Bancolombia S.A.
Q4 2020 Earnings Call Transcript

Published: 28 Feb 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to Bancolombia's Fourth Quarter 2020 Earnings Conference Call. My name is Hector and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. Please note that this conference is being recorded. Please note that this conference call will include forward-looking statements, including statements related to our future performance, capital position, credit-related expenses and credit losses. All forward-looking statements, whether made in this conference call, 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.

[Juan Carlos Mora:]

Good morning and welcome to our conference call for the fourth quarter of 2020. I hope all of you and your families are safe and healthy. The fourth quarter confirmed that the Colombian economy is moving forward. It has rebounded from the lows observed in April and May of 2020. The fourth quarter GDP posted an annual negative variation of 3.6% and a full year contraction of 6.8%. This result shows that economic activity underwent a process of clear improvement with better-than-expected results. As we look at 2021, these results confirm that the worst of the impact generated by COVID-19 has been overcome, but also reveal that the recovery is very sensitive to the evolution of the pandemic. After a very challenging year, the net income for 2020 was COP 276 billion. Before getting to the details of the results, I want to highlight some key topics. During 2020, Bancolombia became stronger. We remained closer to our clients during the pandemic, offering them better safer and more reliable digital solutions. We improved our transactional portfolio with new digital services tailored to our clients' needs, leveraging in self-managed options. We have a strong balance sheet with our diversified funding base, driven by the growth of retail deposits. Allowances for loans for the year-end were COP 16.6 trillion, growing 52% when compared to 2019, representing 8.1% of total loans. We made an early adoption of a full Basel III capital standards, reporting a Tier 1 level of 11.24% that represents an increase of 167 basis points when compared with the Tier 1 reported at the end of 2019. This is aligned with the guidance we have been giving in the last couple of years. Finally, despite high provision charges during the year due to COVID-19, the Bancolombia continues to have a resilient result. The provisioning level takes the bank to a coverage ratio of 213% for the quarter. We expect cost of risk to slow down in 2021, but returning to normalized levels shouldn't only take place in the upcoming years. At this point, I want to turn the presentation to Juan Pablo Espinosa, who will further elaborate on the performance of the Colombian economy. Juan Pablo?

[Juan Pablo Espinosa:]

Thank you, Juan Carlos. Now please go to slide number three in the presentation. At the end of 2020, the Colombian economy continued to rebound. In fact, in year-on-year terms, GDP decreased from minus 15.8% in the second quarter to minus 8.5% in the third quarter and minus 3.6% in the fourth quarter. As a result, full year GDP variation was minus 6.8%. This result not only beat our expectations, but also implies that almost 8% of the decrease in economic activity that took place during the lockdown was reversed in the second half of the year. Despite this positive trend, at the start of 2021, the economy took a hit as a result of the second wave of COVID contagions and the restrictions that local authorities imposed. Consistent with this our real-time data point to a 5% year-on-year decrease in economic activity in January. However, this negative trend has resided quickly in the first weeks of February. Taking this into account, we estimate that during the first quarter year-on-year GDP variation will be around minus 3%. For the remainder of the year, there is a risk regarding the evolution of the pandemic and the effectiveness of the vaccination plan. However, we expect GDP to grow 4.7% in 2021 due to the combination of several factors. Globally, we expect higher oil prices in terms of trade, as well as a stronger recovery of export demand. Locally, low interest rates will combine with the stimulus program executed by the government in sectors such as infrastructure and housing. Regarding inflation, after an historic low print of 1.6% in December 2020, we anticipate that in the short term to have – CPI change will remain below 2%, these expectations relies on the fact that the economy is still running well below potential and risks arising from supply shocks are contained. The end of temporary relief measures taken at the start of the pandemic and the mild increase in the core component will take overall inflation to close 2021 around 2.5%. Against this backdrop, we continue to predict that for a long period of low-end and stable interest rates. We anticipate that reference rate in Colombia will be at its current level of 1.75% at least until the second half of 2021, when the Central Bank will do some upward fine-tuning in order to keep inflation expectations on check. Finally, it is important to mention that in 2021 the implementation of initiatives related to fiscal adjustment will be key to rating agencies decisions regarding Colombia. Officials have stated recently that, this semester the government will submit to Congress a tax – revenue so far around 1.5% of GDP starting in 2022. In addition, legal amendments to allow spending reductions could also be proposed. In our opinion, adjustments to the fiscal rule are also necessary to allow its reinstatement next year.

