Earnings Call Transcript - CIB Q4 2023

Operator, Operator

Good morning, ladies and gentlemen, and welcome to Bancolombia’s Fourth Quarter 2023 Earnings Conference Call. My name is Robert, and I'll 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. Please note that this conference call will include forward-looking statements, including statements related to our future performance, capital position, credit-related expenses and credit losses. All forward-looking statements, whether made in this conference call and future filings and press releases or verbally address matters that involve risks and uncertainties. Consequently, 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 current 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. Julian Marra, Chief Corporate Officer; Mr. Jose Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Preto, Chief Risk Officer; Mrs. Catalina Tobin, Investor Relations and Capital Markets; Director and Mrs. Laura Clavijo, Chief Economist. I'd now like to turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer. Mr. Juan Carlos, you may begin.

Juan Carlos Mora, CEO

Good morning, and welcome to Bancolombia's fourth quarter results conference call. Please go to Slide 2. As anticipated, 2023 has proven to be a year of significant challenges for the Colombian financial system. The prevailing high interest rates and inflation have had a discouraging effect on credit growth, resulting in reduced net interest income generation. Furthermore, these factors have adversely impacted loan quality and led to an overall increase in operating costs. In light of the prevailing macroeconomic environment, Bancolombia's net income for the quarter reached COP1.4 trillion, indicating a 2% reduction compared to the preceding quarter. For the entire year, the net income amounted to COP6.1 trillion, representing an approximate 10% annual decline. The primary drivers contributing to this decline are: firstly, a 1.5% quarterly and 6% annual contraction in the loan book portfolio due to the reduced credit demand and diminished risk tolerance, resulting in slower growth of interest income. Secondly, a net provision charge that increased by 7% quarterly and 97% annually, consistent with the current credit cycle. Thirdly, higher operating expenses, which despite stringent cost control measures remained under pressure due to increased taxes and labor costs. In addition, it is crucial to highlight the substantial 20.5% annual, and 5.7% quarterly appreciation of the peso, leading to a decrease in the volume of loans and the interest income contribution of the dollar portfolio in the consolidated financial statements. As the loan portfolio experienced continued repricing at elevated interest rates, the cost of risk was recovered at 2.7% for the quarter and 2.8% for the entire year. This reflects the anticipated slowdown in the past due loan formation compared to the first half of the year, which was a result of the comprehensive measures taken. The efficiency ratio ended the quarter at 49% and 45% for the entire year, indicating that the growth in operating expenses surpassed the growth in income, as previously discussed. The aforementioned factors accelerate downward pressure on the return on equity, resulting in a 15.2% ROE for the quarter and 16.1% for the entire year. Total solvency ratio experienced a notable increase of 57 basis points during the quarter, ending in a year-end figure of 13.4%. This positive development was primarily attributed to a significant expansion of 105 basis points in core equity Tier 1. And Colombia's robust organic capital origination capabilities, coupled with a reduction in the risk-weighted assets were the driving forces behind this achievement. As a positive indicator and a testament of the bank's inherent capabilities, the generation of sound net interest margin has proven sufficient to absorb increased provisioning expenses and costs while maintaining mid-teen return on equity. The aggregator of Central American banks and offshore operations made a large year contribution to the overall group results, despite the prevailing economic and political environment in each country. We maintain our conviction that the recent downward inflationary trends in Colombia will enable the Central Bank to pursue a sustained interest rate reduction strategy. This, in turn, is expected to stimulate credit demand and improve asset quality in the long term. We anticipate opportunities for credit growth primarily in housing, renewable energy and agribusiness sector as the government advances public spending. For a more in-depth analysis of the macro outlook, I will pass over the presentation to our Chief Economist, Laura Clavijo. Laura?

