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Bancolombia SA (NYSE:CIB)

Q1 2014 Earnings Conference Call

May 6, 2014 9:00 AM ET

Executives

Jaime Alberto Velásquez Botero – Chief of Strategy and Financial Officer

José Humberto Acosta Martin – Chief Financial Officer

Juan Carlos Mora Uribe – Chief Corporate Services Officer

Rodrigo Prieto Uribe – Chief Risk Officer

Alejandro Mejia – Investor Relations Manager

Analysts

Thiago Bovolenta Batista – Banco Itaú BBA International

Tito LaBarta – Deutsche Bank Securities, Inc.

Saul Martinez – JPMorgan Securities LLC

José Restrepo – Serfinco SA Comisionista de Bolsa

Frederic de Mariz – UBS Ltd.

Carolina Yoshimoto – Goldman Sachs

Boris Molina – Santander Investment Securities Inc.

Marielle V. Jan de Beur – Wells Fargo Securities LLC

Laura Mesa – Creditor Capital

Carlos Gomez-Lopez – HSBC Securities USA, Inc.

Nicolas Noreña – Serfinco SA Comisionista de Bolsa

Operator

Good day, ladies and gentlemen and welcome to Bancolombia’s First Quarter 2014 Earnings Conference Call. My name is Sophia and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions)

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 addressed 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 the competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy and various other factors that we describe in our reports filed with SEC.

With us today is Mr. Jaime Velasquez, Chief of Strategy and Financial Officer; Mr. José Humberto Acosta, Chief Financial Officer; Mr. Juan Carlos Mora, Chief Operating Officer; Rodrigo Prieto, Chief Risk Officer and Alejandro Mejia, Investor Relations Manager.

I would now like to turn the presentation over to Mr. Acosta, Chief Financial Officer of Bancolombia. Please proceed, sir.

José Humberto Acosta Martin

Thank you. Good morning and welcome to our first quarter 2014 results conference call.

It is a pleasure to be with you to follow so closely our operations and results. Let us start with a brief description of the main topics that impacted our business in this period. You can follow the slide presentation available in our investor website. First of all, I want to open this conference call elaborated on the strategy of the bank. After completing the capital raised last March, we’re preparing a portion of the earnings generated during 2015.

We finished the quarter with that tier 1 ratio of 8.9% in line with our expectations. As we have experienced in previous occasions, we’re taking consideration to composition of our assets, which are mainly loans. The treatment of provisions and allowances under Colombian regulations, the prospect of organic growth for the next few years, we came to our target tier 1 ratio of 8% to 9%. It is precisely in the high aim of that range where we stand today.

During the quarter, we saw sustained loan demand from corporations typically. corporate remain as our main growth segment as they mainly demanded resources for expansion of these facilities, short-term working capital loans and trade financing. On the other hand, in the reserve demanded loans that have lower pace unite with the seasonal factors, it is what we mention it the impact of 2.2% depreciation of the Colombian pesos versus U.S. dollar during the quarter, which caused that the loans to numbers in U.S. dollar represent more pesos when compared, housing attractive loan in pesos.

We keep our growth target of 10% to15% in 2014. in this quarter, we saw a significant reduction in our funding cost, which has been our goal over the last 12 months with greater liquidity in the Colombian economy and moderate growth in the long portfolio we have focused our efforts in reducing the volume of the most expensive fund resources. in this front, Bancolombia presents one of its main competitive advantage, we already took out it, sticking a leadership by deposits at the lowest rate in Colombia.

These factors contribute to a slight expansion of the lending needs. the other component, the investment seem also presented a good performance. In February and March, Colombian government securities performed well as there were international capital inflows that cause their appreciation. nevertheless our exposure for these trends is small even the small size of the security portfolio only 5% of the assets and the low duration only 15 months.

Another front where we see a positive trend is the key generation, a number of transactions through our channels continuously increasing, in particular through branches, agents and ATMs. Additionally, the bank assurance business remains dynamic and has awarded handful of the distribution capacity of Bancolombia, not only for our products, but also of other companies’ products that generate peaceful assets.

Regarding Banistmo, this year and 2015 will be the years of transition in that operation. this quarter was the first quarter to fully reflect the numbers of Banistmo and also to fully reflect the goodwill amortization under Colombian GAAP. We continue with our efforts to efficiency and improve profitability. expansion of the branch network will be not – will not be as aggressive, but in previous years and we plan to open only seven branches this year. Now we are putting our effort in low cost channels such as internet and mobile banking.

last but not least, I would like to present the results for the first quarter 2014. during the quarter, Bancolombia generated COP 508 billion, which represent and analyze return on equity of 15.3%. the performance of the bank was slightly better than our expectations, and lead us to reaffirm our goals for this year. we will elaborate more on each product afterwards.

