Earnings Call Transcript - CIB Q1 2020

Operator, Operator

Good morning, ladies and gentlemen, and welcome to Bancolombia's First Quarter 2020 Earnings Conference Call. My name is Anna, and I will be your operator for today's call. At this time all participants are in a listen-only mode. 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 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 SEC. With us today, Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Mauricio Rosillo, Chief Corporate Officer; Mr. José Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mr. Jorge Humberto Hernández, Chief Accounting Officer; Mr. Alejandro Mejia, Investor Relations Manager; and Mr. Juan Pablo Espinosa, Chief Economist. I will now turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer of Bancolombia. Mr. Juan Carlos, you may begin.

Juan Carlos Mora, CEO

Good morning, and welcome to our conference call for the first quarter of 2020. In these challenging times, we are all navigating through uncertainty for ourselves, our loved ones, and our community. We hope you are staying healthy and safe. This is a very peculiar quarter, as the rest of the world, Colombia, and the countries in Central America where we operate have experienced the effects of the spread of the virus, with the collateral effects of the lockdowns and the consequential reduction in business activity. As a result, our business plan for 2020 will change in a significant way. At this time, we consider that in the second quarter, we could have a better understanding of what will be the 2020 results. During the quarter, we generated a net income of COP336 billion, which is 60% lower than the net income of the first quarter 2019. In this call, we want to give you an overview of Bancolombia's situation and the actions that we are taking as well as the results of the quarter, which were impacted by the COVID-19 outcomes. First, I want to make a quick mention of the macroeconomic environment and the government's and Central Bank's response to the COVID-19 situation, which we can see on Slide No. 3. As of May 4, Colombia has close to 8,000 confirmed COVID-19 cases and 350 deaths. The Colombian government declared a state of emergency on March 17, and a quarantine has been in place since March 20. Construction and manufacturing sectors were allowed to restart operations on April 27. Other measures to contain virus transmission have included travel bans, border closures, and a suspension of classes. The rest of the countries in which Bancolombia operates have implemented similar containment actions. Colombian authorities have also announced several economic measures as part of the response to COVID-19. On the fiscal side, various packages equivalent to 1.4% of GDP are intended for pandemic containment and palliative measures. The government has also stated that there is a total of 4.7% of the GDP to use in case of a need in the situation, should it further deteriorate. On the monetary side, measures include cuts in the reference rate totaling 100 basis points, the strengthening of liquidity provision mechanisms, purchases of public and private fixed income securities by the Central Bank, the reduction of reserve requirements, and the establishment of additional FX hedging mechanisms. Second, we want to share with you the response from Bancolombia to face the COVID-19 situation. Slide No. 4 gives you some insights. During the last three years, we have created remote working tools and platforms that allow us to run the business today with no significant disruption. To give you an idea, in Colombia, close to 90% of our employees are working from home, and in Panama, 60%. On the commercial front, we have enrolled more than 800,000 new customers in the last three months through Bancolombia a la Mano and Nequi platforms. Bancolombia has played a key role, helping the government distribute financial support to low-income individuals. Our platform has been used to distribute subsidies from the central and local governments to more than 6,000 people. Also, we have taken actions to support our customers in different areas. For 1.8 million mortgages and personal loans customers, we have granted a grace period of three months. In the SME and corporate loans, we have opened the possibility to restructure credits and extend grace periods. As of today, we have extended benefits to around 260,000 companies. In total, we have offered benefits to about COP56 trillion worth of loans. Additionally, we have been active in granting loans to existing customers with guarantees from the Fondo Nacional de Garantías, National Assurance Fund. This guaranteed loans aim to finance working capital, protect payrolls of small businesses, and cover up to 90% of the outstanding balance. On Slide 5, we present the current status of our channels in Colombia. A key point we want to highlight is the rapid adoption of digital channels during this period. To date, we are operating with 70% of our physical branches while we are experiencing a big increase in the use of digital channels. On Slide 6, you can see the rapid adoption of digital banking. The number of digital transactions has increased during the quarter, while the number of transactions through physical channels has decreased. This is an indication of what could happen with our customer attention model in the future. Similarly, our digital platforms, Bancolombia a la Mano and Nequi have increased the number of active users at a rapid pace. Just in March and April, Bancolombia a la Mano added more than 700,000 new clients. That's three times the month average. Similarly, Nequi added 500,000 new customers. On the other hand, the Bancolombia mobile app application has reached 4.5 million users. We expect these trends to continue while our customers adopt a broad offer of digital channels and products that we have developed. This is a brief description of the challenges that we face with our customers, our employees, and our operating environment. In addition to the presentation of the first quarter numbers, we want to give you a point of view regarding liquidity, capital, and provisions. As you will understand, it's too early to provide guidance for 2020, as things are evolving rapidly amid the COVID-19 development. Now I want to turn the presentation to José Humberto Acosta, who will expand on these aspects. José?