Laura Clavijo, Chief Economist

Thank you, Juan Carlos. Now please go to Slide 3. The global economic backdrop of tight financial conditions, declining consumer demand and lower commodity prices, combined with local challenges due to high inflation, low investment and recent consumer sentiment pave the path to a significant economic slowdown in Colombia. Overall, 2023 proved to be a very challenging year for the Colombian economy and resulted in GDP growth of just 0.6% year-over-year, the lowest level in over 3 decades, excluding the covers and well below market expectations and our own forecast of 1.2%. Despite the lackluster results, the final quarter of 2023 noted a slight expansion of 0.3%, rebounding from a 0.6% contraction during the third quarter, mainly driven by 6% growth in agriculture and 5% expansion in public administration. Construction, manufacturing and retail sales continued to underperform. The biggest culprit of economic stagnation lies with public and private investment, which fell close to 25% during 2023. Total investment as a percentage of GDP has consistently declined since the pandemic from levels of 22% to just 17% last year. This scenario weighs heavily on our GDP outlook for 2024, which stands at 0.9% annual growth. On the inflation side, inflation has continued its downward trend, closing the year at 9.3% and falling further towards the 8.3% mark in early 2024, with food prices helping explain much of the expense, but core inflation has come down consistently towards 7.9%. The drought season, coming from a mine, has pressured energy prices to some extent but has proven to be much milder than initially expected. We maintained our 5.9% year-end inflation forecast considering some upward pressure from potential price hikes and the effect of stubborn prices and services such as housing. Given this macro scenario of falling inflation amidst the economic slowdown, the Central Bank began cutting interest rates in late 2023 and early 2024, accumulating a 50 basis point reduction thus far. Currently, the venture rate stands at 12.75%, and we expect it may come down towards the 9% level at year-end. We maintain our view that 2024 will be a year of gradual recovery, especially during the second half of the year when interest rate cuts will begin to pick up speed. 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. Before discussing the quarterly results, I would like to provide an overview of the advancements made in several initiatives that are aligned with our four value driving pillars. These pillars significantly contribute to our market leadership, operational soundness and the scalability of our business model. Please go to Slide 4. Under our first pillar, which embraces our client-centric approach, we would like to share the developments we have made as a part of our capabilities as a service model. This model is based on the open banking regulations approved in Colombia, making it the third country in Latin America to achieve this significant milestone following Brazil and Chile. The regulation establishes the foundation for financial and non-financial entities to disclose, coordinate and utilize data. It complements the Central Bank's immediate payments system framework introduced in October and anticipated to be fully operational by 2025. While there are some potential risks to our strong position in the transactional space, we anticipate numerous opportunities and avenues for growth. Our multichannel platform is well established. We have made significant progress in developing our ecosystem model, and we have already made a range of APIs available. The two primary sources of growth originate firstly, from the immediate payment system framework, which will streamline all types of payments processing through a low-value payments system managed by the Central Bank with real-time clearing, thereby reducing operational costs and improving user experience. Secondly, it will enable us to further integrate our financial capabilities into new marketplaces, promoting financial inclusion and enhancing the value proposition for our clients. Notably, we pioneered the launch of a new feature on our app for account aggregation, allowing our clients to manage all their financial data in a centralized location and interact seamlessly through a single app. Furthermore, we are delighted with the positive development and performance of our banking as a platform, as a service models as they have enabled us to innovate and explore novel business models. As of the end of 2023, we had processed close to 50 million transactions, resulting in deposits and fees of COP7.7 billion. Notably, these models have demonstrated remarkable growth with compelling compounded annual growth rates of 16% and 14%, respectively, over the past five quarters. This indicates the substantial potential for further expansion under our ecosystem approach. On Slide 5, under our second value driving pillar that focuses on our digital capabilities and multi-channel platform, I would like to elaborate on what we believe is the most compelling evidence of the robust competitive advantage we have built in this area. For over a decade, we have strategically invested in the development of a comprehensive resilient, multichannel and interoperable platform. We recognize the critical role of each channel in our business strategy. As illustrated in the accompanying graph, the platform has emerged as a powerful instrument for acquiring new customers, particularly those who are unbanked or underbanked and seek affordable money transfers and cash withdrawal solutions. Consequently, we have achieved exponential growth in transactional volume, increased fee revenue and significantly enhanced our ability to attract and retain deposits. In response, there has been a substantial raise in highly diversified, low-value and low-cost sticky deposits. These deposits have primarily come in through savings accounts and more recently through digital time deposits. Notably, digital time deposits have experienced a remarkable compounded annual growth rate of 125% over the past five years, aligning with our digital transformation. Certainly, this well-structured strategy serves as a reliable foundation for maintaining a competitive funding cost, thereby enhancing NIM performance and overall profitability. On Slide 6, under our fair value driving pillar of structural capabilities that provide distinct market advantage, I would like to highlight the credit risk model we have developed for corporates, midsized companies and most SMEs. We consider this model as a key differentiator in assessing credit risk which significantly contributes to the superior performance of our commercial loan portfolio compared to that of major Colombian banks. This is evident in the latest report released by the Colombian Financial Superintendence which measures performance based on the 90-day past due loan ratio. Our model employs an end-to-end credit cycle approach supported by a comprehensive suite of tools for assessment, writing, follow-up and collection, underpinned by extensive research and well-articulated sectorial risk assessments, our model provides an in-depth understanding of each industry and its cycles. This enables us to effectively diversify our portfolio, identify early warning signals anticipate potential challenges and support our customers with tailored solutions. The most notable and valuable feature is the advanced analytical model. It draws upon the clients' transactional and cash flow insights captured on our multichannel platform. This provides a unique risk perspective freeing us from the sole reliance on financial statements. By leveraging our unparalleled insights, we have meticulously crafted a robust risk assessment framework. This framework has been instrumental in evaluating over 600,000 SMEs and 15,000 corporate clients in Colombia. Currently, we manage approximately COP120 trillion in commercial loans under this model. Notably, our portfolio has consistently outperformed industry peers. Lastly, on Slide 7, regarding our fourth value driving pillar, which is the culture of efficiency and productivity, we would like to present the evolution of our digitalization strategy in addition to the benefits of attracting more clients and transactional flows discussed earlier, it has also provided substantial efficiency gains and flexibility, enabling us to allocate resources more effectively. Over the past decade, there has been a significant shift in the way monetary and non-monetary transactions are processed. In the early 2010, nearly 30% of these transactions were conducted through physical channels such as branches. However, by the end of 2023, this figure has plummeted to just 8.3%, with branches accounting for nearly 0.3% of all transactions. This strategic shift has involved the closure or transformation of branches into sales points with the aim of routing transactions through less expensive channels. Consequently, we have successfully reduced our overall fixed cost by replacing physical channels, primarily branches with digital channels and variable cost-based channels such as banking agents. This strategic move has enabled us to expand our reach and enhance user experience while maintaining operational efficiency. Furthermore, we are pleased to report continued advancements in the scalability of our business model, which will enable us to capture additional gains in efficiency and productivity. Now, I would like to invite Jose Humberto Acosta to provide further elaboration on our fourth quarter 2023 results. Jose Humberto?

