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Executives

Carlos Yepes - CEO

Sergio Restrepo - Chief Capital Market Officer

Juan Carlos Mora - Chief Corporate Services Officer

Analysts

Thiago Batista - ITAU BBA

Carlos Macedo - Goldman Sachs

Tito Labarta - Deutsche Bank

Chris Delgado - JPMorgan

Jose Barria - Bank of America

Mauricio Restrepo - Bolsa Y Renta

Victor Galliano - HSBC

Boris Molina - Santander

Carlos Ferreira - Barclays

Sebastian Gallego - Serfinco

Bancolombia S.A. (CIB) Q3 2012 Earnings Call November 6, 2012 8:00 AM ET

Operator

Good day ladies and gentlemen and welcome everyone to Bancolombia’s Third Quarter 2012 Earnings Conference Call. My name is Sandra and I'll 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 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 currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy and various other factors that we describe in our reports filed with the SEC.

With us today is Mr. Carlos Yepes, CEO; Mr. Sergio Restrepo, Vice President of Capital Markets; Mr. Jose Humberto Acosta, Vice President of Finance; Mr. Juan Carlos Mora, Vice President of Services.

I would now like to turn the presentation over to Mr. Yepes, CEO. Please proceed, sir.

Carlos Yepes

Okay, good morning and welcome to our third quarter 2012 results conference call. It’s a great pleasure to be with all of you who follow so closely our operations and results. Let's start with a brief discussion of the main topics that impacted our business in this period.

First, of course, I would like to present the net income for the quarter COP 434 billion, which represents an annualized return on equity of 15.6%. During this quarter, we saw a reaction of credit demand in Colombia, after a slow first half of the year corporations and individuals started demanding credit again. This impacted positively our loan growth during the quarter.

Coupled with that growth, came a slower pace of deterioration of our loan portfolio. The more stringent credit underwriting standards that we implemented since the beginning of the year are paying off. The proportion of past due loans to total loans declined.

As a result, provision charges also declined in both nominal and relative terms with the corresponding positive impact in the bottomline. Additionally, net interest income grew faster than the loan portfolio thanks to the expansion of the net interest margin that we had been experiencing during the year. This proves thus far our strategy of keeping funding costs as low as possible and being disciplined in pricing our products is paying off.

During the third quarter, we finally get approval by all the corresponding authorities to complete the sale of Asesuisa, the insurance company in El Salvador, which produced a pre-tax gain of COP 83 billion. We keep up efforts of bringing down the cost to income of efficiency ratio. Salaries and administrative expenses present a year-on-year growth inline with our estimations and the efficiency ratio percentages are declining trends that ended the period at 56%.

I would like to use this opportunity to mention the situation that is happening in Colombia, where last Friday the government took control of Interbolsa, one of the most relevant players in the Colombian debt and equity markets. This intervention was due to the fall of COP 20,000 million or about $10 million. The situation should not be considered a systemic threat to the stability of the Colombian markets, because the issue is so recent, it is hard to mention the consequences, nevertheless last Friday, markets behaved in unstable mood.

Bancolombia has two types of relation with Interbolsa. Interbolsa asset line, where we have in exposure about 12 million in the areas of trading on short-term loans and Interbolsa as a counterparty, where we have a net exposure of 7 million in derivatives. Also, our exposure to Interbolsa is very small, given the size of Bancolombia’s balance sheet we continue to operate with discipline in all our activities aiming for a direct operation of the markets and the stability of the system. Last night, I would like to mention that we reached an agreement with the government to operate [chase] for about $1 billion both in the assets and liability side.

And finally, I would like to mention the inclusion of Bancolombia in the Dow Jones Sustainability Index. This is a recognition to our efforts and strengths in the economic, social and environmental dimensions more than recognition, this is a mandate to keep improving industrials and make sure Bancolombia is sustainable in the long run.

Having said these, we would like to continue with a re-discussion regarding the macroeconomic environment. Let me turn the presentation to Juan Carlos who will share our views on this model and after that Sergio will elaborate more on the Bank’s results. Juan?

