Earnings Call Transcript - CIB Q2 2022

Operator, Operator

Good morning, ladies and gentlemen, and welcome to Bancolombia's Second Quarter 2022 Earnings Conference Call. My name is Chad, and I will be your operator for today's call. Following their prepared remarks, there will be a question-and-answer session. 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, 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 Rosillo, Chief Corporate Officer; Mr. Jose Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; and Mr. Juan Pablo Espinosa, Chief Economist. I will now turn the conference over to Mr. Juan Carlos Mora, Chief Executive Officer. Mr. Juan Carlos, you may begin your call.

Juan Carlos Mora, CEO

Good morning, everyone. Welcome to our second quarter 2022 conference call. I am pleased to report a strong second quarter for Bancolombia. We delivered a profit of COP 1.8 trillion and an ROE of 23% in 2Q '22. The strategic emphasis on strengthening customer relationships is paying off. Our commercial and retail banking businesses present a solid evolution over the last quarter. Corporate and consumer companies have been key elements to significant economic growth in Colombia. The loan book grew above our expectations, expanding originations across all segments. This has resulted in important revenue growth. The improved macroeconomic environment in the different geographies where we operate has driven a higher volume of transactions, contributing to stronger client engagement and higher fee generation. The economy in Colombia during the year has experienced a very positive performance. High commodity prices have improved terms of trade, a continuous pickup of domestic demand, and a gradual recovery of employment rates are supporting a strong economic dynamic. For the second half of 2022, we see several challenges ahead. Colombia has experienced an accelerated contractionary monetary policy that started at the end of September of last year when the Central Bank gradually raised its reference rate from 1.75% to end in June of this year at a level of 7.5%, and it currently stands at 9%. As a result of this, economic growth should slow down in the upcoming quarters, with deceleration becoming more evident in the next year. Trade demand is expected to decelerate in the second half and continue this trend in 2023. This impact should occur in all lending products after exceptionally strong growth levels in the economy; however, our asset quality has remained healthy. We are aware that economic policy tightening trends might potentially cause credit deterioration going forward. Let me briefly touch on the highlights for the quarter. We increased loans and deposits at a very good pace. We have seen not only a high rate of new customer loan originations but also improving utilization from existing clients. Net interest income has benefited from dynamic commercial activity. The main drivers of profitability have been the continued expansion of margins alongside a good performance on loan volumes. On the credit losses side, better-than-expected economic trends have allowed us to release a portion of the reserves we built during the pandemic. We are pleased to announce that Nequi was authorized by the financial authority to be incorporated as a financial company. This constitutes a required step to obtain the operating license that will enable Nequi to function as a separate entity. Nequi will continue to be 100% part of Bancolombia. This new stage doesn't represent any change to Nequi's customers in terms of services, features, and products. At this point, I want to turn the presentation over to Juan Pablo Espinosa, who will further elaborate on the performance of the Colombian economy.

Juan Pablo Espinosa, Chief Economist

Thank you, Juan Carlos. Now please go to Slide #3 in the presentation. Let me start by saying that between April and June, economic activity in Colombia kept dynamic performance at the start of the year. Internal demand was again the main driver of growth due to a further expansion of private consumption and public spending. In addition, higher terms of trade and currency depreciation allowed exports to grow at a rapid pace. Our GDP growth estimate for the first half of 2022 is around 10.5% year-on-year, which are outstanding results by global standards. However, we reiterate our call that the Colombian economy is entering a phase of growth moderation. The leading indicators for the third quarter suggest that activity is already losing momentum. For instance, our nowcasting model signals a GDP expansion of 4.6% year-on-year in July, down from the 12.4% estimate for the second quarter. Accordingly, our latest growth estimate for the second semester of 2022 is 4.1%. This trend will consolidate during 2023, when we foresee that the economy will grow below potential at a rate of 2.3%. This will be the result of lower global growth, the removal of policy stimulus, the stabilization of household consumption, and uncertainties stemming from the measures that the new government might adopt. Another significant development is that inflation has accelerated during the past months so that it reached 10.2% year-on-year in July. This is the highest print since Colombia adopted the inflation targeting scheme at the start of this century. Even though food is still the component of the CPI with the largest price increases, core inflation has steadily intensified. This shows that the current inflationary phenomenon is not only due to supply shocks but also to growing demand pressures and operational indexation mechanisms. We believe that these forces will not dissipate soon. Hence, we anticipate that annual inflation will fluctuate between 9% and 10% for the remainder of the year. Furthermore, risks are biased to the upside in case the new administration decides to revise subsidies to gasoline prices. As a response to this challenging scenario, we expect that the Central Bank will adopt a more contractionary monetary policy stance. Although we rule out further 150 basis points hikes by session as seen recently, we think there is still room to grow in order to contain inflation expectations. Accordingly, we believe that the terminal level of intervention rate in this cycle could be between 9.5% and 10%. After this economic overview, let me turn the presentation back to Juan Carlos.

