expected inflation rate from 6.8% to 7.6%. As a response to this challenging scenario, we anticipate that the Central Bank will slow down in its process of adjustment. We are now foreseeing that the rate hiking cycle will lead to a terminal rate between 8.25% and 8.5%. This means that by the end of the year, the monetary policy stance will be in a mild contractionary territory.

Thank you, Juan Pablo. Moving to Slide 4, I want to continue this presentation by explaining the loans and deposit performance. 2022 started with strong overall results for Bancolombia. This is supported by the continuous growth of the loan portfolio. The loan book grew 1% during the first quarter. But keep in mind that the Colombian peso re-evaluated 5.65% during the quarter. Excluding the FX impact, growth was 3%. Colombia and Guatemala were the operations that marked this growth. Although the three main segments where we operate performed well, the retail portfolio is the one that grew the most in relative terms in all the geographies. Deposits remained relatively stable due to the excess liquidity with which the market closed 2021. However, we expect the time deposits to increase during the year to support the growth we are expecting. On Slide 5, I want to make a comment on the commercial loans of Colombia. The commercial portfolio is our biggest segment, representing 65% of the Colombian loan book. Since the second half of 2021, this segment started showing a positive performance. This was confirmed during the first quarter of this year, growing 2.4% compared with the previous quarter and 13% in the last 12 months. We have an asset-sensitive condition, and this is the segment that contributes the most to interest income since 97% of the loans are floating. The pace of the repricing of these loans has been very important for the bank's results. I want to highlight that the NPLs of this segment were 2.8%, one of the lowest in the loan book. Moving to Slide 6, I am going to elaborate on the evolution of digital sales and distribution channels. The way we interact with our clients has changed. Digital sales continue to represent almost half of total sales, 1.1 million merchants have already adopted QR payments and digital channels represent 85% of total transactions. We continue processing a high volume of transactions, with 42% of total Colombian market transactions being internally monetized and 67% made via mobile. This has permitted us to maintain our fee income and improve our credit metrics. On Slide 7, we present our payment ecosystem. As I mentioned before, Bancolombia has more than 25 million clients. Our main goal with the payment ecosystem is that our clients can pay and receive payments with as many alternatives as possible, both online and in physical channels. Therefore, we have developed an ecosystem where our clients find traditional options, such as payment gateways, credit and debit cards, but also contactless payments, digital wallets, and QR codes, among others. In Colombia, we are national leaders in credit and debit cards, amount of transactions, in QR codes, and in the acquiring business with a 33% market share. Moving to Slide 8, I am going to elaborate about Nequi. Nequi continued showing positive trends. We had 1.5 million clients this quarter, reaching 11.5 million, out of which 33% are using products that generate income. We are focusing on our path to profitability, increasing deposits, transactions, revenue, and fee per user, and growing at a solid pace in the loan book. In the last two quarters, Nequi's loan book has increased the average balance from COP1.7 billion to COP127 billion. On Slide 9, we present our ESG update. We remain focused on reaching our 2030 goal of COP500 trillion disbursed under ESG criteria. For 2022, we have a COP41 trillion goal. This quarter, we launched an investment platform that will develop solar energy generation and energy efficiency projects. The goal in the next five years is to reach an installed capacity of 160 megawatts. We also obtained the loan tied to sustainability objectives, COP450 million granted by Bank of America. We're committed to disbursing more than COP2 billion in our sustainable line by 2024, almost multiplying by three the current balance and reducing the emissions of 12,900 tons of CO2. Finally, I want to share that MSCI upgraded our rating to double A. This means we are in the leader category of the global banking system.