Juan Carlos Mora

Thank you, Carlos. As usual, we have a slide presentation in our investor relations website. Let me start with slide number two. Inflation for the 12 months ended October 2012 was 3.06% within Central Bank range of 2% to 4%. The Colombian Central Banks repo rate is 4.75%. It has been stable since August. As inflation and credit demand are converging to desired levels, we expect the repo rate to end 2012 between 4.5% and 5% and inflation to be within the mentioned range of 2% to 4%.

Regarding GP growth in Colombia, the 4.9% year-over-year achieved during the second quarter 2012 shows a resilience of the economy. Remember, in 2012 it grew 5.9%. Gross capital formation represents 24.6% of GDP for the second quarter of 2012 and corporations keep investing which a signal of dynamism.

Consumption remains healthy; although, the pace of growth is more moderate than one year ago, I mean the case like the 9.9 unemployment in September which is low for Colombian historical; that the economy is negotiating. During the last 12 months ended in September, the Colombian created 166,000 new jobs. All these trends lead us to believe that Colombia’s GDP will grow between 4.5% and 5% into 2012.

During this quarter, we saw a significant appreciation of Colombian treasuries, supported by sustained foreign direct investment inflows and low foreign indebtedness of the government. During the quarter, the Colombian peso remained very stable versus the dollar. The Colombian external sector remains solid on exports in particular commodities are performing well, although the pace of expansion is slower than one year ago.

As a conclusion, we could say that Colombian economy remains strong. The indebtedness of households is still in low levels and although the quality of the loan portfolio and the whole financial system has deteriorated, it is still below levels of 2009 or 2008.

After this quick review of the economic environment, let me turn the presentation to Sergio Restrepo, who will discuss the bank’s results. Sergio?

Sergio Restrepo

Thank you Juan Carlos and thank you Carlos Raul. Good morning and for those of you who are following the presentation, I will go straight to slide number three, loan volumes. First the loan portfolio was driven mainly by Columbian peso’s growth, 19% over the year and 3.7% during the quarter. And a total loan portfolio of 12.9 and 4.1 for the quarter. Key drivers for that first of all was commercial loans with some emphasis also in FX funding, you can see that we grew 5.5% over the quarter. Consumer and mortgages had a dynamic development over the year and even though the trend has a lower level than a year ago, we expect that it will continue during the last quarter of the year.

FX loans account 3.6 billion in Columbia, 2.4 billion in El Salvador and 2 billion over the region. Finally, we are expecting a year end growth of 10% to 12% due to the dynamic fourth quarter of last year. As of December last year we had COP61.4 billion as a gross loan portfolio and we have right now about 5.5 year-to-date growth. On slide 4 regarding the asset quality, we have a slight decrease in net provision charges of the quarter and a significant improvement in the new positive loans. We cannot certainly claim it is the end of the deterioration of the 2011 vintages, but certainly there have been two quarters in a row with a decrease in the amount of new past due loans in spite of bigger stock of loans. The level of provisions was higher than the amount of positive loans. This is an important change in the trend, and at this point we have stopped consuming reserves and we are starting to build them again to 68 billion against 237 billion in new positive loans.

In the level of provisions as a run rate of 1.7% on an annual basis compared to 0.7% a year ago. We can expect that the trend would be the same for the fourth quarter; I mean 1.7% compared to the growth of loan portfolio. On slide 5 regarding the asset quality, positive loans were 2.9% of the total loan portfolio; we have an improvement compared to the second quarter this year. Allowances to positive loan of 166. We maintain a very healthy coverage of 30 days and same from 90 days where we have almost three times provisions to positive loans.

In the lower part of the chart, we present the past five quarters past dues in order to analyze evolution. Clearly the emphasis on deterioration has been in consumer whereas we stated in recent conference calls we improved the underwriting standards since year end last year. On slide 6, where we had the net interest income this is probably one of the most remarkable achievements of the company in 22% net interest income year-over-year, 5% over the quarter. This is certainly the result of the growth that we had last year.