Juan Carlos Mora, CEO

Thank you, Juan Pablo. Moving to Slide #4. I want to continue this presentation by explaining the loans and deposits performance. The main driver for growth during the second quarter was commercial loans growing over 10%, where we highlight the operation in Colombia that presents a good dynamic on originations. Retail loans continue with a strong momentum with a growth of more than 23% year-on-year. Our strategy to expand preapproved lines of credit has paid off, delivering a higher rate of utilization by our customers while preserving a healthy risk-weighted ratio. On-lending grew 16%, showing a very positive evolution. In our liability structure, we continue to see strong activity in deposit-taking. We still see an important contribution from savings and checking accounts to support our funding needs, although growing at a slower pace than time deposits, which have reactivated significantly and recovered their pre-pandemic share within the deposit mix, growing 12%. Our strategy intends to promote medium to long-term deposits growth, seeking to have a stable source of liquidity. Moving to Slide 5, I'd like to continue this presentation by providing some details on our funding strategy with multilateral banks. We are proactively financing our liquidity needs for the medium and long term with multilateral development banks. Bancolombia has been granted lines of credit for over $900 million by two sustainability goals by the International Finance Corporation (IFC) and by the Inter-American Development Bank (IDB). As you may see on Slide 6, we remain committed to our plan to dispatch COP 500 trillion on ESG criteria by 2030. By the end of the second quarter, we have originated COP 80 trillion out of a goal of COP 100 trillion for this year. These loans have been directed mainly to climate finance, sustainable credit lines, and gender equality. ESG continues to be one of our focus areas. During this year, Bancolombia obtained first place in Merco's ranking for its efforts in environmental, social, and corporate governance criteria in making its business decisions. Bancolombia is recognized as a responsible company and the bank with the best corporate governance in the country. Moving to Slide 7, we see a notable improvement in the dynamics of the credit and debit card business. The volume of transactions has increased quarter-over-quarter, and the bank has gained market share in Colombia, not only in terms of value but also in the number of cards outstanding. On top of that, the good evolution of POS adoption by merchants and consumers represents an opportunity for expansion in fee generation. The devaluation of the peso during the second quarter had a negative impact on the net results considering some of the expenses that these products have in U.S. dollars. Digital sales continued to perform excellently, consolidating their share within the distribution channels. We continue improving efficiency in the way we interact with our customers. Digital shows an important weight in the total share. Transactions on our mobile app have grown 30% year-on-year, while our transactions in branches have increased at a lower rate, indicating a positive trend while we keep serving customers through a multichannel strategy. Banking agent transactions increased 23% yearly, thanks to faster adoption by our clients and geographical expansion that allows us to reach more customers. Moving to Slide 9, let me summarize our progress in Nequi. We are very happy with the trend we are seeing. We closed the quarter with 13 million users, COP 1.5 trillion in deposits, and positive levels of NPS as well as low churn rates. The loan portfolio continues to grow. More importantly, the number of customers using credit lines has multiplied in the last year, reaching 111,000. We see significant evolution in terms of customer experience; the activity ratio is higher, and we perceive good client engagement. Users are gradually consuming more services in the app and the marketplace, which increasingly contribute to fee generation. Now I want to turn the presentation over to Jose Humberto Acosta. Jose?