Jose Humberto Acosta, CFO

Thank you, Juan Carlos. Please refer to Slide 8 for the results of our Central American operations. Even though the Central American loan book's share decreased on a consolidated basis, primarily due to peso appreciation, nearly all banks saw an increase in their net income contributions. However, the performance varied for each bank this quarter. One bank managed to maintain its net interest margin even with a loan contraction and lower provision charges, but it experienced a decline in return on equity due to rising costs. Similarly, Banco Agricola's interest income fell because of increased income expenses, though the loan portfolio performed better than anticipated, leading to a return on equity of 24.1% for the quarter. In contrast, Banco Agromercantil faced low loan book growth after a significant commercial loan prepayment and sluggish consumer loan growth impacting interest income. Provision charges rose due to various loan categories, which led to a decline in net income. It is important to note that despite an increase in loan defaults, all three banks maintain a comfortable level of coverage for loans overdue by 90 days, providing good protection for their balance sheets. We remain optimistic about El Salvador's microeconomics but cautious about Guatemala due to recent political and social concerns, as well as Panama, which is facing a tougher fiscal outlook due to lower tax collections. Please turn to Slide 9. Following the trend noted in the previous quarter, the consolidated loan book contracted by 1.5% quarter-over-quarter and nearly 6% year-over-year. This decrease underlines the ongoing impact of high interest rates which dampen credit demand and encourage prepayments along with shorter-duration loans, restricting loan book growth. Furthermore, a year-over-year peso appreciation of 20.5% reduced the impact of loans denominated in U.S. dollars. Without the foreign exchange effect, the loan portfolio would have seen a 1.5% year-over-year increase. Segment-wise, the consumer portfolio continues to show the largest decline, with a 2.6% drop quarter-over-quarter and an 8.4% drop year-over-year, as anticipated. Please go to Slide 10. Total deposits grew by 1.5% quarter-over-quarter, largely due to seasonal factors, as government-related entities in Colombia typically increase their deposits at year-end. Year-over-year, deposits fell 1.2%, reflecting weaker credit demand. However, there was a notable shift in the funding mix during the quarter—time deposits dropped by 3%, while savings, current accounts, and other deposits rose. Year-over-year, time deposits increased their share of the total funding mix to 35%, up from 30%, following strong growth in the first half of the year. On an annual basis, time deposits' growth rate fell to 13.3%, which will result in lower interest expenses moving forward. Consequently, the cost of funding slightly decreased to 5.8%, an early indication of potential reductions in interest expenses as rates decline, a trend we are continuing to adjust for in our liability structure to ensure margin protection. By year-end, 70% of fixed-rate time deposits maturing within a year had increased from 68% in September. Please advance to Slide 11. Total interest income and the valuation of financial instruments rose by 4% quarter-over-quarter, driven by a 67% increase in interest and valuations related to financial instruments, bolstered by rising valuations on a large securities portfolio amid falling rates, along with a 1% growth in interest income from loans and financial leases primarily due to loan portfolio repricing dynamics. Year-over-year, total interest income and valuations were up 38%, although this growth was slower than in the previous year and largely attributed to a 42% rise in interest from loans and leases. On the contrary, interest expenses remained stable quarter-over-quarter as deposit interest rates held steady, paired with a slight dip in interest rates on bonds and interbank borrowing. However, annual interest expenses surged by 97%, primarily due to a 17% rise in expenses related to deposits, reflecting an increased share of time deposits and elevated interest rates. Still, the annual growth rate is beginning to slow in line with the decline in deposits. Despite the contraction in loan books, net interest income increased by 8% quarter-over-quarter and 11% year-over-year thanks to rising interest income, while interest expenses stayed stable, with the Colombian operations driving this performance as 67% of the loan portfolio has a floating rate, contrasting with 34% of deposits. Consequently, the net interest margin in Colombia is projected to offset inflation and short-term reference interest rates, as indicated in the graph on the bottom right. Consistently, the net interest margin increased by 47 basis points quarter-over-quarter to 7.8%, primarily driven by a remarkable 354 basis points rise in the investment net interest margin due to the strong performance of the securities portfolio discussed earlier, in addition to an 11 basis points growth in the lending net interest margin. The net interest margin for the full year was 7%, marking a 20 basis points year-over-year increase, backed by a solid 8% annual increase in Colombia, reaffirming our competitive edge in funding and asset sensitivity. Please proceed to Slide 12. Net fee income rose by 7% quarter-over-quarter, mainly due to a higher volume of transactions associated with seasonal activities at year-end. Payment and collections services, banking services, and bancassurance fees saw the most significant percentage growth on both a quarterly and annual basis. However, on a yearly basis, growth was just under 5%, falling short of expectations as fee expenses outpaced income growth, compounded by higher third-party provider costs and processing fees. The efficiency ratio for the year was nearly 19%. Please move to Slide 13. The reduction in the volume of past due loan formations continued this quarter, consistent with the trend since the second quarter of 2023, though at a slower pace than anticipated. This, along