Secondly, a higher cost of funds driven by a clear lean towards CDs. This is a trend developed over the last quarters. In order to lock in deposits and have a less volatile source of funds. The reason for this strategy was based on a more competitive environment for deposits and a higher pace of growth on the loan site than in deposit site. That was what we saw by the beginning of the year. Nevertheless, the development over the year has been that loans and deposits have been even on both sides of the book.

On slide 7, we have the NIM. We can claim that in line with our expectation, we have been able to maintain an even to a slightly increase in the NIM, in spite of a low interest rate environment. The change in the mix both encourages any commercial and retail had a positive outcome in this number. Secondary the behavior of the security investments where you see 4.2 has been healthy over the year, driven basically by the improvements in the rating of the country, the permanent global low rates environment and the assertive treasury strategies over the years. Third as far as we maintain just NIM and clean up the 2011 consumer vintages, we will be able to return to the long-term return equities, some of the companies that follow the bank has stated recently.

The slide 8 where we have non-interest income on fees, fee income is in line with our expectation of 10%. We have made a significant effort to compensate via volume, the fixed or reduction in different fees. This approach is a defensive stance against potential aggressive regulation. This is not insulated because this is clearly a reaction that we have seen global wide. Second, dividend credit card maintained a healthy trend as you see this is a third of our fees. We do not expect significant changes in the business.

We grew 13% the number of credit cards over the year and 16% the billing same period. Asset management has a positive trend in spite of a drop of significant government deals as (inaudible) and from (inaudible). And fourth in banking services we start including the bank insurance fees in El Salvador with a sale of asset visa where we consolidate the total results right now as we have this deal with [BanPublico] in El Salvador. We will start having those incomes on the fee income.

On the slide 9 regarding the operating expenses and efficiency, we had in the upper part in the right hand side, we split the different operating expenses in order to understand it more in a deeper way. OpEx were up 5% over the quarter and 17% over the year, salaries we have 9.5 increase over the year, but they were flat over the quarter, bonds payment plans we had a decrease over the quarter, aligning it to the lower return equity compared to the last years. This is basically an accrual on a quarterly basis as we are aiming to something like between 15% to 16% return on equity this year, the provisions in the third and probably in the fourth quarter will be lower than what we had in the first two quarter of the year.

General and administrative and other expenses grew 12%, impacted basically by depreciation of operational leases. And this has to do with dynamic of this business, where we grew 30% over the quarter. This item accounts for 2% of the total OpEx year the year. This operational leases, as you know, we have the income on the operational income, we have the expenses basically the cost of funding or interest on the operational expenses and also we have the depreciation and those are operational leases.

We have to account for depreciation on our books, and that depreciation didn't go on the net interest income, that go to operational expenses and this is the reason for the explanation because this portion of it is not exactly the part of the operation, its part of the operation of one of the businesses that we have. We have the slight improvement in the efficiency ratio compared to income and a constant compared to assets 4.8.

The slide 10, where we have a books loan deposit ratio grew to 100 basis points to a 104, this is a small change from the last quarter. The reason basically was the issuance of subordinated debt for COP 1.2 billion for 10 years, it was last September. This transaction had also a positive effect in Tier 2 capital where we moved from 3.3 to 5.7 and a total capital of 14.9 to 16.6. That will give us room enough to absorb the changes on the capital requirements that will be in place next year by the local regulators.

And finally on slide number 11, return on equity and return on assets, we have a return on equity of 15.9 for the quarter and 15.8 cumulative for the year. Our challenge today is to leverage the books and to grow costs at a lower rate than income in order to return to higher levels. This year we are focused on cleaning part of the bad loans that we had during the spring of consumer lending in 2011.

Finally, in order to summarize I would like to highlight that the loan book grew 4% in the quarter at 12.2% over the year, net interest income as I mentioned was 22% up and positive loans 2.9% with coverage of 166.

This is the presentation of Bancolombia results and we would be more than happy to take questions that you probably have. Thanks.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Thank you and the first question is from Thiago Batista from ITAU BBA.

