Earnings Call Transcript - CIB Q1 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to Bancolombia’s First Quarter 2025 Earnings Conference Call. My name is Rico, 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. This conference call will include forward-looking statements, including statements related to our future performance, capital position, credit-related expenses, and credit losses. All forward-looking statements, whether made in this conference call, in future filings, in press releases or verbally, address matters that involve risk and uncertainty. Consequently, there are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy, and various other factors that we describe in our reports filed with the SEC. With us today is Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Mauricio Botero Wolff, Chief Strategy and Financial Officer; Mrs. Catalina Tobon, 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.

Juan Carlos Mora, CEO

Good morning. Welcome to Bancolombia's first quarter results call. Please go to slide 2. During the first quarter of the year, the Colombian economy experienced some recovery with an increase in investment and domestic demand despite global trade tensions. Inflation rates remained stable for most of the quarter, resulting in unchanged interest rates. Additionally, increased public spending with decreased tax collection continued to impact the fiscal situation, which will be discussed further. I would like to bring attention to some key issues of the quarter. The quarterly net income was COP 1.7 trillion, reflecting a 4.5% growth both on a quarterly and annual basis, a robust NIM of over 6.4% coupled with strong performance in other income and expenses resulted in an ROE of 16.3%. The loan portfolio decreased slightly this quarter, but grew 7% annually. Deposits fell by 1% in the quarter yet increased almost 13% annually, demonstrating our ability to secure funding and competition without raising costs. We have achieved positive results in asset quality across the group due to our effective models, technical expertise, and precise credit policy. Due to consistently lower delinquency rates across all banks and positive trends in all segments, the cost of risk for the period was 1.6%. Banistmo saw a significant drop in provision expenses due to measures taken to reduce loan deterioration, both 30-day and 90-day consolidated NPL ratios reflect improved performance as we will explain further. Our capital remains strong with a total solvency ratio of nearly 13% and a core equity Tier 1 ratio of 11%. Following our recent ordinary dividend distribution, we are pleased with shareholders' approval of our evolution into Grupo Cibest, allowing us to distribute more volume including an extraordinary dividend of COP 624 per share, resulting in a 69% total dividend payout for the year. Since approval, we have been completing legal steps to reorganize the entities under the holding structure with closing expected on May 16. Changes to Colombian operations will appear in May's financial statements. On August 6, we will release Group Cibest's second quarter consolidated results including a new accounting structure and performance overview of key subsidiaries. This is Bancolombia's last earnings call. Future calls will be focused on Grupo Cibest's financial performance. We are planning a share buyback program for approval at an upcoming extraordinary shareholders meeting. We recently transitioned our banking application to Mi Bancolombia app, enhancing customer experience and saving IT costs. To-date, 8.5 million users have migrated with a nice 3% activity rate over 30 days. I will now hand over to Laura Clavijo, Chief Economist, for a summary of the macroeconomic landscape. Laura?

Laura Clavijo, Chief Economist

Thank you, Juan Carlos. If you could please turn to slide 3. The beginning of 2025 has been characterized by a turbulent international financial environment, nonetheless increasing macro strength for the Colombian economy. The environment of global growth uncertainty, tariff-led pressure on inflation and monetary policy has triggered high volatility in financial markets and a widespread trend of risk aversion. For Colombia, according to preliminary analysis, the ongoing global trade debate would not pose a significant shock to its external position or the economic recovery. In fact, there are potential opportunities to exploit in terms of relative competitiveness in different sectors such as agriculture and manufacturing, in addition to gains from a weakening exchange rate. Thus, we maintained our view that economic growth will continue to gain ground as inflation converges towards its target. Consequently, we maintain our expectation of 2.6% GDP growth this year and a slight surge to 3% in 2026 but we will continue to monitor closely the economic consequences of lower than expected growth for key trade partners such as the United States. Global risk aversion has impacted investor sentiment towards emerging markets and sets an uncertain financial backdrop, which at the outset of Colombia's fragile fiscal position has led to local assets being more severely impacted compared to regional peers. This has been particularly tangible for the exchange rate, which depreciated up to 8% during the second half of March but is also reflected in higher country risk resulting in a 100 basis point increase in Colombia's CDS spread compared to the end of 2024. Consequently, this volatile scenario brings additional pressure to an already challenging fiscal situation and limits the course of action in terms of monetary policy. Indeed, the central bank kept policy rates unaltered during its January and March meetings, despite some apparent calls to continue easing at least from an inflation perspective. The inflationary process continued its course during the first quarter, especially in terms of core inflation but at a higher than expected minimum wage poses pressure on regulated goods, which supports our revision of end-year forecasts from 4% to 4.4% inflation. Accordingly, we increased our end-of-year policy rate forecast from 6.5% to 7.5% in the wake of these developments. Finally, it is worth mentioning the recent suspension of access to the IMF's flexible credit line, a loan facility that has been available to Colombia since 2009 and is conditional on meeting sound, macroprudential policy targets. Even though recent announcements suggest that this does not imply a total translation to the funds' facility, it clearly sets additional pressure for the currency to develop a credible and adequate fiscal plan to address prevailing risks to Colombia's fiscal sustainability. Now please, let me turn the presentation back to Juan Carlos, who will present Bancolombia's quarterly performance.