José Humberto Acosta, CFO

Thank you, Juan Carlos. Now turning to Slide 10, we provide a snapshot of provisions and asset quality. Asset quality continues to improve with delinquency ratios at lower levels and new originations reflecting a healthy balance sheet. The cost of risk for the quarter indicates a closer correlation with credit deterioration, standing at 1.1%, showing a gradual increase compared to previous quarters, although it remains below the normalized cost of risk. The main factors driving this ratio include: first, a natural deterioration of COP 981 billion primarily linked to the consumer portfolio due to rapid growth in this segment over the last 12 months. Second, provision releases related to customers performing better than expected. And third, an improved macroeconomic outlook. The net result is COP 613 billion. Excluding the coverage releases completed during the quarter, the estimated cost of risk will increase to 1.6%, or COP 981 billion in provision charges. Our allowance as a percentage of loans at the end of the quarter was 5.78%, which is the lowest level seen in two years. We maintained strong coverage of 150% on our 30-day past due loans and 212% on 90-day past due loans to prepare for the next quarter and any potential fluctuations. In the second half, we anticipate provisions related to credit deterioration rather than significant changes due to risk model adjustments or macroeconomic factors. We expect the cost of risk by year-end to be around 1.3%. On Slide 11, we provide the breakdown of provisions during the quarter. We have updated the GDP forecast in three of the four regions where we operate, leading to recalibrations in our provisioning models based on macroeconomic projections, particularly in Colombia, which saw a notable adjustment from 4.7% to 7.2% for 2022. For the latter half of the year, we expect deterioration in retail loans due to interest rate increases. On Slide 12, we present our capital adequacy on both a consolidated and standalone basis. The consolidated total solvency ratio is at 10.9%, while CET1 stands at 10.3% under full Basel III for the second quarter. This decline in solvency ratios is attributed to increased loan activity fueled by depreciation impacts. In the second half, we expect slower loan growth, but the bank will continue to generate significant earnings, helping to maintain a core equity Tier 1 ratio around 11%. Slide 13 illustrates the asset sensitivity to interest rates, indicating that the bank has benefited from the recent interest rate environment, with a clear correlation in revenue as the bank's margin expanded after the fourth quarter of 2021. The increase in deposits indexed to fixed rates over the past three years has helped counterbalance rising interest expenses during this rate hike cycle. In terms of the credit portfolio, there is a favorable target share of floating rates in commercial loans compared to retail loans, which allowed for an increase in interest income during the first half of 2022. On Slide 14, we discuss the bank's liquidity position. Annually, deposits have increased by 70%, supporting solid growth in our loan portfolio in recent quarters. Deposits have risen across all product lines, with time deposits seeing a more significant jump of over COP 7 trillion in the last quarter, while savings and checking accounts grew at a slower rate. We expect this trend to persist for the remainder of the year. The interest rate hike cycle in Colombia has continued through the last quarter, with the Central Bank raising its reference rate from 3% at the beginning of the year to 7.5% by the end of June, putting pressure on interest expenses for time deposits. The bank has been preparing its balance sheet to support additional loan needs by increasing trade lines from multilateral financial institutions and debt instruments, providing a more stable funding source. Slide 15 covers the evolution of margins and net interest income. Margin expansion remains a key driver for earnings this quarter, with net interest margin closing at 6.7%, a quarterly increase of 70 basis points following the Central Bank's rate hikes in Colombia. Net interest income has risen by 52% in the last 12 months due to three main factors: primarily, the repricing of assets, followed by an increase in the loan book, and a robust performance in investment activities. The high margin achieved this quarter is a result of the interest rate cycle benefiting the derivatives portfolio. We anticipate the reference rate to remain elevated in the second half of the year, although quarterly margins may not grow at the same rate due to an increase in interest expenses as deposit repricing begins to offset growth in interest income over the coming quarters. We are optimistic about the positive lending dynamics but expect a slowdown in credit demand in the third and fourth quarters corresponding with economic conditions, especially in Colombia. Based on the results as of June, we expect to close this year with a net interest margin of around 6.5%. On Slide 16, we give an overview of our operations in Colombia and Central America. Our outlook for the full year is positive across the various regions we serve, indicating a gradual normalization of the credit cycle, sustained growth in both the loan portfolio and deposit base, along with improvements in efficiency ratios and higher margins. As of June, the loan book in Panama, El Salvador, and Guatemala makes up 27% of our total portfolio. In reviewing each operation, we observe mixed trends. Some regions reported lower provision expenses due to coverage releases and specific situations affecting corporate loans. Originations have improved notably in the commercial portfolio. Conversely, Banco Agrícola faced provision charges due to downgrades in sovereign bond ratings, impacting its financial performance. Meanwhile, Banco Agromercantil is starting to see its cost of risk return to normal levels, despite strong asset quality metrics, with gradual growth in its credit portfolio, especially in retail. Slide 17 shows the evolution of operating expenses and efficiency. Operating expenses rose by 21.4% year-over-year, consistent with trends from the previous quarter, driven by three main factors: primarily, performance-related compensation expenses due to lower bonuses and adjustments last year; second, an increase in labor expenses to retain in-house talent previously outsourced; and third, a 14% rise in administrative expenses linked to the active performance of the renting division and technology-related costs tied to the bank's digital transformation. The bank has successfully maintained budget execution at 99%. We expect expenses to rise by about 12% by year-end. We see favorable trends in our efficiency ratio, closing at 44% for the quarter, as revenue growth has outpaced expense growth year-over-year. Slide 18 illustrates the growth of fees. In the first half of the year, net fees increased by 12% compared to the same period in 2021. Key contributors to this growth include strong performance from debit and credit card fees and retail activities, driven by higher transaction volumes through traditional businesses and e-commerce. Additionally, payments and collections have seen positive results as more customers utilize our extensive distribution network, and bancassurance has shown strong year-over-year recovery tied to vibrant loan origination activities. For the full year, we anticipate fee growth in the range of 10% to 12%. Slide 20 displays our profitability metrics. The net income for the quarter reached COP 1.8 trillion, yielding a return on equity of 23%. This marks significant growth compared to June of the previous year. Despite economic challenges, we are optimistic about our revenue expectations for 2022, driven by robust activity in lending, rapid margin expansion, healthy asset quality, strong fee performance, consistent oversight of operating expenses, and a solid capital structure to support our business operations. Now I want to turn the presentation back to Juan Carlos for closing remarks.