Thiago Batista - ITAU BBA

Actually I had two questions. My first question is on net interest margins. We liked the positive evolution of the loan margin of year-to-date of the bank, could you give me some additional color on this positive trend, I'm not sure that only the mix explains the trend. And also considering the positive momentum of Colombia economy, how much the NII of the banks could expand during next year? And my second question is about the ROE, in the last conference call you mentioned that in the medium-term Bancolombia could post an ROE of close to 18%. So when do you expect to see Bancolombia delivering this 18% of ROE?

Sergio Restrepo

Morning Thiago, thanks for your questions here. Regarding the NIM, we believe that we will be able to maintain the trend. Certainly on a low interest rates environment it hasn't been easy but again I mean it has to be mixed with basically time deposits and savings.

Over the year as we said, we have been focusing our deposit side on the CDs but right now we can move. Now that we have a [look in] an important part of deposits, we can move more aggressively into checking [accounts] and short-term. We believe that we will be able to maintain that and as you said that it's not just the mix but let me explain a little bit on the difference between pesos and dollars that I highlight in the presentation.

The growth in pesos over the year has been 19% whereas in dollars, where the NIM is much lower is just 2.7, this is part of the reason. I understand that regarding the consumer lending, the impact is not as big as that but even though, the most significant growth that we're seeing is basically on consumer where we have basically 26, almost 27% growth. So we believe that the mix has something to do about that.

The other part of the question was about the return equity. Certainly, we believe that we would be able to return to those levels. When you manage to reduce their provision levels, we have this year we are expecting something like 1.7%. Last year we had 0.7%, probably, the long-term trend would be something between and that will have a positive effect on the return equity.

And secondly the leverage. As you remember, we issued almost a $1 billion in new capital by the beginning of the year. So probably it would take at least a couple of years in order to return to level of leverage according to this return equity. This is basically the idea on your questions.

Thiago Batista - ITAU BBA

How much in [interest] expense during next year I am not sure I got the answer?

Sergio Restrepo

Beg your pardon, Thiago, couldn’t understand the question, expenses on what?

Thiago Batista - ITAU BBA

How much net interest income of the bank could expense during next year, the NII?

Sergio Restrepo

I think it would be, first of all in line with loan growth this year which will be something between 10 to 12 and I would say that probably a little bit few basis points based on the improvement on the NIM. So if you do something between 10 to 15, I think will be accurate.

Operator

Thank you. And the next question is from Carlos Macedo from Goldman Sachs. Please go ahead.

Carlos Macedo - Goldman Sachs

I have a quick question on NPLs particularly on the consumer side. So I think there is some positive trends there with a 30 day NPL increasing by lesser than 90 day NPLs but with loan growth and the consumer side being as strongest as you mentioned and the Colombian economy being the strongest you mentioned before, I would expect a little bit more improvement, what is the outlook for this, could you give us some color and when you expect the current NPL trend and why the realized is based on 2011 vintages and not 2012 vintages, but when should we expect these NPLs on the consumer side to unwind?

Sergio Restrepo

Regarding the 2011 vintages, we were expecting something like a year, meaning 2012 and probably first quarter next year. The growth, I think has been within what the Central Bank considers reasonable, therefore, we do not expect that the recent vintages will behave poorly. I mean, it’s hard to say exactly when we will see this change in trend, but as we said and what we are seeing on the behavior is that second and the third quarter of this year start to present lower deterioration and we prefer not to make any promises but we expect that the trend will continue fairly about I don't know exactly by year end or beginning of the year could have a small change upwards. But in the end, I believe that for next year will be more positive than this year.

Carlos Macedo - Goldman Sachs

Would it be fair to say that the peak of NPLs could happen somewhere between the fourth quarter and the first quarter given the trend that we have observed so far for consumers?

Sergio Restrepo

I will say the first quarter of this year and first and second quarter of this year was the peak. No, I think that for the next year, I think it would be downtrend.

Carlos Macedo - Goldman Sachs

Yeah, but will the peak be, would it be fair to say that the peak would be somewhere between for the consumer NPLs would be some say 90 days or 30 days which are still going up, would be somewhere between the fourth quarter of 2012 and the first quarter of 2013?