José Humberto Acosta, CFO

Thank you, Juan Carlos. I want to continue this presentation elaborating more about three key topics: liquidity position, capital position, and credit risk. On Slide No. 8, we present the evolution of the two key aspects of the balance sheet: liquid assets and liabilities. Liquidity is one of the aspects that we have special attention to across all four geographies. During the quarter, we have put special emphasis on increasing the amount of liquid assets and investments that can be easily converted into cash or used as collateral with the Central Bank for borrowing purposes. In particular, the last weeks of March and April, we have been seeing a significant inflow of money into Bancolombia. We have observed significant influence from money that was in the money market accounts, as customers preferred liquid products. We have experienced a flight to quality effect in all four geographies. This liquidity has come through checking and savings accounts across all four geographies. We must mention that the increased level of liquidity is not going to be used to accelerate loan growth, but to maintain a cushion during the current situation. On the liability side, we have been very active in tapping lines of credit with international banks. These resources have been used to extend working capital and trade finance facilities to our customers in our international operations. We have utilized lines of credit with the government's second-floor banks, which are intended to finance small and medium businesses with working capital and payroll needs. The recent evolution of deposits and liabilities has permitted us to reduce the funding cost. This strategy aims to maintain a liquid balance sheet to have more financial flexibility. We recognize that these are not normal levels of liquidity and deposits. They are higher than regular levels and eventually will return to normal levels. On Slide No. 9, we present the current capital situation of Bancolombia and subsidiaries. We currently have a solid capital position that permits us to face stress situations. Our main operation is strong with capital well above minimum regulatory requirements. The same applies to the consolidated ratios. We want to emphasize three aspects to consider when looking at the current capital position. Over the last few years, Bancolombia has accumulated capital organically through earnings retention and asset growth below 10% on a consolidated basis. In our capital structure, 44% of shareholders' equity is in U.S. dollars, which helps us to maintain capital ratios during periods of currency depreciation. The last liability management transaction conducted in December 2019 permits us to have a stable Tier 2 for at least the next five years. The growth forecast for the next years indicates that our current capital position allows us to develop our business plan, including asset growth, provision charges, and net income evolution. In general, the Colombian banking system is well-capitalized, and the regulators have not indicated any restrictions regarding dividend payments. The schedule for possible implementations remains for 2021. As you know, each year, we present a dividend proposal to the Annual General Meeting, and shareholders decide what portion to pay as dividends and what portion to appropriate. This year, 2020, we are paying 36% of 2019 net income as a regular dividend and 14% as an extraordinary dividend. Last April, we paid the full amount of the extraordinary dividend and the first installment of the regular payment. On Slide No. 10, we present the breakdown of provisions during the quarter. I want to draw your attention to the impact that we had this quarter from the provisions associated with the update in parameters, including the deterioration in macroeconomic parameters as expectations related to COVID-19. Regarding provision charges associated with consumer loans, we must mention two drivers for the increase. One is the 29% nominal growth of the consumer loan portfolio between March 2019 and March 2020. This growth occurred mainly in personal loans. The second is the effect that exchange rates had on the nominal amount of provisions, which are larger when dollar charges are converted to pesos. Additionally, we recorded COP296 billion in provisions associated with the COVID-19 impact on changes in parameters. Just to give an idea, the most significant parameters that deteriorated were GDP, inflation, and fiscal deficit. Finally, we made specific provisions for corporate clients. We expect to see a deterioration of the loan portfolio in the second and ongoing quarters as the economy suffers the impact of the lockdown. We don't know yet how much passive loan formation we will have, and therefore we do not have a clear estimation of provision charges for 2020. On Slide No. 11, we give you a snapshot of our standalone operations. We want to highlight the growth in cash, equivalents, and investments in securities that we have across all four geographies. This effort has been coordinated across all balance sheets of the group and aims to provide safety and flexibility in each of our four operations. We must highlight that coverage ratios of our loans are between 120% and 225%, which will permit us to face potential deterioration in the coming quarters. In Slide 12, we present the loan growth and the loan breakdown. As we mentioned a few slides ago, it's key to highlight the composition of our assets as we increase the amount of cash and equivalents and investments to have a better liquidity profile. The loans grew 12% during the quarter, mainly due to the utilization of lines of credit in pesos by corporations and the depreciation of the peso versus the dollar. We do not expect this pace of growth to continue as the economy has slowed down. In the last weeks of the quarter, we started to originate loans using the credit facility designed by the Colombian second-floor banks. We have originated COP480 billion with these lines and focused on loans with less than two years. Second, loans to SMEs with a guarantee provided by the Fondo Nacional de Garantías. Until today, we have reserved COP1.8 billion in loans with this feature with tenors ranging from 12 to 36 months. Finally, loans to SMEs with our own resources account for around COP1.1 trillion. I want to mention a few facts about our loan portfolio. One is the diversification across several sectors of the economy and the small exposure that we have to oil and gas, where we have less than 0.6% of our loans and, as an example, airlines and airports, where we have less than 0.5%. The second factor is the fact that 44% of our loans have either guarantees or collateral. On Slide 13, we see the evolution of margins. Lending margins remained stable during the quarter, in line with the trend observed in the previous quarter of last year. On the other hand, the investment margin remains low, as some securities in the portfolio lost value in the last weeks of the quarter. The Colombian Central Bank cut interest rates twice in the last two meetings, 50 basis points each, setting the reference rate at a level of 3.25%. We could see pressure on margins due to these actions. But so far, the cost of funding has come down as well, thanks to the faster growth in checking and savings accounts. In the following Slide No. 14, we see the net interest income and the evolution of the funding cost. Please note the reduction in deposit cost during the quarter. This is the result of the bigger share of checking and savings accounts. This trend contributed to the reduction of the loan-to-deposit ratio to a level of 104%. The second component of the reduction in funding cost was a liability management conducted last December and January. We did one issuance of subordinated debt and another issuance of senior debt, which permitted us to reduce the funding cost on these instruments by 140 basis points. In Slide 15, we present provision charges. Complementing the explanation at the beginning of the presentation, we experienced an increase in the passive loan ratio to 3.04% for 90 days past due, with a coverage ratio of 188%. This coverage ratio is a result of our risk provisioning models based on expected losses. The next Slide, 16, shows the past due loan formation. New past due loans during the quarter increased in nominal terms due to three factors: first, early impacts of the general lockdown of Colombia and Central America; second, the depreciation of the peso versus the dollar, which caused past due loans from Central America to represent more pesos; and finally, the deterioration of specific corporate clients. Slide 17 shows the evolution of expenses and efficiency. The largest impact on our OpEx is explained by the 20% depreciation of the peso. Nevertheless, regarding COVID-19, we are reviewing the projects pipeline in order to postpone or cancel some, and we are also reviewing all the general expenses. Now I want to turn the presentation back to Juan Carlos to summarize the most relevant aspects. Juan Carlos?