Having said this, we would like to continue with the brief description of how the economy environment. let me turn the presentation to Juan Carlos Mora who will share our views on this matter. after that, we will elaborate more on the banks’ results. Juan?

Juan Carlos Mora Uribe

Thank you, José Humberto. Now I will ask you to go slide number three in the presentation. As the market under Central Bank, we’re expecting the Colombian economy grew 4.3% during 2013. the sectors that lead the growth where the construction as our industry and services, which contributed to a decline in unemployment during the year, the latest report – report of unemployment figure was 9.7%, this is good news for us, because of the hyper relation between lower unemployment and credit quality.

It is also remarkable in fact that 28% of 2013 GDP was explained by gross capital formation, which indicates that Colombian companies keeping best in growth deposits, the Central Bank expecting a 4.3% expansion during 2014, we share that view and estimate that the second half of the year should be more dynamic as the level of extent was spending of the Colombian government declare as well as households demand more goods.

On the other hand, inflation for the 12 months ended April 2014 was 2.72%. inflation has been increasing towards 3%, which is the point target set by the Colombian central bank. This strength inflation plus the stronger economic activity let the Colombian central bank to increase the repo rate in the last session in April to 3.5%.

This hike took the market and ourselves by surprise, as we were expecting increases to start in the second half of the year. Nevertheless we see this action as positive, as it signals a reduction in liquidity and that we might be able to originate loans at a higher yield and eventually, expand the names.

Regarding the FX market, the Colombian peso experienced a depreciation of 2.2% during the first quarter of 2014 and 7.5% over the last year. nevertheless in March, we saw trend of appreciation of the Colombian peso versus the dollar and a reversal of the depreciation trend experience in January and February. this appreciation trend occurred in part, because of capital inflows resulting from a higher weight of Colombian sovereign debt versus the JPMorgan Global Bond Index.

In the market front, we see that indebtedness level of households, I mean is stable. we have not seen any abnormal, the four months of the intelligence on the credit quality of closer financial system remains strong. That trend reduces the risk of higher loans deterioration and provision churns.

We believe the Colombian economy is in a good shape and these will permit us to continue growing at a nice pace, while keeping risk under control.

After this quick review of the economy environment let me turn the presentation to José Humberto who will discuss the bank results in detail. José?

José Humberto Acosta Martin

Thank you, Juan Carlos. On the Slide four we see the evolution of assets and its composition. During the quarter the proportion of loans as a percentage of the total assets increased to 67%, as we deployed more results to our core business which is lending and the securities proportion increased 12%. This increase in the securities portfolios was due to the proceeds then we received at the end of March, project operated stock issuance. Nevertheless securities represent less than they were one year ago and the ratio remain slow at 15.8 months, compared with the duration of 23 months as year-ago.

During the quarter, we used the cash that we had at the beginning of the year to reduce the most expensive funding source, and so wrote our loan portfolio. That’s why we experienced a reduction in the company’s order, as well in deposits. The goal of this mode was to reduce the funding cost and expand the net interest margin, as we will see in the coming slides.

In this quarter, the credit amount evolution confirmed a moderation in the pace of goal inline with our expectations. We are more cautious in the origination process especially in the consumer segment. The loan growth in Colombian pesos reached 1.8% during the quarter, driven by corporate, which demand a short-term working capital loans, strength finance facilities and loans for CapEx purposes. Consumer loans in Colombia pesos also grew during the quarter, but at slower pace, inline with seasonal factors.

On the other hand, USD denominated loans grew above 9% during the quarter, driven by mortgages and corporate loans in Panama. A 2.2% depreciation of the Colombian pesos versus the U.S. dollar during the quarter, closed that the growth of U.S. dollar loans was higher when measured in Colombian pesos. When we analyze the yield overall growth of the loan portfolio, a 26.7% growth is partially explained by the incorporation of Banistmo asset, which contributed to be 16.5% and today accounts for about 30% of the total loan portfolio. Finally, we reaffirmed our growth target of this year that will be between 10% to 15%.

Slide number 5 shows the evolution of provision charges, which was COP 308 billion during the quarter. It was 1.36% of average gross loans when analyzed, which is a very low ratio. In the shaded row of the table at the bottom, represent the amount of loans that came became past due loans during the quarter. The COP 577 billion reflects the seasonal effect that the course every due in Colombia and Panama, when individuals tend to delaying their payments in the first month of this year.

Then most important thing regarding loan quantity is that has been such as originated over the last six months presented a very good performance as a result of a strict credit underwriting standards and they should not the present abnormal deteriorations in 2014. We feel comfortable with evolution of the loan portfolio and forecast to have provision charges of around 1.5% of gross loans during 2014.

Now into slide number six, represent the snapshot of the credit quality at the end of the quarter. The past due loans to total loans ended the quarter at 3.2%, slightly above the 2.9% of December last year. As we just explained in the previous slide this increase is originated by seasonal factors in Colombia and Panama. The coverage ratio ended at 142%, declining against 156% at December 2013, again due to seasonal effects.