Sergio Restrepo

It’s hard to say, yes. Yes.

Operator

Thank you. And the next question is from Tito Labarta from Deutsche Bank. Please go ahead.

Tito Labarta - Deutsche Bank

My question is on expenses, earlier in the year you had guided for expenses growing probably around 10% or so, but in the first nine months of the year expenses are growing 15% in the quarter and 17% year-over-year. Can you maybe give a little bit more color why expenses are kind of growing above expectations and when do you think you can maybe start to see some significant improvements in efficiency particularly with all the investments you have done in IT over the last few years? Thank you.

Sergio Restrepo

Morning Tito. Thank you for your question. Certainly, when we have this split on the expenses, basically I would say that in terms of salaries and headcount, we have been doing a significant effort; basically we've frozen the headcount over last year. When you are growing and you are opening branches and we are evolving most of the time it is impossible really to just to say not a single employee anymore, but certainly, we are making efforts there and when you look at 9.5% increase of the year certainly is high, much lower than 22% that we have in net interest income. And quarter-over-quarter the salaries were flat, were same number.

On the other side, the general and administrative expenses, basically is where we have the most significant impact. When you look at line by line, this quarter we had first of all the growth on the depreciation that I mentioned which if you deduct that from the calculation, the growth will be 200 basis points lower instead of the 17% volume number would be 15% and we can claim that because this is the part of business on the operational side.

Once you achieve a certain level of operating leases then the roll over of the depreciation and the net profits and the sale of these operational leases or once you have fully depreciated them then net profits will be higher, but by the time you are building up these stock deposits you are still having this situation.

The other this is that we raised this quarter the donations that on the general assembly, on general shareholders meeting, the general shareholders approved certain notions to be awarded by the Board of Directors and instead of having them in the last quarter where we have almost every year we had them in the last quarter, we prefer to have them a quarter before in order not to have that significant changes in the fourth quarter. That accounts for COP 10 billion which is like $5 million US and again this is another 1%.

So as an overall, I think that we are doing some efforts on that side and we understand that this is something that is probably that I would say the strongest account or the strongest line that we are focused on right now, but the we understand that we prefer to clean as quick as possible and to pass-through the P&L all expenses that we had instead of accruing them on the assets and that’s basically the reason for that.

Tito Labarta - Deutsche Bank

Could you maybe just give us some guidance then; how much do you think expenses will grow for the full-year and then also for 2013?

Sergio Restrepo

Tito, this year we were aiming for something slightly higher than 10%. We think that we must think of something like that for the next year, I mean something like 10% for the next year and except to this I think we have the means to do it. By year-end, I think that the trend probably would be more inline with what happened, not exactly year-over-year, but want to be as big as 5% quarter-over-quarter, something between 13% to 15% year-over-year would be reasonable.

Operator

Thank you. The next question is from Chris Delgado from JPMorgan. Please go ahead.

Chris Delgado - JPMorgan

Just two quick questions. First as you mentioned, fee growth was somewhat like, could you just elaborate more on kind of what you think the 2013 run rate will be given that there is some pressure there? And second, just kind of given the recent consolidation, you know, among Latin American financial institutions, kind of what's your appetite for acquisitions and do you see any regions that are particularly attractive? Thanks.

Carlos Yepes

Thank you, Chris for the question. Regarding fees, as we said, those are permanently stressed, under stress. We consider the structure that we have is kind of reasonable and year-after-year we are making some concessions when we see some pressures from the community. Certainly, right now there are some pressures based on the monthly fees on the debit card basically for the low brackets of the population. We have to see how it evolves, the point here is, it has a cost; I mean operating that has a cost and so we have to, I would say to balance between cost and benefits on that side.

We want to provide them debit cards, but if the government pushes too hard the envelope probably they will end up closing saving accounts and therefore the debit cards. Therefore it is something that we really as we said tried to be proactive on that side, but we do not really see a significant improvement on the fee side. This year we are moving at 10%, probably next year the number will be around that number we don’t see any significant change there. On those side, we are moving aggressively on the asset management; we are moving aggressively in other fee income sources that are not as sensitive as the ones that we mentioned specifically the debit cards.