Juan Carlos Mora, CEO

Thank you, José. As a summary, I want to highlight that digital channels will play a relevant role in our strategy to be the pillar of our future developments. Loan growth will be difficult to forecast at this moment, but we will continue assessing the developments of the economies in which we operate to see how credit demand is going to evolve. Fee income, which has a high correlation with economic activity, tends to be lower this year. Margins may experience compression and will be correlated to the Central Bank's monetary policy. Provisions will increase, but as we mentioned before, it is still difficult to predict its growth for the year. Finally, regarding expenses, we will face new challenges in this new operational environment, which will require us to be more selective in the projects that we undertake. Expenses are going to be a big focus of our activity, of our strategy in order to be very efficient in this area. With this, I would want to open the line for questions.

Operator, Operator

And we have a question from Andres Soto from Santander. Please go ahead.

Andres Soto, Analyst

Good morning gentlemen. I hope you and your families are doing well. Thank you for the additional details about the cost of risk in your presentation. I noticed that if I exclude the parameter update and the specific corporate provisions, your cost of risk would have been at 1.8%, which is what you had guided for earlier this year. So I would like to understand, first, what was the GDP assumption in your model update? And if we could expect additional updates in Q2 or later this year due to further model adjustments? And second, regarding the specific corporate provisions, I would like to understand how many clients, what is the total exposure, and what the current coverage is for those cases. Thank you.

