Bancolombia S A : Q4 2022 Bancolombia S.A. Earnings Conference Call script in English

Bancolombia S.A.

Fourth Quarter 2022 Earnings Results Conference Call

February 24, 2023

Bancolombia S.A. - Fourth Quarter 2022 Earnings Results Conference Call, February 24, 2023

C O R P O R A T E P A R T I C I P A N T S

Juan Carlos Mora Uribe, Chief Executive Officer

Juan Pablo Espinoza, Chief Economist

José Humberto Acosta Martin, Chief Financial Officer

C O N F E R E N C E C A L L P A R T I C I P A N T S

Ernesto Gabilondo, Bank of America

Yuri Fernandes, JPMorgan

Andrés Soto, Santander

Carlos Gómez López, HSBC

Nicholas Walker, Goldman Sachs

Daniel Mora, Credicorp Capital

Julián Ausique, Davivienda Corredores

Juan Recalde, Scotiabank

P R E S E N T A T I O N

Operator

Good morning ladies and gentlemen. Welcome to Bancolombia's Fourth Quarter 2022 Earnings Conference Call.

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, in future filings, in press releases, or verbally, address matters that involve risk and uncertainty. Consequently there are factors that could cause actual results to differ materially from those indicated in such statements, including changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by our targeted clients, changes in business strategy, and various other factors that we describe in our reports filed with the SEC.

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Bancolombia S.A. - Fourth Quarter 2022 Earnings Results Conference Call, February 24, 2023

With us today is Mr. Juan Carlos Mora, Chief Executive Officer, Mr. Mauricio Rosillo, Chief Corporate Officer, Mr. José Humberto Acosta, Chief Financial Officer, Mrs. Catalina Tobón, Investor Relations and Capital Markets Director, and Mr. Juan Pablo Espinoza, Chief Economist.

I will now turn the call over to Mr. Juan Carlos Mora, Chief Executive Officer. Mr. Juan Carlos, you may begin.

Juan Carlos Mora Uribe

Good morning and welcome to Bancolombia's Fourth Quarter Results Conference Call.

We are very pleased to share with you our results for 2022, a year in which we delivered a strong performance and moved forward in our pursuit for sustainable development in the countries where we operate.

Net income was 6.8 trillion pesos for the year, attributable to the combined effect of a positive economic background, the spike in interest rates as per a contractionary policy stance, and a good operational performance of the Bank.

Due to inflationary pressures, the central bank rose the reference rate 900 basis points during the year. Despite this sharp increase, the loan book grew 3.8%, quarter over quarter, and 22.5% for the year, a significant expansion, albeit a slowdown in demand in the fourth quarter. Loan growth during the year was even amongst segments aligned with the overall improvement in economic activity.

Meanwhile, deposits grew 5.6% during the quarter, and 19.3% year over year, reaching an 85% share of the total funding mix as a reflection of the Bank's capacity to attract competitive low-cost resources to fulfil its growing funding needs, even under more challenging market conditions.

As a result, the NIM expanded to 6.8% for the year end, as interest income generation outpaced interest expenses, driven by loan growth, higher interest rates, and our asset-sensitive condition.

This, without any doubt, is one of the key competitive advantages of the Bank, and one of the drivers for ROI expansion last year.

On the other hand, provisions for credit losses for the last 12 months were 3.7 trillion pesos, equivalent to a cost of risk of 1.6%, an increase of 56%, and is basically explained by loan growth and the low base of comparison versus 2021.

Furthermore, provision for credit losses for the quarter were 1.7 trillion pesos, equivalent to a cost of risk of 2.6%. This represents an increase of 49%, quarter over quarter, driven by a combination of loan deterioration during the period, mainly in consumer segment, expected credit losses as the economy slows down and rates remained elevated, and consumer-related parameters and less favorable macro inputs.

As per year end, allowances represents 5.5% of total loans, a coverage of 254 for 90 days past due, whilst basal 3 core equity tier one ratio stood at 10% and the total capital at 12.5%, well above the minimum regulatory capital.

Higher income generation and our efforts in cost control initiatives contributed to offset the overall increase in expenses, posting an ROI of 19.8% year end.

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Bancolombia S.A. - Fourth Quarter 2022 Earnings Results Conference Call, February 24, 2023

However, less favorable macroeconomic conditions, globally and locally, coupled with political uncertainty in the countries where we operate, make us more cautious with regards to this year performance. Factors such as persistent inflation, interest rates and unemployment, so as the potential economic and social impacts arising from governments' ambitious reform agenda, may impair economic activity.

For further detail on the macro outlook, I will turn the presentation to Juan Pablo Espinoza, our Chief Economist. Juan Pablo?

Juan Pablo Espinoza

Thank you Juan Carlos. Now, we'll go to Slide number 3 in the presentation. Latest data indicate that the moderation in economic activity that we anticipated a few months ago has already begun. GDP for the last quarter of 2022 surprised on the downside, with a year-on-year growth rate of 2.8%, so that full year 2022 print was 7.5%, lower than our 7.8% estimation. This performance was mainly driven by a slowdown in consumption, which had expanded at double digits by six consecutive quarters, and grew just 2.2% year on year in the fourth quarter of 2022.