Thank you, Juan Carlos. Now, turning to Slide 10, we provide you with a snapshot of provisions and asset quality. Provisions are almost done, with only 1% of the consolidated loan book under relief. During 2022, it will be key to follow the evolution of deterioration, restructuring of loans on tech jobs. The charges of the first quarter were COP267 billion, mainly driven by charges associated with the retail segment. As a result of this reduction in the trend of provision charges due to updated performance of our clients and help being purchased. Allowances now represent 6.3% of total loans coming from 8.11% 12 months ago. The cost of risk for the quarter was 0.5%, below our expectations explained by three factors: direct macroeconomic forecasts, better performance of our customers, and provisions related to significant impaired clients. Although we continue with high levels of certainty due to both local and international factors. We want to update the guidance of cost of risk we gave last quarter from 1.8% for 2022 to now 1.5% with upside risks. We continue with a high 90-day coverage level of 222% with healthy asset quality metrics. We don't expect material changes during the year as we're seeing good performance from recent vintages. On Slide 11, we present the consolidated and stand-alone capital adequacy. The consolidated total services ratio stands at a level of 13.5%, while CET1 stands at a level of 10.6% under full Basel III for the first quarter. The reduction in the service ratio level compared to the previous quarter is due to the impact of dividends for 71% of profits that we declared in our General Assembly last March. However, we have accumulated almost COP1.73 trillion of new capital because of the strong results of the first quarter. We expect to close the year with an average level of 11.5% of core equity Tier 1, with the generation of profits in the upcoming quarters. Moving to Slide 12, we present the liquidity position of the bank. On a consolidated basis, we continue operating with sufficient levels of liquidity. On an annual basis, the profits are growing at a pace of 13% in line with the analysis of the growth of the loan book of 12.9%. In the slide, you can appreciate that the cost of deposits in dollars decreased and we expect that it will continue to decrease due to our strategy in Central America operations, focusing on increasing the balance in saving and checking accounts with the implementation of digital products. While the cost of deposits in pesos is increasing due to the rate hikes of the Central Bank. Of the total funding structure, 84% corresponds to customer deposits, maintaining the loan to deposit ratio at a level of 99%. I will now present another view of Colombia and Central America. In general terms, the positive trends in the balance sheet and the income statement are common in all geographies. I want to highlight some key aspects from the stand-alone operations. In Panama during 2022, the key variable to follow will be the cost of risk. After the end of the relief program six months ago, the performance of clients of Banistmo who are coming out of the release is better than expected. In the first quarter, retail clients continue growing and mortgages had a positive dynamic. From the liability side, the growth in savings accounts is outstanding. We are already facing a challenging fiscal and political situation, but Banco Agrícola maintained its good operational metrics with a good performance of the loan book driven by retail and commercial clients. And in Guatemala, we continue having a positive perspective with the economic activity of the country that is reflected in the growth of the loan book, income, and low provision charges. Finally, in Colombia, we must highlight very good growth in the loan book in line with the economic cycle, a very good performance of the income due to high transaction volumes and a high-growth of fee income due to the expansion of margins. On Slide 14, we see the evolution of margins and net interest income. After the low provision charges, margin expansion is the second most relevant variable in the positive results of the bank. Net interest margin reached a level of 6% with an expansion of 70 basis points when compared with the previous quarter. This is the result of inflation and the interest rate increasing at a fast pace. The increase of the NII is mainly driven by these three drivers: the repricing of existing loans, mainly driven by the commercial segment, loan book growth during the quarter with higher rates, and the funding costs increasing at a slower pace thanks to the funding structure. As for automation, the reference rate will continue increasing, and this will continue to impact margins positively. Therefore, we expect to close the year with a NIM of around 6.5%. The slide shows the evolution of expenses and efficiency. Operating expenses increased 22.4% on an annual basis. The main drivers of this increase were, first, the 17% increase in administrative expenses due to the growth of expenses associated with the good performance of the renting business and upgraded speed of execution of transformation and utilization projects of this quarter compared with the first quarter of last year. Second, salaries and employee benefits increased 21% due to the annual salary adjustment and by a strategy of attracting and retaining talent. This retention strategy focuses on the technology area where we are hiring professionals who were part of third-party providers developing in-house talent. Third, an increase in employee bonuses compared to those of the first quarter of last year because, as you may recall, the first quarter of 2021, we did not contemplate such a relevant economic recovery process. Therefore, the bonuses provision was adjusted in the middle of 2021. Despite the growth in expenses of this quarter, this was as expected. We are meeting our forecast by 99%. We're maintaining an 11% growth guidance for expenses this year. In Slide 16, we see the evolution of fees. Net fees declined 3% over the quarter due to seasonal factors, but grew 15% in the last 12 months. The strong performance of this is driven by three main factors: fees from credit cards and merchants continue to have the strongest performance associated with the volume of transactions and a greater number of clients, fees associated with loan book growth, as in the case of bank assurances, and fees associated with the capital market business, such as investment banking. Slide 17 shows the profitability metrics. Net income for the quarter was COP1.7 trillion, more than double the first quarter of 2021. This strong result is mainly explained by the combination of positive loan book growth, margin expansion, a high volume of transactions generating fee income, better risk performance, expenses growing according to the budget, and a solid capital structure growing according to the results of the bank.