Juan Carlos Mora, CEO

Thank you, Andres. Regarding your first question, we updated our parameters with the forecasted GDP decline of 2.7%. Further updates, I think, will come once we have more data. So your analysis is correct about the parameters update. And other than that, the provisions are the figures you mentioned. With this, I want to pass your second question to José Humberto.

José Humberto Acosta, CFO

Yes. Thank you, Juan Carlos. Regarding the exposure to corporate clients, we are primarily talking about two corporate clients here in Colombia that are already past due. That's the reason why the level of provisioning for corporate clients is mainly explained by this couple of corporate clients. And going back to your question of GDP, just to give you an idea, that will change every quarter to complement Juan Carlos' response. For example, for the Panamanian situation, we are assuming a GDP drop of minus 2.4%. That explains the increase in the COVID-19 provisioning.

Operator, Operator

Our next question is from Ernesto Gabilondo from Bank of America. Please go ahead.

Ernesto Gabilondo, Analyst

Hi, good morning. Thanks for taking the question. My first question is on loan growth. We noted that the peso-denominated portfolio came at double-digit growth. So can you elaborate on what was behind that? Was it mainly explained by corporates and SMEs withdrawing credit lines and individuals requesting more credit during the grace period? And how should we think about loan growth in the next quarters? Then my second question is on provision charges and cost of risk. You mentioned in your presentation that you have already created an impairment of COP 296 billion due to expected losses from COVID-19. However, when do you expect the peak of provisions? And how should we think about the cost of risk in the next quarters? Finally, my last question is on your capital ratio. Your Common Equity Tier 1 ratio stood at 9.1%. Well, I believe that with Basel III, you could be around 10.5%. However, considering that Bancolombia is a systemic bank, don't you think that you will be complying just at the limit?

Juan Carlos Mora, CEO

Thank you, Ernesto, for your questions. I will take the first one regarding the loan growth, and I will pass the second and third questions to José Humberto. Loan growth, as you could imagine, once the pandemic became evident and countries started to discuss lockdowns and the effects on the economy, corporate clients began to ask for money to provide enough liquidity to weather this period. So March was a month in which we observed a significant demand from corporates, mainly asking for money. The demand in March, as I mentioned, was substantial, and that is the cause of the growth in our commercial loans portfolio. The economy was growing well in Colombia during the first two months, and we had demand. But in March, that demand was driven by the pandemic. So that created around 12% year-on-year growth in commercial loans. Essentially, it was corporations looking for liquidity. With this, I want to pass your questions to José Humberto. If he wants to complement this answer, please go ahead, José.

José Humberto Acosta, CFO

Thank you, Juan. Just to clarify, complementing the first question, in terms of U.S. dollars, loan growth was close to 1%. In terms of local currency, as Juan mentioned earlier, it was 10%. If the first wave of the first quarter was driven by corporate clients, the next three quarters may be impacted primarily by consumer loans and SMEs, rather than by corporates. Regarding your second question, yes, as we are modeling the COVID provisions under the model of expected losses, we will probably see the materialization of new GDP numbers, unemployment figures, and fiscal deficit numbers in the second quarter. So we might touch the highest point of provisions then, once we have valid data to adjust the expected losses model, especially considering the impact on the second half of the year. This is our perspective. As for the capital ratio of 9.1% that you mentioned, yes, if it were calculated under Basel III, that number would jump by 150 basis points, which is correct. But I want to highlight two factors. This year, we are not expected to have loan growth as originally planned at 10%. So that will help maintain our solvency ratio under control. The second factor is that 44% of our equity is in U.S. dollars, providing some buffer in terms of FX variations. Based on these calculations and our loan portfolio, we believe we will remain stable and do not foresee any particular concerns regarding Tier 1 and Tier 2 ratios.

Operator, Operator

Our next question is from Gabriel da Nóbrega from Citibank. Please go ahead.

Gabriel da Nóbrega, Analyst

I actually have two questions as a follow-up. The first one, regarding these two corporate cases which went delinquent this quarter, could you just maybe share with us what your exposure is there? And what's your coverage levels as well? And for my second follow-up, regarding capital, I understand what you just said about maintaining similar levels. However, I wanted to ask about your payout ratio and what you're expecting for dividends considering that you weren't going to grow. But at the same time, you could have a higher risk from higher RWA results.