Juan Carlos Mora, CEO

Thank you, Laura. Please proceed to Slide 4. After 12 years of promoting financial inclusion in Colombia, Bancolombia A la Mano has merged with Nequi. Bancolombia A la Mano provided banking services for adults without access to financial products, while Nequi focused on helping young underbanked individuals manage their money. With 94% of Colombia's population now banked, our new goal is to meet the evolving technological and financial needs of our clients. A challenge Nequi is well equipped for. After the merger, Nequi will add around 2.1 million users reaching $23.5 million to whom it will start offering digital and physical debit cards, consumer credit, a broad portfolio of bill payments and top-ups, mobility services among others. Additionally, former A la Mano customers will now be able to register their keys to move their money instantly and free of charge between participant entities enabled through greater bank. Also by centralizing operations in one single platform, we will capture operational efficiencies in avoiding duplicated efforts and in turn increase Nequi's scalability and revenue generation, contributing to its profitability potential. As a matter of fact, after the merger, Nequi will increase its deposits by nearly COP 700 billion and forecast an incremental credit portfolio of COP 130 billion by the end of 2025. This, coupled with an outstanding portfolio that grew over 4x in the last year and a low loan-to-deposit ratio will enable Nequi to triple its portfolio balance for year-end, reaching close to COP 1.5 trillion by the end of 2025. This move certainly contributes to achieving Nequi's breakeven in the first quarter of 2026, driven by a reduction in the cost to serve and the increase in ARPAC on the back of a broader base of users adopting value-added services under an enhanced financial inclusion proposal. Now please proceed to Slide 5. Additionally, I would like to present some market metrics that illustrate the progress of our performance in various business lines with the retail segment following the pandemic. First, regarding deposits, Bancolombia's market share in savings accounts and time deposits has increased by 110 basis points as of February 2025 compared to December 2021, outperforming the growth of our peers, some of whom have lost market share with the entry of new participants. This demonstrates our well-defined strategy under our universal banking model to attract and retain granular deposits, which explains our low funding cost and a strong market position. Also, I would like to highlight that Nequi's deposits have also experienced significant growth with a 70% year-over-year increase contributing to the overall growth. Regarding credit card loans, our market share increased by 20 basis points during a period of high interest rates and competition without compromising portfolio quality. With a 16.5% share of outstanding balances, we represent nearly 30% of the transaction value, which raises to 37.7% when debit card transactions are included as of February 2025. We firmly believe that this well-defined strategy, combined with our solid market presence, equips us to effectively navigate new competitors and regulatory changes. I will now hand over the presentation to Mauricio Botero, who will provide further insights into 2025 first quarter results. Mauricio?