In general terms, we see the portfolio with a healthy quality, well covered by allowances and with past due loans under control. And we have our greater company for our loan portfolio outside Colombia, the 90-day threshold for measuring past due loans gains more relevance. That’s why in the next slide, we will analyze the 90-day past due loans loss.

We forecast to have 30-days coverage ratio, of around 150% with the median term. We believe that this is more than enough to absorb potential credit losses that the bank will eventually have. Similarly, past due loans shows a percent between 2.5% and 3% of gross loans at the end of this year.

Moving to Slide number 7, we compare the evolution of 30-day past due loans which is the Colombian standard and the 90-day past due loans, which is the better indicator of credit quality, as we have upgraded portion of our assets in countries that we use that standard. 90-day past due loans have been very stable over the last year, as a result of our growth trade origination processes. At the same time, the 90-day coverage ratio is 296% which we believe is more than enough to absorb credit losses.

Moving on to the Slide number 8, we see the evolution of the net interest income and funding cost and composition. Net interest income for the first quarter was COP 1.36 trillion, 18% above the previous quarter. This growth is explained basically for three main factors, first, higher volumes of loans during the quarter; second, the contribution of the three months of Banistmo results and third, the expansion of the mean cost mainly by the reduction of a funding cost.

The key element of the net interest income increase in the quarter, is that it grew based in the lending business unless only marginal in the investment securities performance. Securities net interest income during the first quarter was 25% of the net interest income generated one year ago. The securities portfolio reached a positive net interest income contribution of COP 58 billion during the quarter, capturing the benefits of the appreciation of the Colombian government securities during the quarter. The duration of the securities portfolio ended at 15.8 months and the day to maturity ended at 4%.

The reduction of the funding cost which was 19 basis points during the quarter and 91 basis points during last year is a result of a strategy that aims to request the most expensive funding sources. With multi-credit in the market and moderate phase of growth of loans, we were able to actually to reduce the startup deposit and therefore the cost of funding for the bank. The proceeds and the stock issuance and cash that we had at the beginning of this year contributed to this effort. Our goal is to reduce the funding cost in an effort to expand the next interest margin and of course the net interest income.

Slide number 9 shows the evolution of net interest margin. The NIM from loans ended up 6.1% in first quarter slightly above the 6% at the end of the year. This increase is mainly explained by the reduction of funding cost that we explained in the previous slide. We forecast the lending mean to be between 6% to 6.2% in 2014. The securities mean was 1.8%, up from 0.1% in the previous quarter as it captured the benefits of depreciation of the Colombian Government securities during the quarter and a lower funding cost.

As we mentioned at the beginning of this presentation, the Colombian Central Bank increased the repo rate 25 bips points to 3.5% in the last meeting in April. This measure took us by surprise and I said we can see a positive contribution in our name due to a small increase in repo rate DTS as our balance sheet is asset sensitive.

Fees are represented in Slide number 10. This line grew 3% during the quarter to COP 542 billion as a result of more volumes for transactions and products that generate non-interest income. in particular, we experienced monetization of credit and debit cards during this quarter, product of our effort to promote the use of plastic to pay in the stores and increase the number credit cards in new segments.

we continue growing our insurance distribution fees, which generate about COP 70 billion during the quarter, also we have to take into consideration these companies more. And finally, we saw a good performance of our asset management business product for the upgraded asset under management volumes. For the year, we remain with our estimate of growing fees around 8%.

The Slide 11 represents the evolution of expenses, which declined 3% during the quarter. This quarterly growth is totally explained by the 19% increase in labor expenses, which tend to impact the first quarter shortly. The three months of additional labor expenses also contributed to this growth. As in 4Q13, we had only two months. on the other hand, administrative expenses declined 90%, because some of the expenses that will usually reflect in the fifth month of the year have not occurred yet and therefore we will post in the next coming quarters.

Our guidance for 2014 is an increase of expenses at around 17% taking into consideration that we are having 12 months of adding small expenses. The cost-to-income ratio was 54% during the quarter. This metric is calculated dividing the operating expenses and goodwill amortization into operating income before provision charges. If we exclude goodwill amortization from the calculation across the income it will be 82%.

On the bottom right hand side, we see how OpEx to total assets came down during the quarter. Bancolombia has been enabled to grow asset faster than expenses. our efforts right now are focused on improving the efficiency of the bank. Revenue should grow faster than expenses and the main drivers of cost growth headcount and branch network expansion are very stable. Our goal is to perform a greater number of transactions through electronic and low cost channels such as mobile banking and edge. As the guidance, we expect cost-to-income ratio at the end of this year at a level at around 53% to 54%.