with an increase in charge-offs quarter-over-quarter, demonstrates our commitment to maintaining a healthy balance sheet. Despite this relatively positive, albeit still modest, new past due loan trend, asset quality metrics showed a quarterly and annual deterioration, with the 90-day past due loan ratio rising to 3.3%, reflecting a 110 basis point year-over-year increase mainly due to the loan portfolio contraction over the last 12 months rather than a rise in bad loans pace. Furthermore, due to higher charge-offs this quarter and some loans with previously accounted provisions maturing during the period, the coverage ratio for 90-day past due loans decreased to 184%, though it still indicates strong coverage for the balance sheet. Additionally, net provision expenses for credit losses this quarter amounted to COP1.7 trillion, reflecting a 7% quarter-over-quarter rise and corresponding to a risk cost of 2.7%. Analyzing the provision charge components for this quarter reveals mixed results. First, the SME segment showed a COP22 billion decrease quarter-over-quarter, driven by releases from loan repayments. Second, in the consumer segment, provision expenses were nearly flat as past due loan formations were contained, which we will elaborate on further. Third, there was a COP168 billion charge in the large exposure segment due to additional provisions for a few loans in the construction and retail sectors. Lastly, for midsized companies and corporates, there was a release of COP93 billion attributed to various prepayments and settlements with clients. Year-over-year, the net provision charge rose by 97%, primarily due to deterioration in the consumer segment in Colombia, as we'll explain further, along with a smaller contribution from SMEs and certain corporate loans, in line with the ongoing economic and credit cycle. On the expected loss front, Stage 1 has remained stable year-over-year while Stage 2 has declined and Stage 3 has increased due to non-performing loans. However, the combined coverage for Stage 2 and Stage 3 loans rose by 17 basis points to nearly 40%. Moving forward, we are confident that the decline in peso past due loan formations will continue due to the measures implemented, albeit at a decreased rate, alleviating some pressure on debtor cash flows. Nevertheless, we remain cautious and anticipate higher delinquencies, especially with the weaker economic conditions. Moving to Slide 14, I will discuss credit quality in Colombia further. Consistent with prior quarters, personal loans, which represent 52% of consumer loans, accounted for the majority of the deterioration this period, with a 90-day past due ratio reaching 7.4% and a cost of risk of 16.7%, having 20% of loans in Stage 2 and 3. Conversely, credit cards, auto loans, and payroll loans showed better performance, reducing their cost of risk and their share of loans in Stage 2 and 3, indicating improved asset quality conditions moving forward. Moreover, regarding past loan formation, while the level of new past due loans in the quarter was low, the deterioration ratio rose due to high charge-offs. Nonetheless, past loan formation in the latter half of the year has grown below the average of the first half, and importantly, new business in Colombia is performing well, with an anticipated improvement in all metrics ahead. In fact, after declining for three consecutive quarters, the volume of new consumer loans slightly rose in the fourth quarter, benefiting from new origination standards and improved portfolio performance. Across the sector, we continue to hold the lowest 90-day past due loan ratio in the Colombian financial system as of October 2023, thanks to our superior risk management framework and capabilities that enable better assessment of credit behavior and mitigation of deterioration. Please turn to Slide 15. The cost-to-income ratio for the period stood at 48.6% as operating expenses increased by 6.6% quarter-over-quarter, driven by IT investments and general expenses. In contrast, personnel-related expenses remained unchanged quarter-over-quarter. Annually, operating expenses increased by nearly 19%, primarily due to significant annual wage hikes, new taxes from the 2022 tax reform, and IT-related payments focused mainly on cloud and business transformation initiatives. However, we are seeing a trend of operating expense growth slowing in the second half of the year due to effective cost control strategies. Furthermore, if we exclude tax impacts, actual evaluations related to employee benefits, and foreign exchange variances, the annual growth in operating expenses would have been 14%, in line with inflation. The efficiency ratio for the full year was 45.3%, slightly higher than in 2022 due to the overall elevated cost and tax environment. Please move to Slide 16. Net income for the quarter was COP1.4 trillion, representing a 3% decrease quarter-over-quarter, and COP6.1 trillion for the full year, marking a 10% decline year-over-year, influenced by lower income generation linked to the loan book contraction and forex appreciation, alongside rising credit and operating expenses. Consequently, return on equity decreased to 15.2% for the quarter and 16.1% for the full year, which, when adjusted for goodwill, results in a return on tangible equity of 21%, reflecting the profitability amid increasing goodwill-related costs. Finally, on Slide 17, I will outline the evolution of capital generation. Shareholders' equity rose by 1.5% quarter-over-quarter but contracted by 2.6% year-over-year, indicating the bank's ability to generate capital while maintaining a solid balance sheet structure. The Basel III total capital adequacy ratio reached 13.4%, an increase of 57 basis points from the previous quarter and 6 basis points year-over-year, driven by strong Tier 1 capital growth with a 105 basis points annual increase, reaching 11.4% by year-end. This positive expansion results from net income generation, a reduction in risk-weighted assets, and peso appreciation throughout the year. I will now turn the presentation back over to Juan Carlos for final remarks. Juan?