Mauricio Botero Wolff, CFO

Thank you, Juan Carlos. Please go to Slide number 6. Let's start with an overview of our Central American operations. Banco Agricola in El Salvador had another strong quarter with increasing profitability. Higher net interest income on the back of a growing loan portfolio accord with lower operating expenses compensating for an increase in provisions driven by loan growth in higher-risk segments. Net income for Banistmo in Panama increased 11.5% this quarter, highlighting a recovery in asset quality driving its cost of risk to 0.2% mainly by an improvement in the performance of its retail portfolio, more effective collection strategies, and better risk segmentation. Funding in Guatemala showed quarterly improvement despite recording a 12% decrease in provision expenses for the period, although the deterioration of consumer loans remains a concern and the bank is implementing a program focused on improving collections by reinforcing controls in the credit origination process. All in all, Banco Agricola recorded an ROE of almost 23%, Banistmo of 7%, and BAM of 4%. Let me now proceed to slide 7. Given a 5% peso appreciation during the quarter, the loan portfolio slightly declined on nominal terms while posting a 7% annual expansion. Net of FX, the loan book grew 1.3% in the quarter and 4.1% annually. Mortgages continued with positive momentum, growing at the fastest pace both quarterly and annually driven mainly by operations in Colombia, where more competitive interest rates have stimulated credit demand and helped increase our market share. Commercial loans grew across all geographies at a moderate pace with quarterly anomalies, once again led by Colombia as an effective commercial strategy focused on corporate clients that boosted demand. On the other hand, the consumer loan book experienced a contraction during the quarter as the pace of originations was offset by maturities given its short-term nature. Please go to Slide 8. Consistent with the loan portfolio performance, deposits slightly decreased in the quarter yet year-over-year deposits showed strong 12% growth, reflecting our ability to attract and retain funding. Breaking down by type of deposit, the aggregate balance of sight deposits outpaced time deposits, mainly attributed to performance across our Central American operations, whereas in Colombia, time deposits maintained solid growth gradually overcoming institutional deposit-taking activity, ensuring a more stable and cost-efficient source of funding. As a matter of fact, deposits were up 37 basis points during the quarter, a remarkable achievement given that the repo rate remained unchanged, reflecting our effective funding strategy even under a more competitive environment. All in all, savings accounts and time deposits increased their respective share in the funding mix on a quarterly and annual basis. This has occurred at the expense of interbank loans and long-term debt, further contributing to reducing the overall cost of funding as illustrated in the table. Please proceed to slide 9. Interest income fell by almost 3% in the quarter, driven by a combination of lower yielding loans and securities as part of the current monetary easing cycle and a smaller investment portfolio. However, this was more than offset by a 7.6% drop in interest expenses such that the lending NIM bounced back to 7% in the quarter, resulting in a 1% net interest income growth. Consistently, the NIM remained at a solid 6.4%, underscoring our ability to manage margin sensitivity effectively throughout interest rate cycles and market competitive dynamics. Moreover, we continue to adapt our asset and liabilities strategies to mitigate NIM compression in the current easing cycle. As shown on the upper right-hand side graph, during the quarter, we further decreased the net sensitivity to interest rates, driven by a reduction in non-sensitive pre-interest rate liabilities, in other words current and savings accounts as previously discussed. Please proceed to Slide 10. Fee income fell almost 8% over the quarter, explained by lower credit and debit card fees due to the seasonal effect related to year-end, coupled with a slower pace of originations in consumer loans that led to a drop in Bancassurance fees. However, fee income increased 9.7% on an annual basis, given the positive aggregate performance of fee income sources derived from a higher volume of transactions and digital adoptions. On the other hand, fee expenses decreased almost 10% on the quarter also explained by seasonality but increased by 22% year-over-year due to higher credit and debit card royalties, third-party collections, and increased banking agent costs. Therefore, net fee income was almost flat over the year, accounting for a fee income ratio of 17.1% in the quarter. Please go to Slide number 11. Looking at the positive trend from last year, asset quality continued to improve in the quarter, as evidenced by the consistent slower pace of past-due loan formation and consequently lower expected losses. The positive performance expected for all segments and the incorporation of improved macroeconomic data into our risk models led to a net provision charge of COP 1.1 trillion. This figure represents a 16% year-over-year drop in an annualized cost of risk of 1.6%. Moreover, delinquency ratios registered declines over the quarter and over the year, both on a 30 and 90-day basis, reflecting better performance of vintages in an overall healthier loan portfolio. The average for 30-day past due loans stayed almost flat at 11%, whereas the coverage for 90-day past due loans increased to 162%. A breakdown by stages confirms the better outlook as you can see Stage 1 loans now representing 88.1%. Also, the coverage ratio for Stage 2 and Stage 3 loans maintained at 41%, ensuring adequate loan loss reserves. Our improved results and asset quality reflect our efforts in developing robust credit risk models and predictive capabilities leveraged on analytics to support decision-making about the credit cycle. Please go to Slide 12. Operating expenses decreased by 7.7% compared to the previous quarter, mainly attributable to a seasonal effect as expenses related to business transformation gradually increase towards year-end. Personnel expenses, on the other hand, increased due to the annual adjustment in Colombia and inflation index items, whereas variable bonuses declined. From an annual perspective, operating expenses grew by 9.8%, partially explained by IT-related costs, annual wage increases, and a base effect on bonus plan provision given the low provision accrued one year ago. We measure in terms of cost to income, and the efficiency ratio fell to 49.6%. Please proceed to Slide 13. So now net income reached COP 1.7 trillion in the period, marking a quarterly and an annual increase of 4.5%. This represents a return on equity for the quarter of 16.3% and a return on tangible equity of 20.4%, demonstrating robust operational and financial performance in the beginning of the year. Now, please proceed to Slide 14. Shareholders' equity fell quarter-over-quarter by the COP 3.8 trillion dividend payout that was approved at our Annual Shareholders' Meeting. Year-over-year, it grew by 11.4%. Consistently, the core equity Tier 1 ratio ended at 11.2%, a 73 basis point decrease over the quarter given the dividend payout yet increased 71 basis points during the year on the back of organic capital generation. On the other hand, total solvency stood at 12.9%, both ratios well above Basel III total requirements. With this, I will now hand the presentation back to Juan Carlos for the final remarks.