Moving to Slide 11, we see the evolution of the net loans to deposit ratio, which increased during the quarter as a result of the deduction of stock deposit and the growth of loans. During the quarter, we used liquidity and cash than we had at the beginning of this year to reduce the most expensive deposits and bank borrowings. This explains the sharp decline in the cost of deposits. During 2014, these loans to deposit ratio should be between 90% to 100%. This quarter, we ended at the high end of the range due to the expectation to review deposits and take advantage of the proceeds on the stock issuance at March.

Regarding capital, on the bottom right hand side, we present the capital adequacy ratio at the end of the quarter. The Tier 1 ended at 8.9%, higher than the 5.8% at the end of 2013. The increased was the result of the stock issuance and the appropriation of 2013 earnings. The 8.9% is well above the minimum required to operate in Colombia which is 4.5% and put us in a comfortable situation of equilibrium between strength of the balance sheet and return for shareholders.

Finally on Slide #13, it shows the return on equity and return on assets of the bank. Return on assets remained stable during the quarter at 1.6% and return on equity declined to 15.3% of a lower leverage of the balance sheet due to the capital increase at March. Considering the capital raise and our forecast for 2014, we are expecting a return on equity of 14% for the whole year.

After presenting this slide with the first quarter numbers to you, I would just like to highlight where we stand today and our plans for the near future. First, our balance sheet reflects evolution of growth of the loan portfolio. Second, the increase of the net interest margin reflects our focus on profitability based on reduction of funding cost. Third, the performance of deposit loans are now at level of provisions and the first quarter reflects a slight deterioration because of seasonality, but in the long term remains at a healthy level. Four, the securities portfolio in comparison with one year ago has a lower sensitivity or shorter duration. And fifth, the cost structure remains under control.

Having said these, we’re happy to take any questions that you might have. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Thiago Batista from Itaú Bba.

Thiago Bovolenta Batista – Banco Itaú BBA International

Yes. Hi guys, good morning, and thanks for the opportunity. I had actually two questions. The first one is regarding the mortgage markets. Could you give to us your view about the mortgage markets in Colombia and also in Central America regarding the expansion, the margin evolution, and asset quality? So this is the first question. And the second one is regarding your coverage ratio, when compared to coverage ratio of the Colombian Banks and yours, Bancolombia with other Latin American banks, it’s easy to note that you have really high level of coverage ratio, especially if you look to the 90 days. And I think to reduce the level of the coverage in the future and may be it will help this will happen with the implementation of the IFRS during next year. This is possible to see this contraction in the coverage ratio? Thanks.

José Humberto Acosta Martin

Thank you, Thiago. Let me start with your second question. Regarding the coverage, we are not expecting to change or modify the coverage of the ratio, basically because we are mostly a corporate bank. So we believe that this is a metric vision that we want to have and this is a kind of offer that we want to maintain. So we are not expecting to change that and if you check our numbers in the last five years, we always try to maintain the number of (indiscernible).

Regarding the first question let me divide it into two different markets. First, in Colombia obviously the mortgage market in Colombia is still very strong. It’s growing at a pace about 20%. We are expecting to maintain interim on the same line of the market, we’re not expecting to gain market share. We don’t see an increase of interest rate of mortgage products. We believe that this year interest rates of mortgage will remain at the levels that we’re seeing right now which is between 11% to 12%. In terms of margins of this product for us, our margin is at around 5%. So, one of the main change of our balance sheet is because of the incorporation of Banistmo’s. Previously, the incorporation of Banistmo’s mortgage to our total loans were 8%, to-date is 11.5% and we’re not expecting to increase this proportion of mortgage into our loan portfolio.

Regarding Panama, El Salvador is different in terms of the proposition of mortgage to total loans. In that case, it’s around 28% to 30% and we don’t expect again to improve the proportion of those mortgage loans in today Panama operations.

Thiago Bovolenta Batista – Banco Itaú BBA International

Thanks.

Operator

And our next question comes from Tito LaBarta from Deutsche Bank.

Tito LaBarta – Deutsche Bank Securities, Inc.

Hi, good morning everyone. Thank you for the call. Couple of questions, I guess the first question in terms of, can you give any color in terms of how much Banistmo’s contributed in the quarter, now that you have on your financials for full quarter. Just want to get a sense, what the contribution from that was like. And then second question in terms of ROE, you said you expect 14% for the whole year, but just wondering maybe thinking longer term and once Banistmo is fully integrated, how would you see – you are profitably evolving in 2015 and beyond. Do you think it can increase somewhere as you may get some synergies or some benefits from the integration of Banistmo once it’s completed? Thank you.

Juan Carlos Mora Uribe

Thank you, Tito. Regarding Panamanian operation, Banistmo operation, we’re expecting that the total view of doing the 2014, that give us net profits of around COP90 million to COP100 million. Always this first part of the year, you will see an increasing of expenses because of the implementation of the different systems, we are implementing right now. But the final number for the whole year will be again COP90 million to COP100 million, but that’s already in the next coming years, which in 2015 and 2016, we expect to increase the level of profits from this operation of Panama.