Juan Carlos Mora, CEO

Thank you, Gabriel, for your questions. Let me pass it to José Humberto.

José Humberto Acosta, CFO

Yes, Gabriel. The most relevant case we are currently addressing is Bioenergy, a subsidiary of Ecopetrol that we are collaborating with. This is one of our primary cases right now. We also have a specific case in the energy sector in Panama. Those are the most significant issues we are dealing with today. As for your second question, we are uncertain about the dividend payout ratio for next year due to a noticeable decrease in Colombia. Our net income has fallen by 60% compared to the first quarter of last year, so our position will depend on what we plan for the second half, including our guidance on loan growth, net interest margin, and cost of risk, which will be crucial. Therefore, we do not have a definitive stance on the dividend payout for next year or the years beyond. Regarding risk-weighted assets, just to provide some clarity, this density will change. The composition is not significantly altering between commercial and consumer loans. We believe that if Basel III is enacted on January 1, our density will decrease from about 77%-76% to roughly 65%, allowing for increased capital for solvency ratios.

Operator, Operator

Our next question is from Julian Ausique from Davivienda Corredores. Please go ahead.

Julian Ausique, Analyst

I have three questions. So the first one is related to the impact, like, if you can give us more impact on what's happening with the equity method. The second one is about the expectation that you all have for the percentage of the total commission that are exposed mainly to this situation? And the third one is if you can provide a little bit more color about the losses model, including the parameters you have, like GDP, inflation rate, and exchange rate.

Juan Carlos Mora, CEO

Julian, could you please repeat your second question?

Julian Ausique, Analyst

Yes, it's about the fees, specifically what the total commission or the total fees are, and which products are more exposed because, as you know, some of them are no longer charged.

Juan Carlos Mora, CEO

Okay. Thank you, Julian. Let me take that question and pass it to José Humberto. What we are seeing is a huge increase in the use of our digital channels, particularly our digital platforms, Bancolombia a la Mano and Nequi. The usage of our app and mobile app has significantly increased. That's positive. As I mentioned, we expect that the fee growth is going to be impacted. But at the same time, since we are acquiring customers at a very fast pace, that should help with fee income. In general, we are supporting our customers by providing grace periods on loans, but we are not waiving fees in general. We are waiving some fees on withdrawals and some specific transactions. However, the gross fees amount still remains charged to our customers. That could change in the future, but we will try to maintain, as much as possible, the fee charges we provide. Therefore, we still expect some growth on the year, although it will be lower than initially forecasted for this year. With this, I'll pass to José Humberto to answer your other two questions.

José Humberto Acosta, CFO

Thank you, Juan. Yes, regarding your question on the equity method, we have three impacts. The first impact is the joint venture that we have with Éxito, the credit card Tuya. Because of COVID-19, they have had to adjust their models and, as a result, dropped the level of income that we have to register. The second impact is what happened with Protección, which also reduced the level of income, so we had to adjust the numbers on the equity method as well. There is a third element; we have another joint venture with Fondo Inmobiliario, Viva Mall, which operates with malls and real estate that are also affected due to the current situation. So those are the three main effects why the numbers dropped. Regarding your third question, for loss models, as mentioned at the beginning, we take into account three elements for adjusting the provisions: fiscal deficit, GDP, and employment rate. To provide some details, originally, for Colombia, our expected GDP was around 3.2% - 3.3%, which we have now reduced to minus 0.8%. In Panama, the projected GDP was around 3-point something; I don't remember the exact figure, but around 3.2% - 3.3% as well. The new number for adjustment is minus 2.8%. Those are the most relevant data impacting the level of provisioning.

Operator, Operator

Our next question is from Carlos Rodríguez from Ultraserfinco. Please go ahead.

Carlos Rodríguez, Analyst

I have two questions. The first one is regarding asset quality and if you could provide more detail as of the close of April and how this COP 56 billion credit relief is affecting new past due loans and provisions in April compared to March. My second question is related to Banco Agricola and its solvency ratio and if the current level is a concern for you, along with any plan to increase the solvency ratio.

Juan Carlos Mora, CEO

Thank you, Carlos. I will take your first question, and I will pass your second one over to José Humberto. Regarding asset quality, we have been very active in providing support to our customers. So we are restructuring many credits, particularly for our retail customers. We proactively moved to give them additional time and grace periods. The asset quality is behaving better than we were expecting. We are receiving more payments than we anticipated. So in general, we see good behavior regarding customer payments and asset quality since we moved quickly to provide new terms to retail customers. Similarly, on the commercial side, we are working with our clients. As I mentioned, we are addressing 260,000 customers, providing them with new loan terms. To summarize, we are seeing asset quality that is better than expected. Let me pass your second question to José Humberto.