Thank you, Jose Humberto. Even though the levels of uncertainty that we are facing, not only in Colombia with the elections, but with the global geopolitical conflict, we are optimistic about this year's results. I want to close the call updating our 2022 guidance: The loan book will grow between 9% and 11%. The cost-to-income ratio will be around 46%. Fees should grow 10%, and finally, with the ROE expected to be at the end of the year in the 17% range. After elaborating on these key topics, I want to open the line for questions.

Thank you. We will now begin the question-and-answer session. Ernesto Gabilondo from Bank of America is online with a question. Please go ahead.

Hi. Good morning, Juan Carlos and Jose Humberto, and good morning to all your team. Congratulations on your strong quarterly results. I have three questions from my side. The first one is on the political landscape and the presidential elections taking place on May 29th. We have seen that recently Petro has been talking to the press. I'm just wondering if he has been saying something about the financial sector in Colombia. Can you elaborate on what some of his proposals are? And then my second question is on loan growth and asset quality. Considering your history, what will be the level at which high interest rates and high inflation start to affect the demand for loan growth? And what do you think would be the most affected products and those that could be more resilient? And finally, the last question is on the ROE. You mentioned you expect 17% for the year. How do you see the long-term ROE of Bancolombia? Will it continue to be 17%? Thank you.

Thank you, Ernesto. Let me start with your first question about the political landscape. We are close to having Colombia's first round, and you ask about the proposals around the financial sector from Petro. It's difficult to tell because in his program, when you read, there are not many details regarding what he might do around financial sectors, at least not radical proposals. He has talked about wanting a stronger government bank that will lend to segments that are not subject to credit from commercial banks. So I think that could be one of his actions: to have a stronger coverage by public banks directed to certain segments. Other than that, some comments about the costs around financial services are more general. So I think we need to wait and see how things will develop. Anyway, I think any effect will be after 2022. You mentioned loan growth and asset quality. I think the loan growth, at this point, is very healthy. We are seeing close to 15% growth across all lines of credit or all segments that we serve. Retail is the strongest one that could be affected a little bit, but we maintain our guidance that the loan growth for the year will be between 9% and 11%. Let me remind you that we believe that inflation will go down, and we expect that by the end of the year, it will be around 7.6%. Segments affected by inflation, probably mortgages, as some mortgages are adjusted to inflation, so that could have some effect on the loan growth of the segment. That has been growing in a very positive way for the last four years, even during the pandemic; it was the segment that grew the most. Regarding your third question on ROE, we maintain our view that the long-term ROE for Bancolombia is between 15% and 17%. So that's our view for the long term for the bank.

Thank you very much, Juan Carlos.

You're welcome, Ernesto.

The next question comes from Jason Mollin with Scotiabank. Please go ahead.

Hi, my question, given you've addressed some of the other issues, is on the expense side. Total operating expenses are up just a little over 22%, personnel costs almost up 30%. You provided some explanations there about attracting and maintaining high-quality employees, particularly on the IT side, and hiring from third-party vendors. Can you give us a sense of how we should think about that? Could we see this trend continue? It seems like the ability to retain and attract talent is indeed getting more difficult. Is this something that we should expect moving forward? Thank you.

Thank you, Jason. Let me provide some details, and I will pass your question to Jose Humberto for additional information. As you mentioned, expenses are growing around 22%. Let me say that this is in line with our forecast, so we are not away from the numbers that we expected for the first quarter. It's important to keep in mind that we are comparing with a year where the first quarter was not normal, so the base we are using to compare expenses has some effect. Regarding what you mentioned about retaining talent being a challenge, I think this is the case for every company nowadays. We have implemented a program to retain and attract talent, but we don't foresee that it will deviate the numbers we expect for the end of the year. Therefore, we maintain our view that expenses at the end of the year will grow around 10%. I will ask Jose Humberto to provide additional details.