[Juan Carlos Mora:]

Thank you, Juan Pablo. Moving to slide 4, I want to continue this presentation by explaining our digital strategy. It is basing three pillars

[José Humberto Acosta:]

Thank you, Juan Carlos. Now turning to slide 7, I want to walk you through the evolution of the relief program. Credit reliefs have decreased throughout 2020, reaching the peak in the second quarter with 44% of the consolidated loan book under relief, and closing the year with 15% level. It is important to highlight that this 15% includes structural solutions that we are giving to our clients in Colombia and in El Salvador. This figure is lower than expected due to the less structural solutions in SMEs and corporate clients.

[Juan Carlos Mora:]

Thank you, José Humberto. 2020 was the most challenging years in the recent history. But it was a year where we also learned a lot. At Bancolombia, we are creating the bank of the future. We have a strong balance a better cost structure, a more diversified portfolio of products and services leveraged by a robust digital strategy with a positive evolution of digital platforms. 2021 began with uncertainty. The main challenges that we will have to face during the year will be; first, a demanding scenario from a risk management perspective; and second, relevant investments in digital and modernization projects to stay ahead in a highly competitive environment. After elaborating on these key topics, we want to open the line for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. Your first question comes from the line of Ernesto Gabilondo with Bank of America. Please proceed with your question.

[Ernesto Gabilondo:]

Hi. Good morning, Juan Carlos and José Humberto, and good morning to all of your team and to everyone. Thanks for the opportunity. I have a couple of questions. The first one is on asset quality. Can you share with us what is the percentage of deferred loans as of fourth quarter at a consolidated level? And how much is delayed with 30 days? And what was the amount of additional provisions built in 2020? And then so my second question is on operating expenses. Considering that you have been doing important efforts to control expenses in the last years, how much additional room do you see to maintain low OpEx growth, or do you think that digital transformation should make OpEx to grow above mid single-digit this year? Thank you.

[Juan Carlos Mora:]

Thank you, Ernesto. Let me give you some color on your two questions and then I will pass to José Humberto to elaborate a little bit more. Your first point about asset quality. When the pandemic began, there was a lot of uncertainty. At that point, we took the decision to release some credits or mainly consumer credits. Then when the year moved on, we started to see more clear what's the situation. And then we started to kind of normalize the situation. So we ended the year with a total of 15% of the total loan portfolio under some kind of relief or restructuring process. But now it's much more different. In Colombia, almost all of the portfolio is under a program of restructuration. Still in Panama there is an important portion of the loan book under relief and that will be the situation until mid -- the middle of the year. But now that we have a clear picture -- clearer picture of the portfolio, we kind of assess asset quality in a better way and have a better understanding of the current situation. Related to your second point about operating expenses, we think that 2021 is a year in which we need to invest in digital transformation, enhancing our capabilities. We will continue our program of digitalization and also improving our capabilities. Also, as I mentioned, we are moving aggressively to the cloud that will require some investments, that will have a very good payoff. So to answer directly your questions, your question 2021 will be a year of investments. The comparison base with 2020 is going to affect us. That means that growth -- expenses growth is going to be definitely above inflation. And as I mentioned, we will keep investing. So we will keep our programs of cost control. We are working on our branch network. We are also keep working on efficiency. But 2021 as in any -- in other aspects is going to be a transition year. Let me pass your questions to José Humberto for additional comments.

[José Humberto Acosta:]

Thank you, Juan. Ernesto, good morning. Regarding your first question, yes, in terms of the deterioration, we are foreseeing a combination of several factors. The first one is, deteriorations of 30 and 90-day past due, you're all going to see a pickup maybe in the first half of the year. Remember that when the reliefs ended at the end of the third quarter last year, we are seeing an increase in payday past due. And now we are going to see a deterioration and increase in 90-day past due. So as a result, we probably will see provisions coming in May and most relevant on the first half of the year. The second element is regarding commercial loans. In terms of consumer because of their model in a certain way is covering that level of provisions, we are foreseeing maybe a deterioration in certain corporate cases that suggest that also deterioration will pick up. Just to give you an idea to-date, we have 30 days past due at around 5%. We are expecting to the number reach a peak at around 6% for 30 days and 90 days, which currently is 3.8%. We are expecting maybe to reach the level of at least or at around 5%. So this is -- at the end of the day, we are naming as a transition year, which means that in terms of provisions, we are going to reach the normalization of cost of risk in 2022. Meanwhile, this year would be a transition period in which probably the cost of risk will be at a level of 3% area. And the second question was fully answered by Juan. Thank you.