Regarding the return on equity because of that, because operations with Banistmo, we are expecting to grow that to the level of 16% in the next coming two years to three years. Based on several configurations, competition landscape here in Colombia and Panama in this laid to remain stable on the asset side. So, the profitability will be focused on reducing funding cost and operating 20% in the level of expenses.

Tito LaBarta – Deutsche Bank Securities, Inc.

Thank you. That’s helpful. And then, just one clarification that you said, you expect expenses to grow 17% this year, that’s 17% because of the integration of Banistmo, does that mean expenses should increase of that significantly compared to the first quarter?

Unidentified Company Representative

Yes, right. It’s used only accounts to Bancolombia operations that include in Banistmo this year. Our expenses revolves around 8% to 9%, that’s again, because we have to include 12 months of Banistmo operations against only two months of the Banistmo operations at last year, the number will grow to 17%.

Tito LaBarta – Deutsche Bank Securities, Inc.

Thank you. That’s very helpful.

Unidentified Company Representative

Thank you, Tito.

Operator

And our next question comes from Saul Martine with JPMorgan.

Saul Martinez – JPMorgan Securities LLC

Hi, guys. Good morning. I wanted to exploit that you’d aim a little bit more and you gave good color hoping that. So but – what in your prepared remarks, but can you give us a sense of what you think a more normalized run rate for securities income or securities NIM is, you obviously mentioned that there was a positive valuation benefits, because of the strength of the bond market JPMorgan, NBN deck increasing the weighting that should continue to help. how do you see, it was a little bit higher than I’d anticipate it and a little bit higher than what you’ve had in the recent quarters, but how should we be thinking about your securities NIM going forward or your securities interest income going forward, just give us to get a little bit more color, on your lending NIM, similar question, on your lending NIM get guidance from 6 to 6.2, does that factor in the higher rate, what is the factoring in terms of interest rate assumptions and as we head into the 2015, you anticipate that that lending and interest margin should increase further than that?

Unidentified Company Representative

Thank you, Saul. we have an equation of the name of the security portfolio in March, obviously because of the appreciation of that’s the extra lender pay, our NIM on the March was around 5% to 6%. remember that we were talking that in this year, our expectations of NIM, because of the security portfolio will be between 1% to 2%, future number of the first quarter today is currently 1.8%. so we are expecting these NIMs for the next coming quarters, I mean in between 1% to 2%. we have been doing several measures regarding the security portfolio reducing the volumes actually we will receive a lot of money, because of the insurance of equity, but we use that money in order to reduce that funding cost of our portfolio right now, almost a similar size that we’ve had year ago.

And we reduced a volatility of that portfolio and we reduced the durations, right now, our duration is on the short part of the call. so we don’t expect for the next coming quarters, leadership profit immediately closes smaller, because again, it’s a portfolio, if I mean say under control. so the guidance would be again 1% to 2% in terms of meaningful for security portfolio.

Second in terms of the loan portfolio in terms of the loan portfolio that this April we will do it for the next coming quarters is try to reduce the funding costs. we are not expecting an increase of interest rates, maybe we are expecting that a new value of a DPF, because of the interest rate that the government and the central bank is expecting to reach the level of 4% of NFCU. so we will gain some NIM, because of combination of better DPF and lower funding costs.

Saul Martinez – JPMorgan Securities LLC

So does that mean your securities, I mean the lending income was right to smack that I think in the middle, there is nothing it will rate smack that in the middle of 1Q of your guidance range, but your guidance for the full year doesn’t really change in spite of the expectation for a higher DPF, lower funding cost, is this guidance conservative, should we be thinking that will gradually move up during course of the year and maybe, it would be higher than that in 2015?

Unidentified Company Representative

It is conserve Saul, that the pace of appreciation of the interest rates in the asset side declined and the…

Saul Martinez – JPMorgan Securities LLC

Yes.

Unidentified Company Representative

And the pace of reduction of course, takes time, so that’s a reason of why we are not expecting that great increase of the NIM at least this year, obviously, maybe at the first half of next year you will see on the slight increase of NIM, because of that, because you have a new structure of liabilities with a lower cost.

Saul Martinez – JPMorgan Securities LLC

Okay. I wanted to ask that the liabilities re-priced, can you give us sort of opinion and once again, give us the sensitivity of your NIM to 100 basis points?

Unidentified Company Representative

It is around 70 bips for every 100 bips unchanged the central bank interest rates.

Saul Martinez – JPMorgan Securities LLC

Okay. what is your expectation for year-end rate?

Unidentified Company Representative

4%.

Saul Martinez – JPMorgan Securities LLC

4%.

Unidentified Company Representative

Yes

Saul Martinez – JPMorgan Securities LLC

Great, thank you.

Unidentified Company Representative

Thank you, Saul.