Juan Carlos Mora, CEO

Thank you, Mauricio. Please proceed to slide 15. We originated over COP 13 trillion on our business with purpose strategy this quarter, reaching a total of COP 210 trillion towards our 2030 goal. We financed more than COP 5 trillion to support the transition to a low-carbon economy through renewable energy and sustainable transport. We were recognized by Merco as Colombia's top ESG company for the 6th consecutive year, reaffirming our leadership in sustainability and corporate governance. Please refer to slide 16. Finally, I would like to present our revised guidance for 2025. Following our latest macroeconomic update for year-end which reflects an increased inflation forecast of 4.4% and central bank interest rates of 7.5%, we anticipate loan growth of approximately 5%. We expect the net interest margin to be around 6.2%. With the cost of decreasing to a range of 1.8% to 2% attributed to strong loan performance in Colombia. Furthermore, we project the efficiency ratio to be approximately 51% and the return on equity to be between 14.5% and 15%. This concludes our presentation of the first quarter results. We are now ready to address any questions you may have.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Yuri Fernandes from JPMorgan. Please go ahead.

Yuri Fernandes, Analyst

Thank you and congratulations on the quarter, everyone. I have a question about your bonus line and personal expenses, which are tracking well above inflation. I understand that bonuses can be variable throughout the year, so I'm curious about the reasons behind the first quarter's higher figures. Could you clarify that? Also, I have a second question about margins. I think you've managed funding costs effectively, but I wonder if there's a limit to that. It seems there's a competitive funding environment in Colombia. I'm trying to comprehend whether your guidance implies that the projected decreases for the year compared to the first quarter signal a potential for further optimization moving forward. Thank you.

Juan Carlos Mora, CEO

I'll address your second question and ask Mauricio to respond to your first one about the cost line. As you mentioned, we've been focusing on cost management, and today our efforts are reflected in the results. Our ability to manage funding costs stems from our diversification and the various types of instruments and savings accounts we utilize. On this front, we've performed well and will continue to do so, despite limitations from current interest rate levels. Regarding income, we initially expected the Central Bank to reduce interest rates more quickly. However, the pace of their monetary policy adjustments has been slower than anticipated. In their last meeting, the Central Bank decreased the repo rate by 25 basis points. Currently, we anticipate that the reference rate will finish the year around 7.5%. Nevertheless, there's a possibility it could rise to more than 8%, which the Central Bank has mentioned. If that happens, it could impact our interest income based on economic interest rates. We are optimistic that the guidance we provided around a net interest margin of 6.2% is attainable given the interest rate trends and our cost management strategies. Now, I'll hand it over to Mauricio to discuss the cost line.

Mauricio Botero Wolff, CFO

Hi, Yuri. As you mentioned we have a significant increase in operating expenses regarding labor expenses and that's due mainly to bonuses. And that's because at the first quarter of 2024, our expectations for net income for the year were lower, so the provisions for bonuses were lower. If I recall, we had a pickup in net income in the fourth quarter of the year. Provisions for bonuses in the fourth quarter of the year were higher. So this year we are expecting better net income for the year, provisions for bonuses started significantly higher from the beginning of the year. So that's the conversion we're going to have throughout the year and it's only going to match in the fourth quarter.

Yuri Fernandes, Analyst

Super clear, Mauricio. I may just a follow-up to Juan Carlos on the NIM. Juan Carlos, can you remind us the sensitivity for rates? I remember it was something closer to 20 bps, but you have been changing your liabilities on the funding like help. So what is the current sensitivity for 100 bps change on rates?

Mauricio Botero Wolff, CFO

Yuri, our sensitivity is still the same between 20 and 22 basis points for every 100 basis points in the Central Bank rate.

Yuri Fernandes, Analyst

Perfect. Thank you very much, guys and congrats again.

Operator, Operator

Thank you. We have Ernesto Gabilondo with Bank of America on the line for a question.

Ernesto Gabilondo, Analyst

Thank you. Hi. Good morning, Juan Carlos, Mauricio and Catalina. Thanks for the opportunity to ask questions. I have three from my side. The first one will be, on the political and economic outlook. We have seen recent polls such as in Barmer, Guarumo and Eco Analytica showing that Gustavo Bolivar is leading the false. On the other hand, the recent suspension of the IMF agreement indicates there are some fiscal challenges for the country. So I would appreciate your thoughts on both topics. And if you think the fiscal situation of the country will be the key challenge to be addressed by the new government next year? Then I have a second question related to the subsidiaries. We continue to see El Salvador with very strong ROE levels. But on the other hand, Panama, I believe it posted something around 7% and Guatemala around 4%, ROE. So I would like to hear what could be your potential ROE targets among your subsidiaries. And my last question will be, on your net income per quarter or what you have said about your guidance. So this quarter it came at COP 1.7 trillion. As you mentioned, an ROE of 16.5%. And you have guided an ROE of around 14.5%, 15% for the year. So when making the numbers, would it be reasonable to expect net income per quarter below the COP 1.7 trillion in the next quarters? Or what should we think about it? Thank you.