Juan Carlos Mora, CEO

Thank you, Jose Humberto. Please proceed to Slide 18 for some remarks concerning our sustainability strategy. As of the conclusion of the year 2023, we have successfully exceeded the COP140 trillion milestone in the total disbursements under our business with purpose strategy, which was initiated in 2020. Notably, approximately COP38 trillion worth of new loans were granted during the preceding year. These loans have been instrumental in providing financial support for various initiatives, including small-scale agribusiness ventures, cream building projects and gender-related endeavors, among others. With regard to environmental matters, we are pleased to inform you that we successfully completed our first set of disclosure information in accordance with SASB Standards for the commercial mortgage investment banking and asset management units last year. Additionally, for the third consecutive year, we have released our TCFD report as mandated by local regulations, thereby enhancing the understanding of our commitments and accomplishments. In terms of economics, the Dow Jones Global Sustainability Index recently evaluated us as well, and we received a score of 78 out of 100 points. This accomplishment is a testament to the strength, influence, and openness of our ESG framework. Finally, on the social front, 12 of the financial education programs we designed to provide financial well-being to our customers are certified by the superintendency under its standards, making us the leader in this important area in Colombia. Lastly, on Slide 19, I will share our guidance for the end of 2024 based on the current data and our macroeconomic forecast. By the end of 2024, we anticipate a loan growth of approximately 3% in peso-denominated loans and 5.1% in dollar-denominated loans. We project a net interest margin of around 6.8% based on the expected lower average reference rate, set by the Central Bank. The cost of risk is anticipated to decline to 2.6%, driven by lower interest rates and inflation. The efficiency ratio is expected to be approximately 49%, influenced by reduced interest income and ongoing investments in business transformation. Consequently, we forecast a return on equity in the range of 14% and a common equity Tier 1 ratio of around 11%. In closing, I would like to inform you that we recently announced the proposed dividend, which will be discussed at the Annual Shareholders Meeting on March 15. The dividend paid out will be 62%, equivalent to COP3.4 trillion and will be paid in four corporate installments of COP3,535 per share throughout the year. With that, we conclude our remarks on the fourth quarter 2023 results. We are now ready to address any questions you may have.

Operator, Operator

Thank you. Our first question comes from Tito Labarta with Goldman Sachs.

Tito Labarta, Analyst

My question on the efficiency guidance that you gave. I understand some pressure on margins from lower rates. But what kind of expectations do you have there for expense growth and fee income growth? And how long do you think you'll continue to invest sort of from a digital perspective? When could you see some benefits from that? And where should we think of the efficiency ratio sort of longer term as things normalize a bit?

Juan Carlos Mora, CEO

Thank you, Tito. Our guidance regarding efficiency for 2024 is 49%. And let me explain why. We ended 2023 with an efficiency figure around 45%. What we think will happen during 2024 is that we will have some decrease in margins. Volume, even though we expect some loan growth, and we expect to be that loan growth of around 8%. But the combination of not big growth on volume and a slight pressure on margins will affect the income. And on the expenses side, we expect the total expenses to grow at around 9%. That is, if you do the math, that implies that the result is that 49% efficiency ratio that I'm mentioning. So, it's from the income side and also we are moving to control expenses and to grow expenses closer to inflation. Regarding fees, we expect fees to grow at around 10% based on the services that we are providing back insurance, cards and the different services that we are providing. And that's for 2024. Regarding the years of 2025 and 2026, we think that efficiency should move or be around that figure of 50%, moving probably between 48% and 52%.

Tito Labarta, Analyst

Juan Carlos, that's helpful. So, do you think by 2025 and '26, expense growth will be closer to inflation? Or when do you expect the expense growth to be closer to inflation?

Juan Carlos Mora, CEO

Yes. We will move closer to inflation. But I want to address one part of your first question. I mean when are we going to stop investing in digital? And I think it with the dynamics of the sector competition, new technologies is very, very difficult in the banking sector to stop investing in technology. We will be moving towards or will be on cloud, probably full in 2026. And that will help a lot on expenses, and we can be more agile. But expenses on technology will be important in the coming years, Tito.

Tito Labarta, Analyst

Juan Carlos. Sorry, if I can, just one follow-up, I guess, from that perspective. How do you sort of see the competition from fintechs, other competitors becoming more digital? Do you see that as a significant threat? Do you think you're well positioned for that? And I mean, do you see long-term benefits from that, from better efficiency?

Juan Carlos Mora, CEO

Yes, competition is increasing with new players entering the market, which is beneficial as it motivates us to improve. We are continuing to grow in customer numbers and transaction volume in the Colombian market. We compete with established banks and newcomers who have received authorization to operate as banks or commercial financial entities in Colombia. These new banks will start offering savings accounts and will certainly become significant competitors. However, we believe we are well-positioned due to our client base, scale, and the strength of our integrated channel network and nationwide coverage. It's important to note that cash remains crucial in Colombia and many other Latin American countries, making cash management alongside digital capabilities essential. We have both our physical channels and digital presence. While we acknowledge the competition and recognize their strengths, we believe the overall market will benefit, and we will thrive in this environment.

Operator, Operator

Our next question is from Yuri Fernandes with JPMorgan.