Operator

Our next question comes from José Restrepo from Serfinco.

José Restrepo – Serfinco SA Comisionista de Bolsa

Good morning and congratulation on the results. I have one question regarding the financing of all these infrastructure projects that are going on in Colombia right now. So I have seen in the local media, the banking lending is not that appropriate for this project, can you give us a color about the position upon Colombia about this infrastructure financing?

Unidentified Company Representative

Yes, we are in the middle of conversation of course, we did project with the regulators. We believe that if something happens, we will be materialized in our loan portfolio, the four key infrastructure projects, just at the end of 2015. and that will be fully reflected on 2016, during this phase, we are just having conversations, try to design to better restructure from lending business. It’s conversations that we are having right now. so we don’t expect active answer in this conference call, because again, you have seen different they process on this module.

José Restrepo – Serfinco SA Comisionista de Bolsa

And Juan, give us like the impact that you are expecting your loan portfolio of this infrastructure projects?

Unidentified Company Representative

With the potential participation of our 4Q that will be around not had around 10% of dollar sort of the lawsuits during the next good year, in terms of 2014 project that will be increase for views, because that will take time to be resource these kind of products and obviously you’ll see an increase of loan portfolio that you will see into the down market so you would see that 4Q projects in the balance sheet of the banks in a different way, Ben, as the long term loans and finally as a best capital markets.

José Restrepo – Serfinco SA Comisionista de Bolsa

Okay, thank you.

Operator

And then next question comes from Fred De Mariz, UBS.

Frederic de Mariz – UBS Ltd.

Hi, good morning everyone. Thank you for the opportunity, a couple of question on my side, the first one on the PDL on the asset quality, you mentioned seasonality as a key driver of increase of the best two loan over 30 days, which was 2.2% you had a little bump in this number in the quarter does it mean that in the second quarter this number will already normalized, so it will get back to a level maybe close to 2.9%. Is it that fast, or is it something that takes longer to normalize and the second question is on the efficiency side you mentioned that there was some expense that was not booked in the first quarter, which maybe surprised there, and it’s going to be booked in the second quarter. I was just trying to get a bit more color on this expense, what exactly happen that was not booked and what kind of efficiency are you looking for this year, but also going forward, I would be interested in hearing on the cost-to-income that said, 3,250 is down the road for the bank? thank you.

Rodrigo Prieto Uribe

Okay. with a number of loans, we expect that the next quarter is going to be like the time that we have last year, we compare the last year in the first quarter and first quarter through 2014 some of the same we experienced comps with two clients but it was not current risk. The risk is really good. The experience comes with the operation – with the operation some of them were implementing SAP. So that’s why we had unquestioned number of such loans under the 30-day basis. So we expect that we turn into the abnormal years that we have seen in the other quarters that are not the person. I want to turn and hasten back to the second question.

Unidentified Company Representative

Okay.

Unidentified Company Representative

Thank you, Rodrigo. Regarding the expenses trade, you are right. When how we see in the past under Colombian GAAP time, that we projected total expenses for the year and we impacted the income statement on accurate monthly basis. But because we are right now, we are preparing going forward IFRS, right now we are doing a 15 the real expenses on every month.

So at the end of the day, you will see an increase of expenses at around 10%, 17% at the end of year. But you will see maybe availability of those – on these lines of expenses, because of that. Because regarding IFRS we want to maintain the thing within depreciation. And our guidance for efficiency at the end of this year will be at around 54%. But that was the explanation of the volatility right now of expenses. We have registering the real expenses that we have in every month.

Frederic de Mariz – UBS Ltd.

Okay. That makes sense. And if I may ask you for followup and what was the expense that didn’t happen in the first quarter was it a big one, I don’t know marketing or was it just a lot of smaller ones that are pushed back to April or May?

Unidentified Company Representative

There are some contracts that only will be paid at the second quarter of that year that is the reason why we have a deviation of expenses regarding the planning at the end of the year.

Frederic de Mariz – UBS Ltd.

Okay. That's great. And you mentioned 64 for the full year going forward. What is the, a good target level that you can reach in terms of faster income.

Unidentified Company Representative

Yes. Thank you. For medium term which means that the next coming contracts our level of our – our goal is to reach the 60% of efficiency ratio.

Frederic de Mariz – UBS Ltd.

Great, 60%. Thank you very much.

Unidentified Company Representative

I appreciate it.

Operator

And the next question comes from Carolina Yoshimoto from Goldman Sachs.

Carolina Yoshimoto – Goldman Sachs

Hi, good morning, thank you for the opportunity. I have a couple of questions to you the first one is a follow up on the Panama operation. I was wondering if you could provide us with some more color on what is going on underground and what was the aero in the first quarter. And my second question is on cost control. You’ve mentioned that the bankers have been having a very strong focus on that. And so I was wondering if you could outline some of the efforts that has been doing in addition to contain the growth in headcount and branches. Thanks.