Juan Carlos Mora, CEO

Thank you, Ernesto. Concerning the political landscape in Colombia, there are several polls indicating Gustavo Bolivar is currently leading in votes. However, it's premature to have a definitive understanding of what the situation will be next year. Colombia will undergo congress elections in March and the first round of presidential elections in May. By the end of this year, we should start to see a clearer picture; we will know who is running. Right now, there are too many candidates expressing interest, but these are merely intentions. By October or November, we will have a better understanding of who will run for each party, who may run as an independent candidate, and an accurate portrait by the start of next year. At that point, I believe the polls will provide valuable insights into who has a viable chance of advancing to the first round of presidential elections and potentially proceeding to the runoff. So, it is indeed too early to draw conclusions. Regarding your second question about Colombia's fiscal situation, it is undoubtedly the most significant challenge facing the Colombian economy at this time. The fiscal deficit reported by the government for last year was excessively high, and this is an issue that requires immediate attention from the government. I will now hand it over to Laura Clavijo for additional details on the SMA line of credit.

Laura Clavijo, Chief Economist

Yes. Thank you. Well indeed the fiscal situation is the main weakness in terms of our macro outlook. We revised 5.9% of GDP expected fiscal deficit for the end of this year. And let me say that this is a base case scenario given also recent international turmoil that has, of course, impacted to some extent the FX rate has expanded kind of the spreads on risk premiums considering the level of oil prices may further impact some of the fiscal expectations that this government presented back in February. So it's still kind of an uncertain landscape for the fiscal situation. A significant budget cut is expected if needed somewhere between COP 30 billion to COP 46 billion depending on prices and a stress scenario. So, definitely something to keep a close eye on. I would just add that we are very expectant to see what the government will present in the medium-term fiscal outlook, which should be presented sometime at the end of June. Our expectations on how budget cuts can be performed are of course given some inflexibility. Regarding the IMF decision to constrain access to the flexible credit line, this is of course still up for discussion in terms of the facility as a whole. But as of today, the assets have been blocked on account of needing more reasonable messages on the fiscal outlook. And again in June, we should have a more grounded scenario of how the government expects to address these many challenges.

Juan Carlos Mora, CEO

Thank you, Laura. Regarding your second question about the subsidiaries' ROE. As you mentioned, the performance is not the same in all countries. Banco Agricola in El Salvador is doing very, very well. And this year what we see is that performance will continue and ROEs in Salvador will be above 20%. In the case of Banistmo in Panamá, its notable recovery of the ROE; remember that we are coming from an ROE for year-end 2024, which was around 4.3%. Now this first quarter was 7%. We think that this recovery will continue, and we are targeting an ROE above 10% for Banistmo. In the case of BAM, it's low for the quarter and also we expect BAM to have a better performance. It's in the middle of the recovery and the full potential ROE is not going to be delivered this year. We are targeting closer to 2025. We expect BAM to deliver an ROE around 14% to 15%. The outlook, I think, is positive in terms of what Banco Agricola is delivering and the trends that the other two operations in Central America are having. Regarding net income, as you mentioned COP 1.7 trillion for the quarter is the highest figure for the last two years. The average is closer to COP 1.5 trillion. There are still uncertainties regarding the macro performance of the different countries and what's happening in the global economy. So we prefer to be cautious in our guidance for ROE between 14.5% and 15%. Even though the ROE for the first quarter was 16%. Is there an upside potential? I believe so, but all depends on external factors and the performance of the economies in which we operate and how global tensions, geopolitics, and the global economy behave. Thus, we want to remain cautious in terms of our guidance for the full year amidst these uncertainties.

Ernesto Gabilondo, Analyst

No. It's super helpful. Thank you very much, Carlos and Laura.

Operator, Operator

Thank you. We have Andres Soto with Santander on the line with a question.

Andres Soto, Analyst

Good morning to all and congratulations on a strong set of results. My question is probably more related to macro. First quarter of 2025 was a good quarter for Colombia, but conditions materially changing in the second quarter as oil prices are at $60 to $62. This is $10 lower than what the government expected for the full year. I would like to understand how this lower oil prices trickle down to your GDP forecast and fiscal forecast and if you expect to make any revisions to your provisioning model considering this new environment?

Juan Carlos Mora, CEO

Hey Andres, let me pass your question to Laura. Once she elaborates on the answer, I will handle the provisions.

Laura Clavijo, Chief Economist

Yes. Indeed, we maintained during our first quarter our 2.6% expectation of GDP growth for this year. This was prior to the whole trunk trade volatility as well as more recent events on the fiscal side. We will have a revision again mid-June, where we expect to incorporate whatever that government brings to the table on the fiscal outlook and as well as settling of some of these international variables especially considering oil prices as you mentioned, which will impact revenues expected. I believe the fiscal plan as today looks at prices more in the $65 to $70 per barrel range, whereas we are now closer to $60. So definitely something to look at from that perspective. The fiscal outlook could impact especially government expenditures that have been one of the leading factors in the economy. On the flip side, and the reason perhaps why we feel attributable to this extent with the 2.6% GDP growth at the end of the year, is also due to the fact that we are seeing a far more resilient internal demand. Consumer households are exhibiting notable resilience coming from remittances; other types of spending; and we are seeing an upswing also in consumption of more durable goods. Leading sectors such as entertainment and agriculture are faring relatively well in addition to new sectors also bringing some dynamics to the table. So despite some challenges, our revision will come mid-year.