Thank you, Juan Carlos. Good morning, Jason. That’s very clear. It's a cyclical situation compared to the first quarter last year. Yes, we don't have any particular surprises regarding expenses; we are confident in maintaining control. We are optimistic about achieving a level of 10% to 11%, as the most relevant item. We have completed our calculations, and the income we are forecasting will result in a level of efficiency between 46% to 47% at the end of this year.

Thank you very much. Very helpful.

Thank you, Jason.

The next question comes from Olavo Arthuzo with UBS. Please go ahead.

Hi. Good morning, everybody, and thank you for the opportunity to ask some questions. I have basically two topics mainly for me, to help us understand this target for the ROE of 17% for the year. But basically, talking about asset quality and NII trends. I just wanted to understand, how does the increase in the 90-day NPL ratio in the quarter impact your outlook? Even considering the new PDLs above COP1 trillion, which is similar to the first quarter of last year, and if we set aside this trend, what about the well below-average cost of risk? I just want to understand the dynamics for the NPL ratio and cost of risk trends for the next three quarters. And the second topic that I wanted to understand, especially for the next quarter, is about the NII trends. Could you give us some more clarity on what caused the strong NII expansion in the quarter and what your expectations are for the following quarters? I would appreciate it. Thank you very much.

Thank you, Olavo. Let me take your first question, and I'll pass your second one regarding NII to Jose Humberto. Let me say that during 2020 and 2021, we experienced an abnormal situation regarding provisions and the cost of risk. During those periods, we accumulated provisions because uncertainty was very high. Now, we see how the economy is developing and how different loan types are performing, and we have a clear picture of what's going on. This means we are returning to what we consider a normal risk situation. However, we have accumulated provisions, so we are now in a phase where we are starting to normalize. Regarding your question on future expectations, we have provisions that are covering the risks we have in our balance sheet, which also cover write-offs. We expect a more normalized performance for the cost of risk to be more around 1.5% this year, possibly a little lower, but going into 2023, we anticipate it to be around 1.5%. Now I will pass your second question to Jose Humberto.

Good morning, Olavo. Yes, regarding the expansion of the NII, there is a strong correlation between the Central Bank interest rates and the expansion of the NII in our case. Remember that we came from 3% in December of the last year to 6% at the end of this quarter. This means a significant impact on NII. Assuming what Juan Pablo mentioned at the beginning of the presentation, that interest rates will rise until 8.25%, we are expecting another NII expansion for the second quarter and maybe in July. We don't expect the trend to be the same for the second half of the year as we expect stabilization of the NII. Short answer: our expectations for NII will touch the level of 6.5% by the end of this year.

Thank you, Jose. I believe the clarification related to NII is very helpful. I just want to make a small follow-up on asset quality. You mentioned that the costs of risk are expected to gradually increase throughout the next quarter. Can you clarify what levels for the NPL coverage ratio we should expect for this year? Any additional color about that metric for the next few quarters would be very helpful. Thank you.

Yes, what happened for Q1 is that there were three one-offs that impacted the cost of risk. The cost of 0.5% is not the standard for the bank. In the next three quarters, we will see a real deterioration and an increase in the level of passing loans. That’s the reason why we are updating our guidance. By the end of the year, we expect a cost of risk in the area of 1.2 to 1.5%. Regarding NPLs, you are seeing the optimal levels of party loans, if you compare to pre-COVID metrics. Furthermore, the strong coverage we have over 90 days is due to clients who may not be past due, but we are maintaining provisions. If the economy performs well in the next coming quarters, we expect that coverage levels at the end of the year for 30 days will be around 130% and for 90 days we will aim for the 180% area.

Let me just add, Olavo, that those levels Jose Humberto mentioned are the levels that we had before COVID. We reached a level of 170 to 180 for the 30-day loans, and now we are returning to coverage levels we consider to be long-term.

Thank you, Jose and Juan. Thank you very much for this. It will be very helpful.

Thank you.

The next question comes from Alonso Garcia with Credit Suisse. Please go ahead.

Hello. Good morning, everyone. My first question is a follow-up on the cost of risk. For next year, I think you mentioned 1.5%. Could you please confirm that and comment on what level of cost of risk you see as sustainable for the bank going forward? My second question is on taxes. What effective tax rate are you assuming for this year and next, and is there any proposal or any potential percentage from candidates that indicates a meaningful change to your effective tax rate in Colombia in the coming years? Thank you.