On the other hand, investment was the most dynamic component of demand, with a growth rate of 10.3%, but in absolute terms it is still below pre-COVID levels.

For 2023, we keep our view that the Colombian economy will land to a growth rate close to 1%, as internal demands cools off in a context of high inflation and interest rates, the stringent financial conditions and continued uncertainty, factors that recover sharply after the pandemic, including retail, manufacturing, construction, and services, will decelerate more than the rest of the economy. This scenario will lead to a deterioration in the labor market, in which average unemployment rate will increase from 11.4% in 2022 to 12.1% in 2023.

With respect to interest rates and prices, we anticipate that the central bank will finish soon the current hiking cycle, with a terminal rate of 13.25. This is consistent with an inflation that will reach its peak this quarter at 14.3% and then will moderate gradually to close the year at 9.3%. Given that this number would be well above (inaudible) target, we foresee that the monetary policy stance will remain contractionary for a long time. Therefore we forecast that the reference rate by the end of this year will be at 12.5%.

Regarding the exchange rate, we forecast an average USD/COP rate of 4930 for 2023, up from 4808 in 2022. This means that factors supporting Colombian peso weakness, including tight financial conditions, a large current account deficit and uncertainty regarding the reform agenda, will remain relevant. Moreover, this depreciation would exert significant pressure on core inflation.

Finally, on the fiscal side, we expect central government deficit to reduce from 5.6% of GDP in 2022 to 4.2% of GDP in 2023, a number that incorporates the additional collection from the latest tax reform, as well as higher revenues by yield sector. Actually, this will allow the government to meet with the fiscal rule targets and at the same time increase spending, as is contemplated by the amendment of the public budget that was submitted to Congress a few days ago.

After this economic overview, let me turn the presentation back to Juan Carlos. Juan?

Juan Carlos Mora Uribe

Thank you, Juan Pablo.

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Bancolombia S.A. - Fourth Quarter 2022 Earnings Results Conference Call, February 24, 2023

Moving to Slide 4, I would like to highlight three key elements that have contributed significantly to our positive performance.

In the first place, an extraordinary growth in clients. We have seen a consistent up-trend in the last years in all segments, and in 2022 we reached more than 29 million clients. We deem this progress as a result of a well-articulated strategy in channels, products, and investments in technology that has become a competitive advantage leverage on the Bank's network's footprint and product offer. Nequi, Bancolombia la Mano, and banking agents are just a few good examples of this broad strategy.

As you may see in the slide, in the case of Colombia, we have compound annual growth rate for the last four years of around 9% in retail and SMEs, and around 5% in corporates. Nowadays, we are adding around 300,000 new clients per month. This significant growth in terms of new clients has been a catalyst for further growth in deposits and asset origination, as we will discuss in the following slides.

Moving to Slide number 5, you see the strong growth in terms of loans and deposits on a group level, posting at 22.5% for loans and 19.3% for deposits for the year.

Peso-denominated loans grew 18% whilst U.S. dollar-denominated loans grew 8%. Nominal growth, net of FX, was 15% for loans and 11% for deposits. Such difference is explained by the sharp peso depreciation amounting to 20.8% during the year.

There was uneven growth among segments during the year. In the case of commercial loans, we must highlight the growth in corporate loans, which benefits the overall portfolio quality as it entails lower credit risk.

In the case of consumer loans, annual growth was driven by personal loans. However, in the fourth quarter, this segment grew less than in previous quarters, consistent with higher interest rates.

The current 24% share of consumer loans as the total loan portfolio is the result of a deliberate strategy implemented in 2014 to capture higher-risk adjusted returns that contribute to broader income generation, as we will discuss later.

Regarding deposits, the growth in time deposits stands out with 46.5% increase for the year, with a twofold drivers: large funding needs to meet loan growth coupled with clients' preferences for this type of instruments, given the higher rates environment.

Savings accounts also grew, albeit more modestly, up 11.3% and reflecting the Bank's strength to attract low-cost funding as we referred to previously.

In Slide 6, I will elaborate on the second key element consisting on the preapproved and automated loan strategy that has been another of the catalysts of growth in loans and risk-adjusted returns, while it also provides management flexibility to adjust originations according to performance and risk appetite.

You started in Colombia in 2014, on the consumer segment. Leverage on the richness of transactional information and investments on data analytics and automation. We have reach interesting effectiveness ratios and in terms of disbursements and clients. More recently, it was extended to SMEs, corporates and subsidiaries in Central America, as it certainly provides value as to preserving asset quality with enriched and more precise risk model based on transactional flows data.

Moving on to Slide number 7, I will touch upon the third and last key element to highlight for this period, which is the evolution and leadership in terms of digitalization.

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ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only.

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