Juan Carlos Mora, CEO

And regarding the effect of the macroeconomic outlook on our numbers and particularly the cost of risk, Andres, that's why we are cautious about our guidance on the cost of risk. Even though we have had two very strong quarters in terms of cost of risk, we remain cautious and that's why our guidance of the cost of risk is between 1.8 and 2. Even though the cost of risk for the first quarter this year was 1.6 and the cost of risk for the last quarter of last year was even better. We remain cautious because there are risks associated with the macro environment that we are considering in our guidance.

Andres Soto, Analyst

Thank you, Juan Carlos. If I may follow-up on Laura's answer, what would be the solution for the government to fix at least the big budget challenges they have this year? Do you see a possibility for some of the measures that have been proposed such as bringing forward tax payments for companies to be the solution? And what other solutions can the government implement to patch the hole that is being created and is growing every day?

Laura Clavijo, Chief Economist

Well, our base scenario of a 5.9% of GDP fiscal deficit suggests breaking the fiscal rule again this year. It's already a stress scenario, which incorporates some space to endure expenditure cuts. But of course, we know there is a lack of flexibility and perhaps a lack of willingness in a pre-electoral year. I think it would have to be a combination of many things as you mentioned, such as delaying some budget execution, cutting expenditure to some extent, and various ongoing initiatives. It is a scenario that in any case, our basic scenario indicates a non-compliance of the fiscal rule, especially given the high expenditure objects.

Juan Carlos Mora, CEO

Thank you, Laura. Regarding your second question about the subsidiaries' ROE, as you mentioned, the performance is not the same in all countries. Banco Agricola in El Salvador is performing exceptionally well. We anticipate that performance will continue with ROEs in Salvador exceeding 20% this year. For Banistmo in Panamá, its notable recovery of the ROE; remember we are coming from an ROE for year-end 2024, which was around 4.3%. Now this first quarter was 7%. We believe this recovery will continue, targeting an ROE above 10% for Banistmo. In the case of BAM, while its low for the quarter, we expect BAM to perform better, but the full potential ROE will not be reached this year; we aim for 2025. We expect BAM to deliver an ROE around 14% to 15%. The outlook seems positive for Banco Agricola and the trends in the other two operations in Central America.

Ernesto Gabilondo, Analyst

No. It's super helpful. Thank you very much, Carlos and Laura.

Operator, Operator

Thank you. We have Brian Flores with Citi on the line with a question.

Brian Flores, Analyst

Hi. Congratulations on the results. Thanks for the opportunity. Two questions here on my side. The first one is I wanted to understand how should we think of provisions, right, and the relationship with growth? You reduced your guidance in terms of both items slightly quarter-over-quarter. So just wanted to confirm if you are expecting lower growth particularly in consumer. And also, if you could expand your guidance by segment; I think that would be really helpful. And then my second question is you made very interesting comments on Nequi and Bancolombia a la Mano. Just wanted to confirm if you said two things: one, you're reaching breakeven in the first quarter of 2026 and you will reach COP 1.5 trillion in loans also by the end of this year. I just wanted to confirm those data points. Then maybe a derivative of this question, right, you're seeing more transactions increasing the LDR. Can you say or quantify if Breve is having an impact or should have an impact on fees and this is already incorporated in your guidance? Thank you very much.

Juan Carlos Mora, CEO

Thank you, Brian for your question. Let me address your second question regarding Nequi. As you mentioned, we decided at the beginning of this year to merge Bancolombia a la Mano and Nequi and that's undergoing. By the end of May, we are expecting to finish the migrations of Bancolombia a la Mano clients to Nequi. That will give a considerable size, with Nequi expected to end May with around 24 to 24.5 million clients. I would like to highlight that the level of activity among these clients is very high; around 78% of Nequi's clients are active at least once a month, moving money. This indicates that Nequi is used quite frequently. As mentioned, we are pleased with Nequi's loan portfolio development; we expect COP 1.5 trillion in loans by the end of the year. The figure at the end of April is COP 1.2 trillion. We are on track and expecting better performance in terms of loans for Nequi. Many of these loans are of average of $500, so they represent small amounts, but we are pleased with the performance, which is in line with our expectations. Also, we expect Nequi to reach breakeven by the first quarter of 2026. I will now pass your first question to Mauricio regarding provisions.