[Ernesto Gabilondo:]

Thank you very much, Juan Carlos and José Humberto. I appreciate it.

[Juan Carlos Mora:]

Thank you, Ernesto.

[Operator:]

Your next question comes from the line of Jason Mollin with Scotiabank. Please proceed with your question.

[Jason Mollin:]

Hello, everyone. Thanks for the opportunity. My question is related I think in big picture terms to the impact of the 11% depreciation of the Colombian peso versus the US dollar in the fourth quarter itself on the results because given your business in Central America about 30% of the business on the assets, liabilities, equities side is denominated in US dollars. We see these big movements. And I think it would be helpful to have you confirm my view that the depressed level of net interest income which was down 19% quarter-on-quarter and you showed it very clearly that it's related to the debt investments, the loss on the debt investments. But you have in -- the way you showed other operating income we put it in trading, but there's a mark-to-market, I guess it's a net foreign exchange gain that's very large just to give it in that some of the numbers that I see here is the loss in the net interest income was COP152 trillion. And I see net foreign exchange gains of COP670 trillion. So if you kind of net that against each other the impact of treasury looks quite strong. And then maybe from a strategic perspective, I think this represents the fact that with that business in US dollars that you don't hedge that is my understanding. So you're going to face that volatility. So my thought is just can you share with us if there is some decision that could change that, or will -- is this just a position that will remain in dollars and that's part of the strategy, or could there be some hedging implemented in the future? Thank you.

[Juan Carlos Mora:]

Thank you, Jason. Yes, Jason, three questions in your speech. The first one is regarding the big picture. Yes, there were an appreciation of the currency in the fourth quarter and it is affecting in several lines. And let me elaborate. First on the asset side, you are seeing a drop in the loan portfolio. And this is as you mentioned one-third of our loan profit is denominated in US dollars. The second effect you are seeing is on equity side, which is from our point of view, a positive thing in terms of our equity structure because again 30% of our equities is denominated in US dollars, so also you see coming down the number in COP1 billion. I have to highlight Jason that we are fully matched in terms of our structure of US dollar business, which means that for example in Colombia, our exposure in US dollar is very, very limited and we don't have more than 3% of our loan portfolio in US dollars. The rest of our international operation is fully matched. So no matter what happens with FX, at the end of the day we are able to sustain our solvency ratio and we are not having any imbalances. But there are a third element regarding this particular quarter, which is what you are seeing on debt investments, which is true that investment shows a negative number and decline as a result of debt investment corresponding to the short-term portfolio invested in US treasuries. That as a result of the FX appreciation shows the negative numbers. However, Jason, this is a hedging of other balances position that we are having and those are reflecting in other operational income and the net effect is positive. So at the end of the day, when you see a change of the FX rate, in our balance sheet, we don't have a big change. We don't have a big impact. We are seeing that impact as a result of the hedging. So this is a particular situation that happens in the fourth quarter. Regarding the NIM, the reason why the NIM is compressed in the fourth quarter is not because of FX. It is because of combination of three factors. The first one, you see -- you know that the interest rates in Colombia have been dropping. We are asset sensitive. So the repricing of those loans is affecting and compressing the NIM. The second one as you see, stage three is growing up. And as a consequence of the big portion of our loan, 8.9% of our loan is stage three also we are affected. And the third element is the relief program because you are changing the interest rates so you have to register the net present value -- the new net present value and it is affecting the NIM. Regarding NII, NII in terms of the FX, moved both sides of the equation. NII has impacted the interest rate coming from the loan portfolio in US dollar, but also it has impacted the interest rates coming from the debt that we are having in time deposits, saving accounts and checking accounts. So at the end of the day, NII, it is compensated because of the two parts of the equation. What we expect NII in 2021 that will be lower than the loan growth. And there is one specific reason why? We are expecting that the loan growth for this year will appear. So we'd consolidate in the second half of the year. So again, the big picture is we are pretty much -- we are not having any particular exposure in US dollars. So the consequence is the managing of the hedge.