Yuri Fernandes, Analyst

I have two quick ones. One is regarding your tax rate. I know it really depends on ex-Colombia operations and also your security in the country; usually, you have some tax-exempt instruments, but 2023 has been a bit on the low end, I would say. So just a guidance on effective tax rate, how much you believe the tax rate should evolve in 2024, '25. If you see the 25% effective tax rate level is sustainable or if this should be higher? That's the first one. A second one regarding Tuya, we saw an impairment this quarter. I think this was a headwind for your results, about COP100 billion, so just checking if you can explain a little bit what happened if we should see this on a yearly basis or no, it's more nonrecurring. That would be my second one. And a third one, if I may, regarding shares, if you have an estimate on the potential outflow impact from the removal from the index? That would be my final one.

Juan Carlos Mora, CEO

Thank you, Yuri. I will address your first two questions, and then I will ask Jose Humberto to assist with your third question regarding the FTSE situation. First, the tax rate. I want to clarify that we have a statutory tax rate in Colombia and in other countries. When we consider both the statutory and effective tax rates across different regions, including Colombia, we believe that the 25% effective tax rate from 2023 is sustainable and we expect it to be around 26% for the next 2 to 3 years. So in response to your inquiry about our guidance, our effective tax rate for the upcoming years should be around 26% given the current regulations. This is feasible because we have a corporate structure that facilitates tax efficiency in the next three years. For your second question regarding Tuya, Tuya is a financial institution that relies mainly on time deposits for funding. Throughout 2023, there were times when liquidity in the Colombian market was challenging, which meant that smaller institutions, including Tuya, had to seek funding at higher interest rates. Additionally, income was impacted because the maximum allowable charge rate for institutions in Colombia decreased significantly due to changes in the formula for calculating it. This rate that was once close to 45% fell to around 35% or even 33%, which compressed profit margins. The combination of higher funding costs and reduced income resulted in narrower margins amid increased risks. This trend affected other institutions focused primarily on credit cards as well, not just Tuya. We are implementing measures to improve this situation by shifting towards different products and adopting a lower risk strategy. We expect conditions to improve, even though there may still be some pressures in 2024; 2025 will look different, and Tuya will return to profitability. Now, I will hand your third question over to Jose Humberto.

Jose Humberto Acosta, CFO

Yes, the consequences of being removed from the index. We have three different moments. Yesterday, Monday and Tuesday, as you probably checked, the price of the ordinary shares dropped at around 5%. We believe that the next coming two weeks, there will be stabilization of the price of the share. But then on March 15, the date in which the new calculation will take effect, we are going to see another drop in the price of the ordinary shares. The second element that I have to highlight is the level of floating of the ordinary shares is very low, at around 10% of the ordinary shares. So the numbers will change in this floating. The third element is that the preferred shares, those are the shares with a high level of liquidity, and we don't foresee any particular concern regarding those shares. Summarizing the sell-off based on some calculations that we received from some analysts, there will be a potential sell-off of around $770 million in the next coming days.

Yuri Fernandes, Analyst

That's super clear, Jose, very clear. And regarding Tuya, I totally get it. My point is that if not for Tuya, your results would have been even better this quarter. So I get it's a tough situation in Colombia, but trying to see the glass half full, maybe the underlying results of the bank per se were better. But thank you for the clarification, everyone. Thank you, and good luck in 2024.

Jose Humberto Acosta, CFO

Thank you very much, Yuri, for your comments.

Operator, Operator

Our next question comes from Andres Soto with Santander Bank, Mexico.

Andres Soto, Analyst

Thank you for the presentation and the opportunity to ask questions. My first question is related to your outlook for NIM, but not in 2024, but rather once interest rates normalize in Colombia. What is the level for normalized interest rates? That will be the first question. And based on that, what is your expectation for NIM? My question basically is in the past, Bancolombia used to operate at a NIM of 5.5%, something like that. So you are still 130 basis points above that level in 2024. I'm curious about the ROE guidance of 14%. And what will be the outlook once interest rates fully normalize?

Juan Carlos Mora, CEO

Thank you, Andres. NIM, as you mentioned, improved because of what happened with the interest rates in the markets where we operate, but also because we changed the mix in our balance sheet between commercial and consumer loans. So there are two effects. When the normalization of the interest rates, we will have pressure on the NIM, of course. What we expect, and you mentioned 2024, what we expect for 2024 is that the NIM to be around 6.8% and that normalization process should keep happening. We expect that margin to be around 6.3%, 6.5% moving in the coming years. And that's explained mainly for the mix that we have in our balance sheet. We have more SMEs and medium enterprises, and we could charge higher interest rates to those entities, but also we have a larger mix of consumer loans, so that’s why we expect that our NIM is not going to drop to what was our NIM around 6.8, 5.9% that we had in the past. And with that, I could affirm that our ROE in the midterm should be around 14%. I don't know if Humberto wants to complement me with something in this answer.

Jose Humberto Acosta, CFO

On the funding side, Andres, we have a structural change, which is you see that CASA represents 50% of the funding and the correlation with the interest rate it's lower than the correlation that we have with the time deposits. So for the next cycle, as Juan mentioned, that the interest rates will come down, we have, if I may say, natural protection because of the CASA funding. And remember that most of our time deposits are short term, more than 60%. So that is why our guidance or our forecasting for NIM remains at the level that Juan mentioned, which is around 6.5%.

Andres Soto, Analyst

Carlos and Humberto, and based on this, can you please provide a sensitivity in terms of points versus the policy rate?