In terms of the consolidation and the architecture of Bancolombia for that, I would say that we always look what is available, but the most important thing is that we always look for something that is well managed and has to be accretive for shareholders. So basically that's the point and let me just say something that Colombia itself has been developing very well, and we mentioned that the strength of economy and the growth, I think the best investment we have been doing over the reason years have been investing in Colombia, has one of my collogues recently pointed, last year we grew two times the size of Banagricola just on the organic growth. So this is not a mandate and this is not something that we are desperately looking for.

Operator

Thank you. And the next question is from Jose Barria from Bank of America. Please go ahead.

Jose Barria - Bank of America

Hi, gentlemen. Just a follow up on the asset quality, you mentioned that for the fourth quarter, we should provisions to average loans will be at the same level as in the now third quarter, but what about going forward; if you think that we haven't yet seen the full extent of deterioration in consumer and going forward and looking into 2013, two things, one would you expect the provision to average loans to remained at the 1.7 level or we think that could increased? And second, do you think charge-offs which also have been increasing, that sounds of a new run rate at the current levels? Thank you.

Sergio Restrepo

As Carlos Macedo from Goldman was pointing in the question I think that the asset quality of 1.7 would be the run rate for this year, so that's probably the number that we are seeing for the full quarter. And if we certainly peak the number by the first and second quarter next year, we probably can expect something more towards 1.5 for the next year. Again it has to do a lot with the behavior of the economy, and so far with the actual situation we can see that there could be easily the case.

Regarding the other part of the question was about if I'm not wrong about the, charge-offs, yes. As Raul said the way we do it is once we have a 180 days, most of the time we already have 100% provision set for mortgages where you have these collateral, so you never go to a 100% provision of mortgages. But the other ones specifically commercial and consumer, once we have these level of provisions, we always charge them off and doesn't mean that we forget them. Usually what we do is, we either sell them or we keep on collecting them. But that's the way to maintain a healthy book and the 2.9 positive [institutional] loans that we mention. This is a part of the exercise of cleaning the books and not letting the books growing and growing with really something that has no value.

Jose Barria - Bank of America

Have you seen more of your loans coming into that 180 day category, and is that what's driving up your charge-offs then.

Sergio Restrepo

Not really, but I would say that probably as we said that with the vintages starting to deteriorate by the beginning of this year, the last quarter last year, first quarter this year this year, I don't know what's the word in English, I mean its like a rolling down and going from B to C, C to D and finally to E which is where you have a 100%. It’s like - this 180 and the 198 [billion] is like something that has started to deteriorate by the beginning of the year and right now end up at the bottom of the quality therefore they just go out.

That's the reason why we believe that because of the underwriting standards this year’s been better than what we have last year. This bulk of debt or this stock of debt wont to move us as what we saw over the last two quarters. Probably fourth quarter will have kind of the same, but I tend to believe that there won't be a case for the next year.

Operator

And the next question is from Mauricio Restrepo from Bolsa Y Renta. Please go ahead.

Mauricio Restrepo - Bolsa Y Renta

I have two questions. The first one is if you can give a guidance for return on equity for next year, and the next is if you have an estimation of the current capacity to expand the books for new loans. And have you seen any specific trend in Colombia that can accelerate that process?

Sergio Restrepo

The return on equity, we think that next year should be something towards 16%, probably way up. We can deliver positive news on that, but with the recent development, I think that aiming something like a 16% would be reasonable. The growth of the loan portfolio I mentioned, year-over-year, because of the dynamic of the last quarter last year, the 2012 growth would be more towards 10% to 12%. Therefore, the leverage will be at a much lower pace than what we were expecting by the end of the year when we issue the capital.

Again, the means that probably the return to higher returns on equity will take quite a bit longer. In terms of capacity of growth, certainly with this capital that we had in January, with the [soaring] net debt we issue in September, we have tier 1, tier 2 capital of a 16.6%. That means that we have plenty of room to grow in terms of loans, and again with something like a pay-out ratio of like a third of the net income, we keep on building capital. Therefore I think that the growth capacity is something that we have plenty of them.