[Jason Mollin:]

Thank you very much.

[Juan Carlos Mora:]

My pleasure.

[Operator:]

Your next question comes from the line of Sebastián Gallego with CrediCorp Capital. Please proceed with your question.

[Sebastián Gallego:]

Hello, good morning. Thank you for the presentation and opportunity. I have three questions today. The first one maybe a follow-up on asset quality, I would like to understand a little bit better, how should we expect on a sequential basis, during the upcoming quarters the evolution of provision expenses? You mentioned that we could see that peak on, on NPLs and PDLs in the first half, but I just want to get a sense on how much we could see an improvement or how much can improve provisions on a sequential or on a quarterly basis? Second question is regarding actually dividends. You released yesterday your proposal as well. I just want to understand first, the material differences between the net income between full IFRS and the local individual net income? And also, what was your rationale behind the payout ratio in this proposal? And finally, my third question would be on Panama. How should we think about what could happen on provisions once the moratorium law is over? Thank you.

[Juan Carlos Mora:]

Thank you, Sebastián. Regarding your first question about asset quality, definitely, as we mentioned, we think that the second semester is going to be better than the first one. And regarding quarters, we think that this first quarter, we still will need to assess what is going to be the economic situation. Our expectations are on the positive side meaning that we are optimistic that economic conditions, particularly in Colombia are going to improve. We have a first month of the year January with some issues related to second peak of the pandemic, but we see some vigorous economic activity that allow us to be optimistic on the economic performance. But, what we have in our models is that we introduced that macro parameters and we run the provisions - the provision models. So if we see that economic activity is improving, we will be incorporating those results in our models. So we think that the first quarter, we still will see some provision levels in line with our forecast or our guidance but we will see further improvements in the second quarter and further on. Regarding dividends. Basically we have international norms of accounting, and it's the ones that we used to report and run the bank. And we have local Colombian GAAP in which we report to the superintendents in Colombia. The differences are mainly related to provisions and how provisions are incorporated in the local way of accounting. So we reported on an individual basis meaning, our Colombian operation, a net income of COP 900 billion in net income compared to what we reported on a consolidated basis. But the way we are -- or the way this works is, we are proposing dividends based on the local accounting rules and that is 28% payout ratio. What is key for us is how the solvency ratio is going to behave, and we are sure -- or we are comfortable very comfortable that the levels the capital levels that we have after this dividend proposal it's fine. So that's mainly the reason about dividends and regarding your third question Panama. Panama as I mentioned, it's under a moratorium until the middle of the year but we are not waiting for that moratorium to end. We are doing the provisions. We have a healthy coverage ratio. After the moratorium ends and the second half of the year, we will start working with our clients on restructuring them and working doing the things that we need to do to manage the situation. I don't know if José Humberto would like to add something to my comments. José?

[José Humberto Acosta:]

Thank you Juan Carlos. Just to complement the rationale why we are paying dividend remember that 47% of our shares are preferred and we have a dividend that we have to pay. That was the rationale. But the dividend payout as you can see in terms of yield is very low compared to what we paid last year. That's all Juan Carlos.

[Juan Carlos Mora:]

Just to complement that last comment is we have preferred shares that one of the preference is to have a dividend equal to 1% of the issue price. So what we are doing is we are compliant with that dividend.

[Sebastián Gallego:]

Very clear. Thank you very much.

[Operator:]

The next question comes from the line of Tito Labarta with Goldman Sachs. Please proceed with your question.