Unidentified Company Representative

Okay Carolina. Regarding the Panamanian operation that we are having a contract with HSBC in which during 18 months, we will be placing our seasons they will see some quarters ours. The schedule is right on time then we are projecting to world 10% during in term of deposits and there will be more oriented in COP launch that we are expecting to grow that has owned 50% this year and in consumer loans we are projected to increase 5% this year.

What we expect in terms of economics looking for the HSBC for the Banis operation that would be between 5% to 10% you will take in consideration, but we are right now making adjustments, we are doing a lot of expenses regarding the IT platform and also we are putting place some procedures that we have to do it directly in Panamanian operation. Give me one second. Can you repeat the second question?

Carolina Yoshimoto – Goldman Sachs

Yes, of course my second question is on cost control about the branches has been doing in that from and if you could outline some of the efforts you’ve been combine expenses in addition to control headcount and branches. Thanks.

Unidentified Company Representative

Okay, Carolina. Yes. In terms of cost control we again the guidance is to reach the level of 50% in the next coming years. How we’re doing that we have been specialty in Bancolombia focus on we intend to reduce some costs and we right now with distribution channels so we taking different channels as we mentioned during the presentation and the best example of that is we’re increasing only seven branches for this year and we use to go up at least 60 branches this year. We’ve maintain at the same labor cost because we’re not growing in terms of people, we’re growing in terms of transactions and volumes.

So that there will be a combination of maintain the same interest total, but continuing growth in terms of transactions and claims, that’s why we able to efficiency level and that’s how we’re facing that and the results are very clear if you check whether to compare our expense to the total loan or the total asset side, that it is right now below 4%.

Also we’re beginning a pricing project in which we’re right now analyzing every single product in terms of pricing. This is our trends in the banking industry in Latam. So right now we’re facing this project trying to increase our level of income regarding the clients of the transactions.

Carolina Yoshimoto – Goldman Sachs

Okay. Thank you.

Unidentified Company Representative

Thank you, Carolina.

Operator

And the next question comes from Boris Molina from Santander.

Boris Molina – Santander Investment Securities Inc.

Yes. Good morning. Thanks for taking my question, I had a question regarding your IT an integration cost budget for the year, do you have the figure for the full-year expense is that you plan to incur in integration and how much integration expenses where in the first quarter of the year.

Unidentified Company Representative

Thank you. As you know we are in the process of integrating by major – we have undergoing around 14 fronts of integration some are operation of some systems from HSBC, and other new systems that we’re implementing – the impact in the first quarter is not significant since we’re at the beginning of the project. So we’re expecting that those projects as impact during the next quarters. We’re in the process of quantifying the final expect during this year, but we think that its going to be around $30 million to $40 million the final effect of these integration projects on a consolidated basis because some of the investments are going to be in Bancolombia or in Colombia seems we’re going to operate some the systems from Colombia.

Unidentified Company Representative

But at the end of this year at the end of the day when we say that will reflect net profit of $90 million this year, that is included in the expenses regarding the integration and remember that when we spend in integration process that will increase on the assets because of the software, that’s way we’re so again $90 million reflect also including a level expense of the product.

Boris Molina – Santander Investment Securities Inc.

Okay, wonderful. Thank you so much.

Unidentified Company Representative

You are welcome.

Operator

And the next question comes from Marielle V. de Beur from Wells Fargo.

Marielle V. Jan de Beur – Wells Fargo Securities LLC

Hi, my question is related to Banistmo at fiscal year end the past due loans coverage was very low, I mean was around 70% I believe. Do you have plans to increase this coverage or why is that the level of 100%?

Unidentified Company Representative

Thank you, Maria if you see the numbers in Colombia, under Colombian gas we have been included the provisions for the operation in Panama remember than in Panama provisions accounts popular that’s the reason why we increase our level of party loans under Colombian regulation, because I know we have high level of volatility of that loans, but what we’re doing in order to reduce our maintenance and control deposit loans in Panama we’re implementing a collection department in Panama and we are right now collecting and calling our clients beginning with the 30 days. They use to call the client after the day 90. So we’re expecting for the next coming quarters to reduce the level of party loans regarding 30 days party loans.

But again under Colombian regulations we have – this coverage the level of party loans in Panama remember that in December we have to have an increase of $100 million in provisions and that is reflected in our booking in the Bancolombia operation under Colombian guidance.

Marielle V. Jan de Beur – Wells Fargo Securities LLC

Okay. Thank you. And so what's the provisions that on loss reserve coverage as at the end of the first quarter for Panama. Do you have the data?

Unidentified Company Representative

It is a 142 on consolidated basis I mean in Colombia because for us the most important progress take place in Colombia under Colombian gas.

Marielle V. Jan de Beur – Wells Fargo Securities LLC

Okay.