Juan Carlos Mora, CEO

Thank you, Jose Humberto. Let me now update you on what we expect for the bank going forward. We continue to be confident about the group results for the rest of 2022. Considering our macroeconomic estimations in terms of GDP, inflation, and employment rates, our guidance for 2022 includes loan growth between 12% to 14%, a net interest margin of around 6.5%, a cost of risk of 1.3%, and an ROE in the 20% area. For the next year, however, we foresee significantly lower economic growth. In this scenario, we are aware of the impacts for the credit business. At Bancolombia, we expect moderation in loan demand after a very dynamic activity during 2022. The higher base effect in the loan portfolio will also be reflected in growth rates hitting single digits for 2023. A turning point in monetary policy for next year will further impact NII by a contraction in lending margins. Credit risk will likely move higher following normalization in the credit cycle. Expenses could be increasing below 10% in line with inflation rates adjusting at lower levels. Altogether, we expect that earnings for 2023 could be lower when compared to this year. It is also important to highlight the current political situation. A new government in Colombia has taken office in recent days. There are many challenges ahead that need to be addressed by the new President. From a social perspective, the country demands greater efforts to face unresolved issues, such as economic inequalities and sustainable development. A national agreement will be fundamental for policy changes, and the coalition led by the government will be of great relevance to achieve the execution of these initiatives. The agenda that the executive and Congress will follow includes proposals in several fronts, such as energy transition pathways, fiscal policies, and reforms in health and pension systems, just to mention a few. We are in the early stages of foreseeing the evolution of the national development plan. In the upcoming months, we will have a more comprehensive outlook about the potential impact and the opportunities for the country. At Bancolombia, we are aware of the impact of our actions on the countries and communities where we operate. We have prioritized the promotion of sustainable economic development in our daily activities. For this purpose, we have contributed to expanding financial inclusion so that more people and companies can access opportunities generated by financial services. We continue to focus on achieving our goals in environmental, social, economic, and corporate governance terms as one of our top priorities. After elaborating on these topics, we want to open the line for questions.

Operator, Operator

And the first question will come from Jason Mollin from Scotiabank.

Jason Mollin, Analyst

Congratulations on the strong results, specifically ROE well above 20%. One question I had is on the outlook for Central America. I mean, you mentioned, I mean, we do have lots of uncertainty on what's going to take place in Colombia given the new political environment and/or administration. And if you maybe, I think it's uncertain, but it didn't sound like the tax proposal had anything different for the financial sector. If you can give us our thoughts there. But also the outlook for Central America. We did see positive contributions. But as you showed in the presentation, El Salvador and Guatemala had lower earnings negatively impacted by provisions. Perhaps you could give us a sense of the outlook there as well going into next year. So one taxes into Central America.