Jose Humberto Acosta, CFO

Yes. We have been managing our sensitivity because our floating is around on the asset side, the loan side is 60% to 70% of the portfolio. But on the other side, the floating on the liability side is at around 40% plus savings accounts at which accounts also act as floating as well. So the number is 30 basis points for every 100 in change of the interest rate of the Central Bank.

Andres Soto, Analyst

My second question is related to cost of risk. I was checking my notes from the previous call. In the previous call, you mentioned your expectation for 2024 was for the cost of risk to be in between 2.3% to 2.5%, so around 2.4%, let's say. And now you are saying 2.6. So I would like to understand what happened, what changed over the past 3 months for you to have a more cautious view on cost of risk?

Juan Carlos Mora, CEO

Yes, Andres. We changed or increased a little bit of our view on cost of risk because we had the results of the GDP growth of 2023 that was disappointing. It was 0.6%. The market was expecting something around 1.2%. There were even some analysts expecting 1.5%, the most pessimistic analysts were expecting 1% and the figure ended being 0.6%. So that made us more cautious regarding 2024, but even though we feel that in terms of how we are handling originating consumer loans, how are we doing or working on the commercial side of the portfolio? Still, we think that we will have an improvement in the cost of risk, but we are more cautious and will be updating this figure as the year moves on. I think we will have a clear view around mid-year of how things are evolving. I think the first quarter will be key to determine or to see the evolution of the Colombian economy. We expect the government to start implementing some counter-cyclical measures regarding housing infrastructure. So that we think will have a positive effect, even though our view for the year, as you know, is that the GDP growth for 2024 should be around 0.9%, which is low for Colombia, but better than 2023. But that's why Andres, we are cautious regarding the cost of risk. Jose you want to complement something here.

Jose Humberto Acosta, CFO

Thank you. On this carload element is the change in our view of inflation and interest rates at Three months ago, six months ago, we believe that the interest rate and inflation would drop beginning in February and March. But you see that we are on our line in terms of inflation and interest rates. So that's the other reason why we believe the first half of the year, we have also an increase in the cost of risk.

Andres Soto, Analyst

That's very big. You guys mentioned at the beginning of the presentation that one of the areas where you need to do monitoring is the SME segment, right? So far, most of the deterioration in your loan book has come from the consumer. Now you are looking into the SME. Looking at your corporate book, is there any sector in the economy that you think may be suffering with this environment in 2024 with high interest rates and still high inflation?

Juan Carlos Mora, CEO

Andres, we are monitoring very closely, as you mentioned, but we haven't seen so far a deterioration outside our forecast. Sectors in particular, construction, particularly housing construction is something that we are monitoring and working with our clients in restructuring some of their loans. So particularly construction, housing construction and another sector that even though our position is very, very low or is low, it's the health sector. The health sector concerns us, and we think that there could be some deterioration on the health sector or the participants in the health sector and risks.

Operator, Operator

Our next question comes from Carlos Gomez with HSBC.

Carlos Gomez, Analyst

It is about your foreign subsidiaries. We noticed a very high number reported in Sapa, which we understand relates to reversals of provisions. Can you share what your expected normal profitability will be in each of your operating markets? Additionally, regarding expenses, you previously mentioned that growth without taxes would be 40%, but inflation is also a factor. This growth is still notably above inflation. Could you provide further clarification on that?

Juan Carlos Mora, CEO

Carlos, we had some difficulties with the line. I just want to be sure that we understood your question; your first question is regarding the profitability of our operations in Central America. Is that correct?

Carlos Gomez, Analyst

That's correct. And apologies for the...

Juan Carlos Mora, CEO

And the second one is regarding expenses and the explanation we gave around the operating expenses growing 9%, and that compares with that 40% tax rate was...

Jose Humberto Acosta, CFO

Carlos, yes, regarding El Salvador, historically, it is one of our operations with the lowest cost of risk. In this case, what happened is we change and update the models with new data, and that's the reason why the level of provision is coming down. And this is one of our most profitable operations with more than 20% return on equity and a very stable cost of risk. If you topped the last three years, we have been in the area of 1%. Regarding operating expenses, what happened this year, the 9% that we are forecasting, remember that at the beginning of the year, we have been with high inflation that came from 2023. So most of the prices are adjusted because of CPI and the other element is the minimum wage in Colombia was 12%. So both elements imply that we began with a high level of expense, about 9% is a number doable for the year. And we believe that at the end of the year, as Juan mentioned at the beginning, we are going to reach an efficiency level below 50%. That will be at around 49%. But the main reason why is 9% is because of the CPI of 2023. And basically, this is the main reason.

Carlos Gomez, Analyst

On the foreign subsidiaries, I wondered what your normal ROE would be for each of them. And in the case of Salvador, I mean it was over 20% because of this reversal. Do you expect more than 20%?

Jose Humberto Acosta, CFO

Carlos, we are expecting to maintain that level, assuming this cost of risk that I mentioned before, assuming that we will be able to sustain the NIM of around 6.5% to 7%. And the operation there, the efficiency also is below 50%. So we are forecasting for Salvador that level at around 20% area, at least for the next two years. They have a very positive structure of funding as well as Bancolombia based on CASA deposits. In the case of Banesa, we are expecting to maintain a level of around 10% in the next coming, at least for 2024 and increased to 12% next year. In the case of Guatemala, Bancagrmercantil in Guatemala, you see that the numbers this year are very low because of high level of provisions, but we expect to sustain a return on equity in between 10% to 12%, in 2024 and 2025.