José Humberto Acosta, CFO

Thank you, Juan. Regarding your second question, Banco Agricola, the situation concerning solvency ratio, I must remind you that Banco Agricola is one of the best performers in our group. To give you some comfort about our solvency level, we currently have a coverage ratio of more than 280%, which acts as a buffer. It is the most profitable operation, and we are not seeing a huge deterioration in the loan portfolio, so we're maintaining very good performance. The reason why the capitalization is lower is primarily due to the dividend policy, which results in generating 90% to 95% of the dividends. We have accumulated those dividends in our Bancolombia Panama operation. Remember that we have Bancolombia Panama close to $1.9 billion, and that is the result of the capital that we are generating or the dividends that we are receiving from our subsidiaries. Therefore, we don't face any particular concerns regarding capital right now, and the drop is primarily due to the dividends.

Operator, Operator

Our next question is from Alonso Garcia from Credit Suisse. Please go ahead.

Alonso Garcia, Analyst

My question is about cost of risk and asset quality. Looking back to 2007, your cost of risk was 1.8%, which is quite close to the 1.9% reported last year. However, in 2008 and 2009, during the subprime crisis, your cost of risk significantly worsened. So, I want to know why you think this current crisis might turn out better or worse in terms of cost of risk and provisions compared to then, considering the economic situation, your portfolio mix, and current household and corporate leverage. My second question is about how your liquidity metrics performed this quarter. I noticed your loans-to-deposit ratio declined compared to Q4 2019, which is a good sign. Could you elaborate on metrics like the liquidity coverage ratio or the net stable funding rate?

Juan Carlos Mora, CEO

Thank you, Alonso, for your questions. I will take the first one and pass the second one to José Humberto. The cost of risk is a key concern, and many of you have been asking about it. You mentioned a 2007 cost of risk at 1.8%. We were moving towards a normalized cost of credit of around 1.7%. Our cost of risk in 2019 was 1.9%. What can we expect regarding the cost of risk? It is closely related to what will happen with economic activity, mainly in Colombia. As I mentioned in my presentation, Colombia allowed some sectors to start working again one week ago; that includes construction and manufacturing. Now we have information that a significant number of companies have resumed operations and are moving towards normal activity. This will be crucial for us. I believe Colombia has done a commendable job in controlling the situation, and now it is allowing the economy to move forward. We have been very proactive in working with our customers, and the key here is to anticipate the challenges that the customers are going to face. They will face difficulties. Therefore, we have moved proactively to work with them. So the cost of risk is going to increase, no doubt about it. How much it will be remains uncertain. It could be similar to the 2008-09 figures. But remember, in our case, the impact of the 2008-09 crisis was different; we were not hit as hard as many other economies. This time, the effect may be greater in Colombia because this crisis is different. However, we believe we have all the necessary tools to manage this situation effectively. There will be an increase in cost of risk; how much remains to be seen. We expect to have a clearer picture probably in the second quarter once we know how much economic activity will look at that point and how severely the economy will be affected. With this, let me pass your second question to José Humberto.

José Humberto Acosta, CFO

Thank you, Juan. Yes, regarding your question about liquidity, just to give you an idea, we have doubled the size of the liquidity we usually maintain on a regular basis here in Colombia and also in the other geographies. We have an internal measure called the liquidity horizon, which indicates our ability to support all liabilities and disburse all commitments. Typically, we manage that number between 45 to 60, 70 days. Currently, we have more than 100 days of liquidity horizon. This is the best way to understand that we have, at this moment, doubled the size of our liquidity. However, as we mentioned in the script, we have not contemplated that extra liquidity as a general purpose for loan portfolio because we understand that these liquidity inflows will likely return to their respective asset under management or fiduciary responsibilities. But today, we are comfortable in local currency and also in U.S. dollars. To further increase our liquidity in U.S. dollars, we approached the market and raised funds through international banks. This measure has been crucial for us during these challenging days in maintaining high liquidity levels.

Operator, Operator

Our next question is from Jason Mollin from Scotiabank. Please go ahead. Our next question is from Natalia Casas from Porvenir. Please go ahead.