Thank you, Alonso. As we mentioned, the cost of risk that we now have is not normalized; it's too low. As I explained before, it's due to the provisions that we applied during COVID. I can confirm that the sustainable cost of risk for Bancolombia in the coming quarters, meaning by the end of 2022 and into 2023, should be around 1.5%. That said, inflation is going to have some effect on the cost of risk, and we also consider that we are adding more retail loans to our book, which can have an effect on the mid-term cost of risk. Regarding your second question, we are estimating an effective tax rate for 2022 of around 34%. Remember that we have an additional tax for financial institutions that we are considering. The current mix indicates 34%. Moving forward, it's difficult to say if we will have additional taxes or not. As I mentioned, we already have an extra tax that other industries do not have in Colombia, so I don't foresee that an additional tax could affect our tax situation moving forward. I don't know if Jose Humberto wants to add something.

The only reason why the taxation today is at 31% and we are closing with 34%, as Juan Carlos mentioned, is that net income mainly comes from Colombia, where we have the highest level of statutory tax.

Thank you very much, Humberto.

Thank you, Alonso.

The next question comes from Andres Soto with Santander. Please go ahead.

Good morning, Juan Carlos, Jose Humberto. Thank you for the presentation, and congratulations on the results. My first question is regarding margins. I was positively surprised by the expansion we saw this year on your margin on loans. I am wondering if you can update us on what is the sensitivity of your margins to interest rates. Is there anything that has changed in the bank's structure that allows for faster repricing or faster expansion in margins, or are there any one-off elements that we should now consider when assessing the results ahead?

Thank you, Andres. As you mentioned, the margin expanded considerably in the first quarter, which we expected more for the middle or end of the year. This is due to the interest rate increases made by the Central Bank during the end of last year and the beginning of this year impacting interest rates positively. Additionally, our ability to maintain low funding costs has a very positive impact on the NIM, which we expect to maintain or even increase during this year. Jose Humberto could provide you with additional information regarding that margin.

Thank you, Juan. Hi, Andres. Regarding NIM, as Juan mentioned, sensitivity in our case has changed a lot in the last two years, primarily because of the way we're trying to grow. Right now, the proportion of savings and checking accounts is relatively high, allowing us to maintain a significant portion of our loan portfolio on the asset side as floating. Approximately 95% of the commercial loan portfolio is floating, while on the liability side, it’s less than 50%. The sensitivity is now around 30 to 40 basis points for every basis point increase in interest rates from the Central Bank.

Thank you both. My second question is regarding the long-term ROE guidance that Juan Carlos just mentioned, which is between 15% and 17%. I'm curious what has changed in your view versus the guidance provided six months ago. I remember I asked the same question during your Investor Day, and you mentioned 14%. Now this is significantly higher. I'm curious if what has changed is the interest rate environment, a more optimistic view on your structural cost of risk, or any efficiency targets.

Andres, it's all of the above. We are seeing that our loan mix is allowing us to achieve a NIM better than we anticipated in the past. Based on the strong trend in acquiring new clients, which we highlighted, this allows us to be positive on fees as well. The expansion of the loan volume we have is also significant. Therefore, if you see, several factors are making us more optimistic regarding our ROE. So it's NIM, it's better fees of income. Additionally, the cost of risk we updated to 1.5%, but we previously anticipated a higher number. So as I mentioned, it is a combination of factors. Jose Humberto, any additional thoughts on ROE?

Andres, another factor affecting the definition of the optimal capital for the bank is essential. Remember that not long ago we spoke about the optimal level of the Tier 1 ratio being around 11.5% on average. This definition of our optimal capital also consequently increases return on equity.

That is very clear. Thank you all for your responses, and congratulations again.

Thank you, Andres.

The next question comes from Tito Labarta with Goldman Sachs. Please go ahead.

Hi. Good morning, Juan Carlos, Jose Humberto. Thanks for the call and for taking my question. So another follow-up on your margin and a little bit on the ROE as well. You mentioned a 6.5% margin by year-end, but just to understand, is that 6.5% for the full year implying that you should be above the 6.5% in the coming quarters? Or did I miss it, or is the 6.5% going to be the highest level on a quarterly basis? Just trying to understand that. And then, I guess, following up on that, if interest rates stay at this level, when do you expect rates to come down? Will that be in '23 or maybe '24? Will that margin remain elevated throughout next year, which is also tied back to your ROE guidance, which can be higher? Or do you expect to stay above a 15% ROE even in 2023, depending on what rates might do? Or when do rates come down, and how does that impact the margin, if you can provide any color on that? Thank you.