Unidentified Company Representative

If your question is under Panamanian gas we have been complaint with a coverage there which is at around 50% to 60% based on the standards of the Panamanian regulation, but the most important thing is we’ll reconsolidate Banistmo, we are having extra provisions to maintain our tight regulations under Colombian law.

Marielle V. Jan de Beur – Wells Fargo Securities LLC

Okay fine and thank you very much.

Unidentified Company Representative

My pleasure Maria. We are almost ended of quarter, 60% of the coverage on the Panamanian regulation. Under Colombian regulation we have almost 90% on the consolidated basis. We have to know that each portfolio has a history and we have to model each portfolio and that is free so that’s why we have each model for each country, that’s why we have this coverage on the Panamanian portfolio. One of the main factors for success at operation in Banistmo is almost 30% of the loan portfolio is mortgage, but has a different treatment in terms of provisions, that’s the reason why it’s reflected with level of provisions on the consolidated basis.

Operator

And our next question comes from Laura Mesa from Creditor from Credit Corp.

Laura Mesa – Creditor Capital

Thanks. My question on efficiency level was already answered.

Unidentified Company Representative

Thank you, Laura.

Operator

And our next question Carlos Gomez from HSBC.

Carlos Gomez-Lopez – HSBC Securities USA, Inc.

Hi, good morning. I have two questions, the first one refers to your Page 10 on fee income. On banking services and other services you have 54% increase I wanted to understand if it was this mostly because of the integration of Banistmo, that it had a very high level of fees in this with regard, or there’s something anonymous or extraordinary in these figures.

And the second question is regarding Page 12, on capitalization, you mentioned that you had already incorporated both the offerings. And if I understand correctly also in the accrued earnings from last year, is there anything else that you need to add to your capital? Should we expect higher capital ratios in the coming quarters or this should be at the highest of the year? Thank you.

Unidentified Company Representative

Okay, thank you Carlos. Regarding your second question, we are expecting to see the level of Q1 between 8% to 9%, and based on our calculations for the next two, three years, we will maintain that. Remember them our level of dividend payout that will be one-third of our profit. So we are not expecting to go below the level of 8%, neither we are expecting to go after the level of 9%. So (indiscernible) we will maintain the same level of equity. Regarding the question of the…

Unidentified Company Representative

Fees.

Unidentified Company Representative

Fees, there are four different reasons, or there are four things that have experienced an increase of fees. The first one is again credit card shows a very important performance, because we are offering right now different credit cards to different buckets of the population, and that is reflecting in terms of fees. Especially we have reason with the debit card, we are promoting the utilization of debit card in different channels, for example, we are the number one with 70% of utilization in gas stations, that give us a lot of fees and that will increase our level of fees.

The third one is bank assurance, so we mentioned at the beginning it’s a very profitable business, we have been growing at a pace of 30%, 35% of the transaction point of view, which help us a lot. And the fourth factor as you mentioned Carlos, is the piece that comes from Banistmo provisions, that also is important because they are, we have almost 0.5 million clients with debit or credit cards, as well.

Carlos Gomez-Lopez – HSBC Securities USA, Inc.

Okay, then to clarify this answer, so the second line is banking services, which grows 54% again that should be a normal level COP 665 billion COP 572 billion should be a normal level of income for this line?

Unidentified Company Representative

This is bank assurance, mostly…

Carlos Gomez-Lopez – HSBC Securities USA, Inc.

Market share, okay.

Unidentified Company Representative

Yes, right.

Carlos Gomez-Lopez – HSBC Securities USA, Inc.

Okay, thank you. And then the capital just, again my question was what that you need to often you cannot give, anything needs to come in after the first quarter? The answer should understand it now.

Unidentified Company Representative

No we only generate that because of the profits, correct.

Carlos Gomez-Lopez – HSBC Securities USA, Inc.

Okay, thank you very much.

Unidentified Company Representative

Thank you, Carlos.

Operator

And our final question comes from Nicolas Noreña from Serfinco

Nicolas Noreña – Serfinco SA Comisionista de Bolsa

Hello, good morning and thank you for hosting this conference call. My question regards factoring Bancolombia and its announcement to transfer assets and liabilities to some Bancolombia’s operation. I understand this would actually help efficiency, but my question is regarding leasing Bancolombia. Is there an intention to merge leasing Bancolombia to the banks, to the main banking unit as well?

Unidentified Company Representative

When you reached on why we are really based the business of flattering is because of funding. That will be very more efficient doing from our bank and from our book. With leasing operations we have not contemplated an integration of the operation.

Nicolas Noreña – Serfinco SA Comisionista de Bolsa

Okay. Thank you.

Unidentified Company Representative

My pleasure.

Operator

And we have no further questions at this time. I will turn the call back to you. Mr. Mejia.

Alejandro Mejia

Thank you again for your time. Hope to see you in the next coming quarter. Thank you again all of you guys.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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