Mauricio Restrepo - Bolsa Y Renta

Can you elaborate more on the return on equity for the long-term? When do you expect to reach those levels of 18% three, five years?

Sergio Restrepo

No we probably will arrive there more in one to two years. I think that it really has to do with how fast can we grow the loan portfolio, and if we manage to improve the new and reduce the provisions. But I think that probably in two or more years we will be arriving into that number.

Operator

Thank you. And the next question is from Victor Galliano from HSBC. Please go ahead.

Victor Galliano - HSBC

Just a couple of questions, firstly on coming back to the ROE and what we saw in the third quarter of 2012, obviously recovery there in the ROE but that was driven was it not by the disposal that includes the disposal of Asesuisa in the third quarter. So what was the clean ROE without that disposal and could you also say who the buyer was of Asesuisa and I have a follow up on credit quality as well.

Sergio Restrepo

The cleaner ROE without this the sale of Asesuisa would have been 13% with all the expenses that we put on the books. And certainly we sold that to Suramericana de Seguros that was the transaction that we announced like a year and half ago. We sold the pension fund to Protección, and it was last year and this one it took really long time like a year and ago from the legal authorities in El Salvador and Panama to get the authorization. But it was Suramericana de Seguros the acquirer.

Victor Galliano - HSBC

And just quickly on credit quality, what has been within the consumer, can you pinpoint any particular line or types of products that have been the main problem areas here for this worsening credit quality?

Sergio Restrepo

Certainly, Victor. When you look at the advantages car loans are the once that probably had that the worst behavior. Some of the payroll loans had bad behavior, but it was basically for a couple of strikes in coal company. I think the strike is already sell so we expect that that part of the payroll loans will go back to normal numbers. But this won't, and it’s directly and then if they are on the strike, they won't pay us, so immediately that moves the ratio up. I will say these two are the most important ones and probably what we call the free expenditure is the third one there. But basically those three are the ones that are behaving the worst right now.

Operator

Thank you and the next question is from Boris Molina from Santander.

Boris Molina - Santander

I had a question regarding your tier one capital. We saw a slight decline quarter-on-quarter, there appears to be an increase in demand of deductions. So I don't know if could you provide some color on why the Q1 capital still declined. And you mentioned some challenges and changes in regulation, could you please give us an update of what are the expected impacts that are likely and regulatory changes over the next year or two related to (inaudible) versus two etcetera that we could expect on your capital ratios.

Sergio Restrepo

Basically the decrease on the Q1 capital from 11.6 to 10.9 is basically for the growth. At the same time, we grow the loan portfolio and the securities portfolio we consume of the tier one. So there's nothing to do with any deduction there. Certainly the new capital rule that will be in place next year, will have a negative impact in the overall capital of roughly 200 basis points. So probably from today's number we will go down something 16.6% to something like 14.5%. It will be primary capital, additional primary capital and secondary capital will be the three layers of capital, been the additional Tier 1 capital basically the shares that we have, the preference shares.

Boris Molina - Santander

Could you just give a little more color what are the changes that are actually taking place on this 200 basis points, how much would 50 basis points for this and 100 for that how is this?

Sergio Restrepo

Certainly, the biggest change there will be basically the goodwill and intangible assets. As you remember we have like a little bit lower than $300 million in goodwill right now, just basically from the acquisition of Banagricola, that would be, I think that would be the biggest impact.

Secondly, it would be the valuations on investments that we have that will account for a portion of the capital, not the Tier 1 but on Tier 2 and the other ones will go down in terms of relevance. There is a document from Central Bank which specifically relates what's the actual regulation and what's the number or the new regulation that will come. But we are expecting to prepare documents over the next months to be more probably by year end this year, it would be a document where we can state what the changes will be and how much it will be but initially on the first calculations as I said it will be like 200 basis points.

Operator

Thank you and the next question is from Carlos Ferreira from Barclays. Please go ahead.