Thank you, Tito. Let me provide some information and then I will pass the question to Jose Humberto. We anticipate that rates will peak this year and start to decline in 2023. Margin expansion will be noticeable during 2022 and partly into 2023. I expect that margins will normalize in 2023. Therefore, we can anticipate an expansion reaching 6.5%, which Jose Humberto will discuss further. In response to your question, that 6.5% is an average for the year, so we could exceed that on a quarterly basis. Our Chief Economist believes that rates will peak at 8.25%, then begin to decrease, reaching approximately 7.75% in 2023 and lower in 2024. Jose Humberto, could you elaborate on margins?

Thank you, Juan. Hi, Tito, yes, the 6.5% refers to the average for the year. So on a quarterly basis, we could surpass that. For next year, we are anticipating the central bank's interest rates will decrease from 8.25% to around 7.75% based on inflation assumptions. This means we are expecting to see a slight reduction in the margin next year, as higher interest rates will support elevated margins for 2023. However, the actual significant reductions will occur later on.

Alright, thank you, Juan Carlos, and Jose Humberto. Just to clarify, the 6.5% is the average for the year that can exceed on a quarterly basis. The reduction in overall rates will begin next year, but will the average also be higher in '23, given where you started in '22? Would you expect modest reductions in '23, with real reductions occurring more significantly in '24? If I've understood you correctly.

That's correct, Tito.

Okay. Thank you very much.

Thank you.

Thank you, Tito.

The next question comes from Yuri Fernandes with JPMorgan. Please go ahead.

Thank you all, and again, congrats on the good results. I have a question regarding over there. Given the level we are seeing, how this could affect your operations? Do you see any impairment in your operations? Do you anticipate anything on that front? That's one. And also, a follow-up on Tito's previous questions regarding rates and margins: At what level for rates could we start to see a headwind for asset quality? We know the impact on growth acceleration volumes, but at what point do you think rates will be above eight—what kind of concerns do you foresee regarding deteriorating asset quality for corporates? Considering your 1.5% cost of risk guidance, how might your expected loss models be affected? With inflation globally remaining resilient and rates moving to 9 and 10, how do you see asset quality? At what level does this become a headwind rather than a tailwind? Thank you.

Thank you, Yuri. Regarding your first question on Salvador, we are witnessing Banco Agrícola doing very well. The loan book is growing, NPLs are low, and the cost of risk is at a level we feel very comfortable with. Therefore, our operation there is performing well with excellent results as we are adding new digital products that are in high demand. However, we also see a fiscal situation in the country that we need to consider. You mentioned sovereign risks; in our forecast, we are including some risks related to the sovereign situation in Salvador. I want to mention that our short-term local positions are limited to local petitions and letters, without exposure to Euro bonds or other instruments. We are considering this risk, and it's incorporated into our numbers. For asset quality, while we are maintaining a cost of risk of 1.5%, we do take into account the potential for deterioration due to rising interest rates and inflation. We anticipate that impact to hit more in 2023, without expecting a material effect in 2022. We reflect this in our numbers. I don’t know if Jose Humberto would like to add something else.

Yes, we are seeing high levels of consumer loans, and that’s the reason we are updating our loan growth guidance for the second half of the year. While we have been growing at a pace of 12%, we anticipate growth for the whole year to be 9% to 11%.

Perfect, Juan Carlos and Humberto. Thanks, and congrats again.

Thank you, Yuri.

Thank you.

Sorry, we're running out of time. This concludes the question and answer session. I would now like to turn the conference back over to Mr. Juan Carlos Mora for any closing remarks.

We would like to thank all of you for attending this call. We are very happy with the results we are seeing so far. We foresee positive results for the remainder of the year. As we mentioned, NIM will remain in a very good range for us. Also, we are actively achieving targets on new customers. Regarding the dynamic nature of the bank, we feel confident that we can attain a very strong performance in 2022. We hope to see you or hear from you in our next call where we will report the results for our second quarter of 2022. Thank you very much, and have a very good day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.