[Tito Labarta:]

Hi, good morning everyone. Thank you for the call. A couple of questions also. I guess first to get to that 12% to 13% longer-term ROE target. Just to understand the drivers to be able to get there. You showed this slide on your margins at 4.9% in 2020 down from 5.7%, 5.8% in prior years. Do you need to get back to that 5.7%, 5.8% level of margin? Is that dependent on higher interest rates? What could be the drivers of improving your margins going forward back to the historical levels? And sort of related to that in terms of efficiency, I understand you're investing in just the digitalization of the platform and moving to the cloud. But also like in Slide 16 you showed expenses to interest-earning assets fell to like 3.6% from a historical level like 4.2%. Is this 3.6% sustainable given the investments you're making? Is the 4.2% more reasonable to get to that 12% to 13% ROE? Where should that level of expenses to assets be? If you can help with those 2 it would be very helpful? Thank you.

[Juan Carlos Mora:]

Thank you, Tito. Let me elaborate on your two questions. 12% to 13% ROEs and your question is dependent on margins. Clearly we are at a low point of interest rates globally. I mean that's the case in the geographies that we operate particularly in Colombia. We are a very -- on a very low rates interest rate environment. So what we expect and I think is -- general expectations is that interest rates are going to raise in the probably not 2001 but 2002. And since we are asset sensitive that is going to give us some push on the NIM. But the ROE of -- the 13% ROE, it's going to depend basically on cost of credit. That's the main driver of our results. We keep working on interest rates how the mix of our loan book is going to be that it's going to help. We will continue working on fees and we have a big strategy on fees as we mentioned. We are moving aggressively to offer different alternatives to our customers that's going to help also. We will recover some margin. I don't expect to return to the levels we have before, but we will keep working on that and that will come. And then expenses that is your second question is another driver that we need to work on for achieving the ROE target. As I mentioned 2021, will be a year of transition. You mentioned this 2.4%, 3.6%. I think we will target midterm, the 3.6%. But it will be -- it will take us some time. This year, definitely is going to be a year, we will have, as I mentioned before, our efficiency programs in place and we will keep working, but expenses are going to be higher. I don't know, José Humberto, if you want to elaborate on the second question -- on the Tito's second question.

[José Humberto:]

No, that's very clear, Juan Carlos. Thank you.

[Tito Labarta:]

Okay. Thank you, Juan Carlos. Just one quick follow-up I guess, I understand yes, it definitely depends on the cost of credit. And you probably don't get there till 2022, but even if you get to that cost of credit like 2%, it still seems you would need some margin expansion. And I guess, just to try to take out, whether interest rates increase or not, which is probably out of your control. What can you do to improve the margin? Is it, grow the consumer loan portfolio, improve your funding costs? I mean, we have seen some improvements on your funding costs. But what kind of like self-help can you do to get that margin up to help also boost profitability?

[Juan Carlos Mora:]

Yes Tito. All of the above. As I mentioned, some recovery of the margin will come from interest rates that are raising. The mix is going to help. We are going to grow a little bit more on consumer loans that will give us a better margin. And cost -- funding cost also, is going to help. And let me add some color. We are growing our savings accounts on a very healthy pace and granularity is there. So -- and we -- and our digital platforms that now have close to 10 million customers are giving us that granularity and are helping with the funding cost. So, that also will help. So, we will have some better margins, because of increase in interest rates, the mix that we are going to work on adding more consumer loans, starting in 2020. we were very careful about the risk. And then funding cost, I think during this pandemic, we showed how strong is our franchise, how our capillarity to get deposits and our digital platforms are going to help a lot with the funding cost, so all of the above, Tito.

[Tito Labarta:]

Okay. Thank you, Juan Carlos.

[Operator:]

The next question comes from the line of Carlos Rodríguez with Porvenir. Please proceed with your question.

[Carlos Rodríguez:]

Good morning, everyone. Thank you for the conference call and taking my question. I have two questions. My first one is, what will be the strategy for the 2021 and onwards to tackle the new and coming banks, both digital and traditional banks and to defend your market share in Colombia? And my second question is regarding your guidance, in efficiency and ROE for the coming quarters and for the year in 2021 and going forward? Thank you.

[José Humberto:]

Carlos, good morning, let me begin with your second question.