Carlos Ferreira - Barclays

I don't know if I understood well, you are increasing your guidance for NLPs [or] average loans for 1.7, more or less for 2012 and do you expect that you will reach about 1.5% in 2013 and these would be the reasons mainly because of improvement [Technical Difficulty] and also are you seeing further improvements in origination standards, origination your (inaudible) that started at the end of 2011, right?

Sergio Restrepo

Thank you, Carlos. I think you are right. I mean, we are expecting 1.7 over this year and 1.5 for the next. And you are right, on your statements, certainly, we improved underwriting standards and on one side, it was voluntarily; on the other side, it was suggested by the Central Bank to reduce the amount of consumer lending. So these two reasons clearly are the ones that we account for the 2013 cost of credit or provisions that we're expecting for the next year. I think that I don’t have, the second part of the question I don’t really get it clear I mean that the sound wasn’t that good. Could you repeat that part?

Carlos Ferreira - Barclays

Yeah. I did not understand why because in past quarters, you moved your guidance upward towards 2% and now you are decreasing it to 1.5 but delinquency is still right in the case of the consumer side, so I am trying to understand what you are expecting to happen to improve that much in the case of consumer so that you get so left NLPs in 2015. So I what I understood from your answer is that you have seen a pickup in consumer NPLs during the year because of strike in lending and these went out you would expect these would device further NPL improvement ahead?

Sergio Restrepo

Carlos you are absolutely right and regarding that what we saw probably a couple of quarters before and it’s typically a fresh quarter this year, second quarter this year the trend was probably towards 2% as you mentioned and even though when you think about that part of the year, the economy itself what’s behaving on a much slower mood that is today than we were expecting something probably like a 2% for the year. So we were in kind of a bad mood on that particular moment, so we said well better to be conservative and be prepared for past dues more like 2% in terms of provisions. But as we said on the presentation of the second quarter and the third quarter, we have seen slight improvement on past due loans even with the growth on the stock of loans.

So that's probably the reason where we can claim that we can really see a trend going down, now that 2% that we were mentioning couple of course before but 1.7% now. 1.7% now means that the four quarter provision amount will be something like COP 350 billion which is more inline with what we have in second quarter and a much higher probably COP 100 billion higher than that we had in third quarter.

So I think we are playing safe on that number. But and for the next year, with the new size of the loan portfolio probably 1.5% would be reasonable on that metric. Regarding the past dues and consumer, you are right, and but again part of what we said before is that part of these past dues are rolling down and we are kind of cleaning the books, no doubt that changes in the economy could have negative impact but the most important part is that the commercial as it proven significantly. Right now, the past dues are probably is almost the second best over the last five quarters, and I would say this is more important even that deterioration that we have in consumer.

Operator

Thank you. The last question will be from Sebastian Gallego from Serfinco. Please go ahead.

Sebastian Gallego - Serfinco

I just wanted to ask you about the commercial loan side, we are seeing the growth under 10% and if I remember it well, during the last conference call you mentioned that the construction industry or the other side of the economy will boost the growth on this part of the loan book, could you give us like some color what do you expect for the fourth quarter and early 2013 on the commercial side?

Sergio Restrepo

Thank you Sebastian. You are right about the commercial loans. What we saw as the drivers for the year 2012 but certainly, I mean none of the big drivers were finally awarded. The good news is that all this new roads and highways recently awarded by the government certainly will need capital, it will need loans over the next year and probably about next years I would say. The other ones is the hydro power plants (inaudible) which is the biggest hydropower plant in the country is already under construction. So we started seeing some funds coming, they are demanding some funds there. So we, in a nutshell we think that finally infrastructure is going to start moving probably not as fast as we wish but no doubt that there is some contracts already in place that sooner than later will start demanding money.

Operator

Thank you. This concludes the question-and-answer portion of today's call. I will now turn the call to Mr. Carlos Raul Yepes, CEO of Bancolombia for closing remarks.

Carlos Yepes

Okay, thank you very much for attending this conference call and thank you for your comments and questions. Have a good day.

Operator

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

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