Natalia Casas, Analyst

According to your presentation, around 40% of the increase in the provision expenses was caused by COVID-19, which means that the remaining 60% increase was caused by the normal operation of the bank. According to my numbers, this brings to an ROE around 11%, which is not very good to me and to the history of the bank. So I want to understand what's going on in Central America. What happened there? Which of those corporate clients created this impact on your P&L? And do you expect further provisions from this operation specifically, without considering COVID and the current crisis?

Juan Carlos Mora, CEO

Thank you, Natalia, for your question. Let me pass your question to José Humberto. José?

José Humberto Acosta, CFO

Okay, José Humberto is having some issues with the call. Let me address your question. Provisions, we have several issues around provision as you mentioned. We have the effect of COVID-19 and the parameter updates that totaled around COP 300 billion. Additionally, we have some provisions related to our retail portfolio. As you know, we increased our consumer loans portfolio last year, which was performing well until February. The expectations we had and the vintages we followed were performing according to our expectations. But then in March, we faced the impact of COVID-19. Some customers that we could not work with quickly enough to restructure their credits have been adversely affected and are now past due. Specifically, we have seen this impact in Panama. Moreover, there are other effects related to corporate clients. We mentioned Bioenergy, which is linked to Ecopetrol. Then in Panama, we have other corporate customers that have required provisioning. Those are the effects from the quarter. Regarding what we could expect from those clients moving forward, we will need to set additional provisions for them. The coverage ratio for many of them is close to 50%-60%. Thus, we have provided adequate provisioning, but we will still need to book additional provisions. The cost of risk will be impacted; we are taking that into account, considering COVID-19 impacts and also additional provisions for corporate clients.

Operator, Operator

Our next question is from Yuri Fernandes from JPMorgan. Please go ahead.

Yuri Fernandes, Analyst

I have two questions. The first one is regarding the capital, specifically the 44% of capital in U.S. dollars that José Humberto mentioned. I remember that this number was around 20% in the past, even in 2019. My question is whether you shifted your long-term exposure to dollars this quarter and if you have any kind of sensitivity. If the peso depreciates, how much would we see as a benefit to your capital? I believe around 30% of your assets are denominated in foreign currencies, correct? So now it seems like you have a long dollar position. My second question is regarding renegotiated loans and the 41% of your loans in Colombia. I'd like to know if you have this figure for Central America. Essentially, how are the renegotiated loans in Central America tracking? Do you have any estimates of potential NPL for those renegotiated loans? I know it's not entirely comparable, but I've heard that in other countries, the renegotiated book typically has a 5x higher delinquency than the average book. I'm curious for any insights you have on potential losses given that 41% of renegotiated loans is a substantial number.

Juan Carlos Mora, CEO

Thank you, Yuri. Let me pass your questions to José Humberto. Let's see if he reconnected to the call.

José Humberto Acosta, CFO

Yes, I'm here, Juan. Thank you very much. Yes, Yuri. There are two reasons why the number increased in U.S. dollars from 20%, as you mentioned, to 44%. The first reason is that when we announced dividends this year, we set them at 50% of net income. All of these dividends are being paid in pesos. This caused our peso figure to drop while the U.S. dollar equity level increased. The second reason is that the net income of our international operations was positive last year, which helped enhance the equity levels in our subsidiary, Bancolombia Panama. Consequently, we have seen a larger percentage of equity in dollars compared to the previous year. Regarding your sensitivity, we calculated, and for every COP 100 depreciation, it will affect the solvency ratio around 4 to 5 basis points. That's the math. Also, remember that around 37% of our assets are in U.S. dollars, which provides a kind of protection for us on the equity side. Regarding your second question, the status of renegotiations in Central America is not at the same volume as in Colombia. As Juan mentioned earlier, we have done an excellent job here with over 40% of the loan portfolio undergoing grace periods. In Agricola, we have lower figures, and also in Banco Banistmo in Panama, the numbers are less. Of course, we are addressing individuals first through mortgage and consumer loans; the second wave includes SMEs and corporates. However, the volume sizes there are lower than what we are seeing in Colombia. Regarding the deterioration of those loans with grace periods, it is essential to remember that under IFRS, you must adjust provisions. No matter if you have a loan with a grace period, if it belongs to a sector under significant stress, the bank must recognize provisioning levels; this applies to every quarter based on market conditions.

Operator, Operator

Our next question is from Sebastián Gallego from CrediCorp Capital. Please go ahead.