Juan Carlos Mora, CEO

Thank you, Jason. Let me address both points that you touched. Taxes in Colombia, you are right. The tax reform was presented by the government to Congress last Monday. We are still analyzing the effects. But in the case of the financial sector, the only provision that the reform includes is the income tax rate that we already have; it remains unchanged. So we don't foresee a material impact on financial institutions. We will need to wait to see how the discussions develop in Congress. But so far, what the government presented is not different from what we already have in terms of taxes. Regarding your second question, in Central America, I want to separate the answer into two parts. First, the performance of the bank and how we are developing our activities in Guatemala, El Salvador, and Panama. We are very happy with the development of the banks. Banco Agrícola is performing very well, the loan book is growing, and the asset quality of loans is under control. The bank is running well. We are aware that there are some uncertainties surrounding the fiscal stability of El Salvador. However, we are confident that the government is going to handle the fiscal situation with some measures that they are taking. Regarding our operations, they are growing at a healthy pace, and credit risk is under control. We're also adding new products and features, and the digital transformation of the bank is going well. So we are happy with our results there. As for Guatemala, as you remember, we took full control of the operation almost 3 years ago. The bank is improving its performance and doing well. The economy in Guatemala was probably the least affected by the pandemic. Now it is growing; demand is there, and the bank is performing well. We are also improving our operation there and taking all the necessary measures to enhance operations and grow. All in all, we are happy with our operations in Central America. I know that we have challenges around specific issues in each country related to political and economic matters, but we are navigating these challenges effectively with operations that are improving and performing well.

Operator, Operator

The next question is from Yuri Fernandes from JPMorgan.

Yuri Fernandes, Analyst

Congratulations on the strong quarter. I have two questions. First, what is the outlook for asset quality for 2023? You mentioned that the cost of risk is below the normal level. What is the normal level for the cost of risk? Is it the 1.8% you used to mention in the past? I'm trying to understand this because I'm concerned for 2023, as we are seeing GDP decelerating, higher inflation, and higher rates, while you're growing consumer loans rapidly. My concern is that we might see the cost of risk return or exceed historical levels, possibly the 1.8% referenced earlier. That's my first question regarding asset quality. My second question is about ROE. You are achieving very strong ROE levels, so congratulations on that. What do you consider to be a sustainable level? Do you believe this 20-plus percent is sustainable? Given that the cost of risk may increase, are we nearing a peak? How should we assess the cost of your ROE? Additionally, regarding the cost of capital, what are you looking at in Colombia, and how do you think these two variables will impact the bank?

Juan Carlos Mora, CEO

Thank you, Yuri. Regarding the cost of risk and outlook for 2023, we acknowledge that we are currently experiencing abnormal cost levels of risk. The long-term cost of risk for Bancolombia should be around 1.7% to 1.8%. We foresee that we will be at that level during 2023. You mentioned that we are growing rapidly in consumer loans, and that's correct. However, we are confident that we are originating loans in a way that will not significantly impact the cost of risk above those levels. The cost of risk for the quarter that we are reporting was 1.1%. If we normalize that cost with some extraordinary factors, it could be around 1.5% or 1.6%. So returning to 1.8% is what we expect. We anticipate deteriorations, but as I mentioned, we are originating with a wealth of new information. We are reaching customers we have not reached before. Regarding your second question on ROE, we expect for 2023 that our ROE will return to our long-term target of around 16% to 18%. I personally don't think we will reach 20%. It will likely settle more around 16% to 18%. You mentioned cost of capital; it has increased in Colombia and in other countries where we operate. What we see is that we will be performing 2 points above the cost of capital. We believe that with the margins we are obtaining due to the increase in interest rates, we will grow net interest income healthily. This will allow us in 2023 not only to cover the cost of risk but also to deliver what we consider a healthy ROE.

Operator, Operator

The next question is from Ernesto Gabilondo from Bank of America.