Mauricio Botero Wolff, CFO

Thanks, Brian. Regarding provisions, as we mentioned before, it was a very positive quarter in terms of cost of risk at 1.6. But the good thing I would like to highlight is how we got there, which is that the deterioration of the different segments was better than expected. If you take a look at the different metrics regarding asset quality, they are looking good. We don't have any one-offs in the quarter that would explain the 1.6. Provisions are looking good in the quarter, and for the year, but we still need to be prudent because of the macro scenario that we've discussed. In terms of guidance, the breakdown is as follows: commercial loans growing at 4%, mortgage loans growing at 4.5%, and consumer loans growing at 8%.

Brian Flores, Analyst

No, that is very helpful. Just a quick follow-up on the first answer. I think we did not discuss the impacts of Breve. Do you think Breve could present any downside to your fees in the coming quarters?

Juan Carlos Mora, CEO

Thank you, Brian. I apologize for not addressing that part. Yes, Breve is going to have an impact on how people move their money. But let me say that we expect the impact to be mild. We opened both Bancolombia and Nequi platforms in January to allow free immediate transactions among banks. Today, it is possible to move money among more than 10 to 15 banks in Colombia without fees or costs. In the medium term, there will certainly be some effects, but I believe we are well-prepared to manage that effect. As I mentioned, we moved forward and made the possibility of free transactions available to our customers. So in the end, we believe the effect will be positive in terms of how money is moved in Colombia, and we are positioned to take advantage of that possibility, Brian.

Brian Flores, Analyst

That’s super clear. Thank you, team.

Operator, Operator

Thank you. Our next question comes from Tito Labarta with Goldman Sachs. Please go ahead.

Tito Labarta, Analyst

Hi, good morning. Thank you for the call and for allowing me to ask a couple of follow-up questions. First, Juan Carlos, regarding the margin, you maintained the same margin guidance. However, you also mentioned that you expect the policy rate to be higher than your initial expectation of 7.5%. I think you initially mentioned 6.5% with a potential risk that it could reach 8%. You noted that the sensitivity to rates has not changed. Can you explain why you are keeping the NIM guidance unchanged despite the likelihood of higher rates, or is this indicative of some conservatism and potential for upside? My second question concerns loan growth, which is lower than guidance despite good asset quality. There's still some uncertainty in the economy. Could you provide insight into potential downside risks for loan growth? When do you anticipate it might improve and potentially show some upward trends? I'm trying to gauge the situation since asset quality is strong, yet economic uncertainties remain. Thank you.

Juan Carlos Mora, CEO

Thank you, Tito. Let me give you some context on your two questions, and I will pass to Mauricio if he wants to add something on margin. We were more optimistic earlier, thinking that this year 2025 the interest rates would go down faster. Our previous expectations were that the NIM would be around 6% or even below 6%. With the behavior of inflation and what the Central Bank, Banco de la República, is doing regarding inflation and the speed at which they are applying monetary policy, that's why we are giving guidance of 6.2% for the full year. We ended this quarter at 6.3%. So what we foresee is a 100 basis point reduction. The interest rate is currently at 9.25% as we indicated, and we mentioned this could drop to 7.5%, though there is a risk it could reach 8%. So that 125 basis point or 175 basis point reduction is where we are moving regarding the margin. There is a risk of a positive nature that we could maintain the margin in response to how the interest rates are shifting in Colombia. We are being conservative. It will depend on how the interest rates change in the economy. Regarding loan growth, it's challenging. What we have seen in the economy is that it's performing pretty well. I mean, the asset quality is good. Demand is affected by political uncertainty and global developments. There are uncertainties, but consumption remains robust. We are observing improvements in consumer loans, which could grow a little faster. Also, mortgage performance is strong. Commercial loans will depend on projects driven by expectations of the new government demanding credit. So, the ultimate conclusion is that it depends on macro factors and political expectations. Mauricio, do you want to add anything?

Tito Labarta, Analyst

Okay. That's very clear. Thanks, Juan Carlos. So just to make sure on the NIM guidance, it sounds like there could be upside risk there, but the trend is still that it should be coming down as rates decrease but with some potential upside given that rates may be coming down slower than expected?

Juan Carlos Mora, CEO

That's correct.

Operator, Operator

Thank you. Our next question comes from Carlos Gomez with HSBC. Please go ahead.

Carlos Gomez, Analyst

Hello. Thank you for taking my questions. Two brief ones. One, you have modified slightly your guidance. We have gone to a different element. But I see that the CET1 that you have between 11% to 11.5% is no longer part of the guidance. I was wondering, if you want to have more flexibility as to how much capital you want to hold. Second question is once you have Grupo Cibest set up is your priority still to do the buyback for $300 million, or what else do you think you can do immediately that you couldn't do as Bancolombia?