Sebastián Gallego, Analyst

I have three questions. The first one: can you provide some color about the treatment of risk-weighted assets coming from guaranteed loans, particularly the ones that have been announced in Colombia? The second question is regarding Central America. You have been focusing quite a lot on Colombia, but can you provide more details on your business strategy for the Central American operation under the current environment? And my third question: going back to loan growth, you mentioned that you expect a deceleration of loan growth, but how does this contrast with the fact that the government is promoting initiatives with guaranteed loans?

Juan Carlos Mora, CEO

Thank you, Sebastián. Let me take your third question, which is related to the first question, and I will pass your other question to José Humberto. Regarding loan growth, as I mentioned, we have observed significant demand for credit lines at the end of the quarter, driven by emerging circumstances. However, we are seeing a tendency among people to be more cautious about requesting loans. Thus, we will maintain a prudent approach when earning credit, which is essential. Therefore, we expect that loan growth will not be robust this year. We will certainly work extensively on client restructuring and provide them with some additional credit. However, the demand probably will not be very high due to the slowdown in economic activity. Concerning the loans the government is providing guarantees for, these loans represent a small portion of our portfolio overall. The total lines the government is offering at this moment stand at COP12 trillion, which was the total disbursed in March. Thus, the overall impact on our total loan figures in Colombia will not be substantial. We have disbursed around COP250 billion of those government-guaranteed lines so far. This number will likely increase, which is beneficial, and supports the economy; however, the significance of these figures for Bancolombia remains relatively low, so they won't dramatically alter our numbers. We complement that with loans we provide using funds from second-floor government banks, which offer us liquidity. Therefore, we anticipate that these loans will continue to grow but will not be considerable. With that, I will pass your other questions to José Humberto.

José Humberto Acosta, CFO

Thank you, Juan. Regarding your first question, the treatment of risk-weighted assets, I want to emphasize two aspects. First, in the case of mortgages, our loan-to-value is below 40%. Today, it measures approximately 39%. This means that the capital consumption for mortgages is low. Under Basel III, it will decrease further, dropping to approximately 25% from today's 50%. That gives you an idea of what to expect. The second factor is that 44% of our total loan portfolio is backed by guarantees. This implies that we have lower capital consumption for risk-weighted assets. Under Basel III, if corporates have a rating, or if SMEs have a guarantee, we can reduce our capital consumption from 100% to possibly 80% or 60%. Therefore, the idea is that for 2021, because of Basel III, we will release capital as the density will change. Regarding our strategy in Central America, I want to reiterate our original plans. Initially, we focused on consumer finance in those regions, replicating the successful experience we have in Colombia. However, due to COVID-19, our primary challenge right now is to support our clients and offer them essential facilities. Ultimately, we may maintain the same composition in each geography. For example, in the case of Banco Agricola, it's almost 45% consumer, 45% corporate. By the end of the year, it should remain in that area, and a similar situation applies to our other operations. In short, our focus remains on supporting clients, offering grace periods, and providing facilities for working capital. We don't anticipate a major shift in the composition of the loan portfolio.

Operator, Operator

I will now turn the call back over to Mr. Mora, Chief Executive Officer of Bancolombia, for final remarks.

Juan Carlos Mora, CEO

Thank you, everyone, for attending this call. I want to recap and highlight a couple of ideas. First, we took all the needed measures to protect our employees and our customers, and we are operating normally at this moment, with close to 90% of our employees working from home in Colombia and high figures also in the other countries. We are operating normally while protecting our employees and our customers across the four countries in which we operate. Second, we took all the necessary measures to secure sufficient liquidity to confront this situation, and we have been very successful in achieving that. Our deposits grew, and we secured funds from correspondent banks, so our liquidity position is comfortable. We possess ample liquid assets at this moment. Third, regarding solvency, we are implementing all necessary measures to maintain our solvency during this period. We feel confident that the quality and size of our capital are more than sufficient to support the situation we are facing. Finally, we are actively engaging with our customers to understand their needs and anticipate the challenges they are confronting, so we can work together to minimize the potential impact on past due loans and delinquency. We expect there will be some significant effects, but I believe that with the measures we are implementing, we can manage these challenges effectively. I sincerely hope that the situation in the world will improve soon. Please take care of yourselves and stay healthy. See you on our conference call for the second quarter of 2020. Thank you.

Operator, Operator

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