[Juan Carlos Mora:]

José, I'm here. Let me -- I'm sorry. Okay. I am here sorry. Let me take your first question on competence and the competition. Competition is increasing, both from traditional players', banks and other entrants to the market fintechs and nontraditional financial service companies. What are we doing? And we mentioned we are investing. We are investing on digital. By the way, we are getting market share. We are at a pace in which we are acquiring clients is very healthy. We now have in all our platforms close to 17 million customers in Colombia, that's half of the -- half of any person that has had a relationship with a bank has a relationship with Bancolombia. That's not market share in terms of loans or deposits, but we are acquiring clients. Our digital platforms are acquiring clients at a pace of 300 to 400 each month new customers. So the activities there we have the platforms. We are adding new features. Now, we have digital debit cards. We are -- given our ability to analyze the credit risk and provide line of credits through our digital platforms is already there. So I think we are very well prepared for the competition that is coming. And by the way, we are growing. The competition is there. We have a big opportunity to prove. What we were doing in the past, during the last year, that accelerated a lot of our programs and we are growing very – on a very healthy pace. José could you take the second question – the second question, please?

[José Humberto Acosta:]

Yes, sir. Carlos, regarding your first part, return on equity as Juan Carlos mentioned, our goal for midterm is to be between 12% to 14% and that will be a function mostly of cost of risk. But going to the 2021 to your specific question, we are forecasting at the end of this year, mid-single-digit return on equity. And this is again, because probably we are assuming that we will come from 3.9% cost of risk, so 3% at the end of the year. That will be the most relevant point that affects the return on equity. Regarding efficiency, as Juan Carlos mentioned in the previous question, digital will be the key investments during this year and that will be focused on maintaining the competitiveness to maintain the level of transactions that we are having today. So our goal for mid-term is to reach the level of 45% 46% efficiency level. And that will be achievable once those investments that we are planning to do this year begins to show on the net income side.

[Carlos Rodríguez:]

Thank you, Juan Carlos and José Humberto.

[Juan Carlos Mora:]

My pleasure.

[Operator:]

Your next question comes from the line of Alonso Garcia with Crédit Suisse. Please proceed with your question.

[Alonso Garcia:]

Good morning, everyone. Thank you for taking my question. My first question relates to taxes. I know it's – there's a lot of uncertainty, given the tax discussions in Colombia this year. But what's your effective tax rate assumption for this year and for the years ahead? And my second question is a follow-up on provisions, where you mentioned that, if you see improvements in economic expectations later this year, you would update your models and that would probably result in a release of provisions like basically the opposite of what happened this quarter. So I wanted to ask, if that's something embedded in your 3% cost of risk guidance, or if that would be upside to that number? Thank you.

[Juan Carlos Mora:]

Thank you, Alonso. Let me start for your second question provisions. Yes I mentioned that we will incorporate further information into our models, once we know how is going to be the economic performance. But that is not incorporated right now on the guidance that we are giving around provisions. It's with the expectations that we have at the end of the year and the beginning of the year and it doesn't incorporate further improvements. That – if that improvement occurs, is it going to mean that we are going to release provisions? I don't think so. I don't think that that is not going to be the case during this year. That could affect the cost of risk is going to – could be lower, if those – that economic activity is healthy. And we see that the GDP forecasts are improving. But I don't see provision releases during this year. That could occur more towards the next years. Related to taxes, we expect a tax rate around 28% for this year. That is because of the mix of statutory rates and particularly – particularities around tax regulations in the different geographies in which we operate. I don't know, José, if you want to elaborate more on taxes or provisions.

[José Humberto Acosta:]

In tax, specifically Juan, yes, there will be as Alonso mentioned, very difficult to forecast taxation this year. But let me put it in perspective there will be three factors that will affect the taxation this year. The first one is, you know that in our international operation the statutory tax is lower than the statutory tax that we have in Colombia that will give you a bit maybe the opportunity to reduce the taxation. The second element is we have other operations with zero taxation, as for example, Bancolombia Panamá also will help to maintain taxes at a level that Juan mentioned. And the third element that is also relevant regarding the operations in Colombia is every time we have a mortgage social housing or investment in productive fixed assets, we have our exemptions. So if you combine those that would be – the number would be below 28% as Juan Carlos mentioned.

[Alonso Garcia:]

Thank you.

[Operator:]

Your next question comes from the line of Andres Soto with Santander. Please proceed with your question.