Operator, Operator

Thank you, Carlos.

Operator, Operator

Our next question comes from Alonso Aramburu with BTG.

Alonso Aramburú, Analyst

Yes. I wanted to ask about Nequi. Can you give us an update on when the spin-off is going to happen? And just some color about the path to profitability and the monetization drivers of Nequi. How do you see the platform evolving over the next few quarters?

Juan Carlos Mora, CEO

We ended 2023 with more than 18 million customers on our platform, of which around 13% are active users. So definitely, we have the network effect happening in Nequi, and transactions are going on there. We expect that the growth will continue and probably we will reach around 21 million customers, which if we put in perspective, Colombia has around 50 million inhabitants. So it's a very significant number. And that allows us to, with that network effect and platform effect also move forward on our profitability strategy that will be based on offering those customers different services, including insurance, some investment opportunities, but mainly credit loans. We have to be careful, and we need to be aware of where we are on the economic cycle. We think that this is not a year in which we can push very hard on offering crediting in a platform like Nequi. This is to say that we have the elements, we have the clients, we have the products. We will continue evolving on the products but our path to profitability will be dependent on where we are in the economic cycle and how much we can push credit. With this, with our current situation and our expectations on how the economy is going to behave in the coming two years, we expect that we could be profitable in 2026. That's regarding how we see the evolution of all our path to profitability. Regarding the spin-off, we are ready to spin-off Nequi, and that is happening in the coming weeks. The superintendency should evaluate our readiness. They will give us some recommendations. And after we implement them, we will spin-off Nequi. That will come and depend on their recommendations that we will receive from the supervisor. We will be ready to spin-off Nequi in the coming months, maybe two months. But it depends on, as I said, what they see and the results of the assessment in which we are ready. As a matter of fact, we'll start that assessment, the superintendency will start that assessment next week.

Operator, Operator

Great. Thank you very much. Next question comes from Julian Ausique with Davivienda Corredores.

Julian Ausique, Analyst

My first question is regarding the ordinary shares. I know you already mentioned something about that, but I didn't get it. But my question is related to the plans that the company has related liquidity of the share due to the recently elimination of the share from the FTSE Index. And my second question is something related to something that you already mentioned about the spin-off and Nequi. Are you expecting some inflows in terms of cash to Bancolombia? And if there is some inflows, what are, what will be the uses of that cash? And just to catch up in terms of cost of risk, I heard that you are expecting some deterioration of the housing and construction sectors, like I don't know if you have a down scenario in terms of cost of risk, if you saw really weak deterioration in those sectors.

Juan Carlos Mora, CEO

Thank you, Julian. I have some comments on your first question. I will address your second question regarding the spin-off of Nequi, as well as provide a comment on the cost of risk. Starting with your second question, the spin-off will not generate any cash for Bancolombia. We are transferring assets and liabilities to a different entity, which in this case is Nequi, which will be fully owned by Bancolombia. On a consolidated basis, Nequi will be included in the numbers we present for Grupo and Colombia. Regarding the cost of risk, 2024 presents some complexities in interpretation. With the expectation set at 2.6%, we are taking a more conservative approach. There may be some upside potential if we effectively manage our risk appetite. In concrete terms, our expectation is 2.6%, and while it is conservative, it could improve if the year progresses better than anticipated. Moving to your first question, it's important to note that the situation is influenced more by the size and liquidity of the Colombian market rather than being specific to Bancolombia. Although Bancolombia is the most liquid share in Colombia, the overall market is quite small. That’s why when index companies like FTSE assess liquidity, they find the market lacks depth; nonetheless, Bancolombia stands out as the most liquid within that limited market. Jose, I wanted to highlight that, and could you please add to my comments?

Jose Humberto Acosta, CFO

Yes. Thank you, Juan Carlos. Julian, on practical terms, the change of FTSE means a sell-off of $70 million in the next coming weeks on ordinary shares. Probably the consequence will be the price will come down. And again, as Juan mentioned, we have the preferred shares with a high level of liquidity, and we don't foresee any particular concern regarding those shares. The second element is there is a very important element here right now for all players that we are listed in the local stock market, which is to have a market maker. This is relevant in our case, we're hiring a market maker two months ago. And the consequences were very clear in both in ordinary and preferred. In terms of the ordinary, the bid-offer spread reduces more than 50%, and in preferred more than 45%. And this is very important because at the end of the day, it’s a way of democratization of the shares on individuals. So we are using platforms such as Trip, for example, trying to offer them the opportunity to have the possibility to buy our shares, no matter if it is ordinary or preferred.

Operator, Operator

Thank you, Julian. We have reached the end of the question-and-answer session. I would now like to turn the call back over to Mr. Juan Carlos Mora for closing comments.

Juan Carlos Mora, CEO

Thank you all for your interest in this conference call. As we approach the first quarter of 2024, it's important to understand how the year will progress. When we report our first quarter results, we will have more insight into our situation. I would also like to remind everyone that our General Shareholders Meeting will take place on March 15, where we will present the proposed dividend from our Board of Directors. We appreciate your interest and look forward to having you join us for our first quarter conference call in 2024. Thank you very much, and have a great day.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.