Ernesto Gabilondo, Analyst

Good morning, Juan Carlos and Jose Humberto, and good morning, everybody. Congratulations on your strong quarter. I have a couple of questions from my side. The first question is on regulation and the political outlook. We have seen that Petro would like development banks to have a more active role in Colombia. We have been hearing in the proposals that they want to have a higher democratization of financial services. So I wanted to hear your thoughts on this. Also, within this context, how is Nequi helping to increase the financial services of the population and reducing costs? My second question is on competition. We have seen that the regulator has approved new banks in Colombia. How do you see this type of competition? What do you think will be Bancolombia and Nequi's approach towards this type of competition?

Juan Carlos Mora, CEO

Thank you, Ernesto. Regarding regulation, I think we are in the very early stages of the government. We need to separate campaign promises or ideas from what the government will actually be doing. However, I will share my thoughts on what is happening. I believe developmental banks have a very important role, and they will complement what commercial banks like ours are doing. Let me elaborate a little on this. What is happening in Colombia around digital wallets and access to financial services is revolutionary. It is a genuine revolution in the sense that now all Colombians have access to financial services easily, often free, or at a very low cost. In the case of Nequi, we have 30 million users leveraging the platform to manage their finances effectively. Many independent and formal workers are using these platforms to receive payments. We are starting to provide credit based on how these individuals manage their money. Concerning your second question about competition, the competition in Colombia is intense—not just from new players but also among traditional banks. There are numerous offers on digital platforms for people to choose from. You mentioned that a new bank entered Colombia last year. Competition is healthy and will benefit consumers. Our operations are growing rapidly; particularly in credit cards, we are seeing growth both in the number of outstanding cards and their utilization. We are well-equipped to compete in this evolving landscape. In summary, I don't think it's sufficient to try to replace what commercial banks are doing well; we should focus on complementing those areas where commercial banks may struggle to find a viable business model.

Operator, Operator

And the next question will come from Carlos Gomez from HSBC.

Carlos Gomez, Analyst

Congratulations on a very good result. I'm going back to Jason's question and asking for a bit more specific clarity. On the tax rate, could you tell us, given the current exchange rates—and we know that it is very dependent on that—what do you expect the tax rate to be this year and next year for the consolidated company? Second, regarding El Salvador. You mentioned that you have taken some provision for the sovereign bonds. We know that there is a very difficult fiscal situation, and they cannot print dollars. Can you give us an idea of where you have marked the bonds in Salvador? How low can they go before you might need to think about recapitalizing your banking unit?

Juan Carlos Mora, CEO

Thank you, Carlos, for your questions. Let me address the first one and pass the second one regarding the bonds in El Salvador to Jose Humberto. What the reform is bringing is not a change for us. We already have the tax rate for financial institutions in Colombia, which is currently 38%. What the reform states is that this rate will remain temporary—it will not revert to the rate applicable to other industries. We will maintain the 38% rate, which is three points above the rate for other industries. No significant changes are expected from what we have today. If the reform is approved as presented, we may need to record a deferred tax that will have a one-time effect during 2022. Looking forward, we expect to maintain our effective tax rate at around 32% to 33%. Let me pass your second question to Jose Humberto.

José Humberto Acosta, CFO

Thank you, Juan Carlos. Regarding the sovereign bonds, in Banco Agrícola, we have around 8% of our total assets in local bonds. These bonds are between 1 to 2 years, not exceeding 8.5% of total assets. The situation with the bonds in international markets concerning El Salvador is with euro bonds that will mature next January. The price, as you mentioned, is currently high. However, it is not correlated with the bonds we hold, as they represent a local, very low level of secondary market exposure. Nevertheless, we are increasing our level of provisions related to these local sovereign bonds, which is about 5% to 6% of the total exposure. We are awaiting developments regarding the euro bonds for next year. The government has reiterated that it intends to honor these bonds, but we continue to maintain provisions for our local exposure.

Carlos Gomez, Analyst

Okay. And again, you stated you have 8% of total assets in this short-term local paper, then you mentioned 1.5%, 2%. Which of these figures is correct?

Juan Carlos Mora, CEO

8% of the total assets are in short-term securities, which means 1 to 2 years.

Operator, Operator

The next question is from Olavo Arthuzo from UBS.