Juan Carlos Mora, CEO

Thank you, Carlos. Let me address your second question and I will pass your first one to Mauricio. Definitely, we are in the process of settling up Grupo Cibest. Our expectations are that by the end of May, we will have everything in place. We will call our shareholders' meeting in June, where we will present the buyback program. As mentioned, we aim for a buyback program equivalent to $300 million at that first Cibest shareholders' meeting. Regarding the first question, I will pass it to Mauricio.

Mauricio Botero Wolff, CFO

Regarding the guidance for the core equity Tier 1. The reason why we didn't include it is that the guidance will basically be driven by Cibest's performance. At year-end, we will be presenting Cibest's results. For reference, CET1 will not be a metric in this context but will still have a target of between 11% and 11.5% for the operational companies. Cibest will follow double leverage metrics starting in the second quarter.

Operator, Operator

Thank you. Our next question comes from Olavo Arthuzo with UBS. Please go ahead.

Olavo Arthuzo, Analyst

Hi, good morning everybody. Thank you for taking my question. I have just one. It's related to the profitability of the bank. I want to understand how would the ROE increase again to reach the high-teen figures that we used to see in the past? I understand the top elements which are key in this process. But what could you share with us in terms of borrow up initiatives? Also in this context, could you remind us or update about the long-term ROE the bank is targeting for the long term? Thank you very much.

Juan Carlos Mora, CEO

Hi, Olavo. Thanks for the question. I'll start with the long-term ROE goal, which is to reach 16%. You may remember that a couple of years ago, when our margins were significantly higher, we achieved ROEs of over 20%. However, those levels are not sustainable. We believe we can aim for a 16% ROE moving forward. The potential upside is linked to Cibest's management of the capital structure and macroeconomic changes that will allow us to grow the loan book more quickly. This growth could increase fees and lead to a more sustainable cost of risk, with a long-term target around 1.8. If we meet these objectives, ROE might surpass 16%, possibly reaching around 17%. Nonetheless, for the sake of sustainability, we should focus on targeting approximately 16%.

Operator, Operator

Thank you. Our next question comes from Nicolas Riva with Bank of America. Please go ahead.

Nicolas Riva, Analyst

Thank you very much, Juan Carlos and Mauricio for the question. I have two. One, it’s a follow-up from the question Carlos Gomez had asked on capital. But if you can give us your thoughts regarding plans for rational capital basically because I look at the buffer of the minimum requirements for total capital vanishing with the maturity of Tier 2 2027. So I'm thinking more on Tier 2 capital, do you have any plans to replace this capital before 2027? And again, given the buffer on total capital looks a bit thinner.

Mauricio Botero Wolff, CFO

Hi, Nicolas, thank you for your questions. First, regarding our capital position, we typically distribute dividends based on a year-end target of 11%. Last year, our dividend distribution saw it fall to 10.5% as anticipated, but it rose back above 11% at year-end. This year, after distributing dividends, our basic capital only decreased to 11.2%. The figures you mentioned are reassuring. We have conducted all stress tests and scenarios. We're maintaining a conservative approach and keeping in contact with rating agencies, and we feel secure with our current capital levels. As for your second question about the new holding company, we do not have plans for any capital issuances or new instruments in the short term. However, Cibest will provide us with options at both the holding and operational levels. We may consider addressing the market for Tier 2 instruments in 2026. We can also explore AT1 at the holding company if necessary; while it’s not an immediate need, we recognize that options are available.

Juan Carlos Mora, CEO

Okay, go ahead please, Nicolas.

Nicolas Riva, Analyst

No, I was going to say one last follow-up. Yes, sorry to interrupt, Juan Carlos. One last follow-up question for Mauricio on that. I would imagine that as you said the holding company doesn't have capital requirements other than perhaps some double leverage. So I would assume you would either issue senior debt at the holding company level outside and then downstream it as an equity injection to the bank, or you could raise AT1 or Tier 2 capital at the Colombian bank level. Is that fair?

Juan Carlos Mora, CEO

It is fair enough, Nicolas. I just want to emphasize that the evolution of our corporate structure will provide us flexibility. As you described, we can explore opportunities for additional resources at both the holding level and operational levels. However, we want to emphasize what Mauricio said; this year, we feel comfortable with the capital that we have across the board at both the holding company level, Cibest, and operational banks in different geographies. Yet this flexibility to tap the market for any operational needs remains important.

Operator, Operator

Thank you. We have no further questions at this time. I would like to hand the conference over to Mr. Juan Carlos for closing remarks.

Juan Carlos Mora, CEO

Thank you everybody for attending this conference call. Our next conference call will present the results of Cibest. Thus, the results for the second quarter will be Cibest results due to our corporate evolution as I mentioned. Thank you very much, and hope to see you in our next conference call. Thank you very much everybody and have a good day.

Operator, Operator

Thank you. This concludes today's conference. Thank you for participating. You may now disconnect.