Olavo Duarte, Analyst

I have two questions. The first one is related to the OpEx because I just wanted to hear from you what could we expect for costs during the second half, considering the solid increase in expenses that you reported during this quarter and also the ongoing pressure of inflation rates. If you could add what the expectations for OpEx for next year would be great. I know you just mentioned during the presentation, could you repeat that? My second question is a follow-up on competition. Do you have targets for the number of users for the coming years? You showed in your presentation that this quarter, Nequi recorded more than 13 million users. But how many of these are actually active users? I mean, how many clients are more active users?

Juan Carlos Mora, CEO

Thank you, Olavo, for your questions. I will tackle your second question about competition and Nequi. As we mentioned, we have now 13.3 million registered users in Nequi. Of those, 70% are considered active users, meaning they make at least one monetary transaction per month. This demonstrates the healthy activity we are witnessing around Nequi. We have been growing at a pace of between 300,000 to 400,000 new users a month, but we expect that pace to slow down. We anticipate that we will peak around 15 million users. With that level of engagement, as I mentioned, 70% active users, we foresee that the offerings on the platform will increase, introducing new products like insurance or investments at different levels—offerings that will be more sophisticated, allowing us to start charging fees. This will move Nequi toward profitability. Now let me pass your question regarding OpEx and expectations for 2023 to Jose.

José Humberto Acosta, CFO

Thank you, Juan. Olavo, as we mentioned, we expect expenses by the end of this year to reach a level of around 12%. The reason for the increase this quarter compared to the previous year is that the prior year was abnormally low—much of this variation stems from performance-related compensation expenses involving bonus provisions. Regarding 2023, we expect expenses to grow above inflation by roughly 100 to 200 basis points. Assuming inflation sits at around 7% by the end of 2023, this means we project expense growth for next year to be in the 9% area. That’s our goal for the next two years: 12% this year is positive when considering inflation in the range of 9% to 10%. Regarding your question about taxes for next year, we are expecting the tax rate at around the 34% area. We anticipate maintaining the same level of taxes. Remember that our operational base in Colombia, with a tax rate of 38%, influences this, while the rest is below 25%. This accounts for our overall tax rate for next year to be about 33% to 34%.

Operator, Operator

The next question will come from Tito Labarta from Goldman Sachs.

Tito Labarta, Analyst

My question is about your very good trends there that continue to increase. You mentioned that interest rates may go up still a little bit more from here. However, thinking about how rates can go next year as they start to come down, how sensitive will the current generation be to rates if and when they do come down? How quickly will they decrease? In the quarter, you also had a very high securities margin. Should that normalize at a 1% level? What does that imply for the total as well? Could you help us consider how margins will evolve from here for the second half of the year and into next year when rates come down?

Juan Carlos Mora, CEO

Thank you, Tito, for your question. Let me give you some general comments, and I'll pass it over to Jose Umberto for the details. As you know, interest rates are currently rising quickly, and along with the Central Bank's increases on reference rates, our margins are expanding. As we mentioned, we expect this year we'll continue progressing towards a margin of around 6.5%. Next year, we anticipate that interest rates will remain at a level that allows us to maintain a healthy margin. Once the monetary policy direction changes, we will see some contraction in margin levels. With those general comments, I'll pass your question to Jose Umberto for more insights.

José Humberto Acosta, CFO

Thank you, Juan. Tito, to answer your question, we expect the high margin levels we are reaching this quarter to stabilize for at least the first half of 2023. We expect to observe a net interest margin between 1% to 1.5% concerning our securities portfolio. When forecasting for the remainder of the year and 2023, we anticipate a standard NIM from the treasury or the securities portfolio, sitting within that range.

Tito Labarta, Analyst

Great. Just a quick follow-up for clarity. So regarding those securities, is it expected to normalize already in Q3 to that 1% to 1.5%? Does that mean to achieve the total NIM of 6.5% for the year, will the lending margin need to stay around a 7% level at least, if rates stay high, and that only starts to decline when rates come down?

Juan Carlos Mora, CEO

Yes, that is correct. For the second half of the year, the loan portfolio will continue to expand as the interest rate hike from the Central Bank occurred just two weeks ago. Therefore, the repricing of the assets will continue, at least through the third quarter.

Operator, Operator

Ladies and gentlemen, we have no further questions at this time. This concludes today's event. We thank you for participating, and you may now disconnect. Take care.