[Andres Soto:]

Good morning Carlos and Humberto. Thank you for the presentation. I have a couple of questions. The first one is a follow-up on your guidance on cost of risk. When I look at your total allowances to total loans, the ratio is 8%, which is pretty high to me. But still you are expecting cost of risk to be significantly above your normalized level in 2021. I would like to understand if you think about geographies to what extent this is driven by Colombia or rather by your Central American operation? That will be my first question. My second question is related to expenses. You mentioned digital investments as a reason to expect a high expense growth in addition to hard comps in -- from 2021 to 2021 -- sorry from 2020 to 2021. So, I would like to understand in terms of your digital investment cycle, what is the point we are now? How much you are expecting to invest in 2021? And how much additional investment you will need for 2022? Thank you.

[Juan Carlos Mora:]

Thank you, Andres. Cost of risk and we are -- currently, we are at -- 8.1% is the percentage of provisions that we have in our balance compared to our loan portfolio. That number seems adequate. Again, we are giving that guidance that 2021 still we will have a high cost of risk depending on the economic performance of the economies, mainly Colombia. And you mentioned Panama. Yes, Panama, it's probably the geography in which we have more questions about how it's going to perform. Last year was the economy hit harder by the pandemic in terms of economic activity. Also we expect a rebound as in the other geographies. But put it in perspective what is going to drive the cost of credit during 2001 is going to be Colombia. Since it's our main operation and represents three quarters of our assets. So, Panama is going to have an effect. We have a lot of questions still to be answered around Panama's economic performance. We are more optimistic about Colombia. We think that the economy could perform better than what we have in our models, but we need to wait and see. And I think it's responsible for us to give you the guidance of 3% cost of credit that we have now with the variables that we are incorporating in our models and wait for the evolution. I remind you that we have a normalized cost of credit between 1.8% to 2% still three is pretty high. And as I answered Tito's question that's the main driver of our results. I don't have to say this. It's -- you know it but that's the key driver. Expenses, where are we on the digital cycle of expenses? I mean it's difficult to know. We made a big effort -- we have been making a big effort since 2017 investing in digital or 2016. We already have the platforms, but we will keep investing. And I can -- and I cannot say that this is going to end. I mean we will keep investing. But what is going to happen is that those investments are going to start returning -- or they started returning last year and will -- will return this year and the year after. So, probably we will need to keep investing to have the competitiveness of the bank in place but returns are going to be there. José I don't know if you want to elaborate on these two questions?

[José Humberto Acosta:]

No, Juan. It is very clear. Thank you.

[Andres Soto:]

If I may just a follow-up. When you mentioned this migration to the cloud that is going to start this year. What timeframe are we looking -- are you looking for these? And what is the specific investment for this in total and for 2021?

[José Humberto Acosta:]

Andres, could you repeat please, we couldn't get you?

[Andres Soto:]

Sure, José Humberto. I'm asking about, the cloud migration. You mentioned in your initial remarks…

[José Humberto Acosta:]

Yes.

[Andres Soto:]

Juan Carlos mentioned, this investment -- this plan. I'm curious about the timeframe and total investment related to 2021?

[José Humberto Acosta:]

Okay. Yes. We are investing for three years the timeline is the implementation will take us three years moving to iCloud. And the investment is -- it is at around $15 -- 1-5 million the cost of migrated to iCloud.

[Operator:]

That's perfect. Thank you, José Humberto and Juan Carlos.

[José Humberto Acosta:]

My pleasure in this.

[Operator:]

Your next question comes from the line of Carlos Gomez with HSBC. Please proceed with your question.

[Carlos Gomez:]

Thank you very much. My first question is regarding, how confident are you about the guidance for 4%, 5% ROE for this year? And in particular, how confident are you about the provisions in Panama which seems to be quite a fluid situation? The second question refers to, the difference between local accounting and IFRS and that is the basis for your dividend. Since your earnings were higher in 2021, does that mean that as provisions catch-up in local accounting that you might have lower returns in 2022 in accounting terms and therefore you might -- you might have less than 4%, 5% ROE in local terms in 2022? Thank you so much.

[Juan Carlos Mora:]

Thank you, Carlos. How confident are we with the guidance of 4% to 5% ROE? We are confident, it's challenging in relation with loan growth. But it's achievable. We are convinced that we can achieve those returns during this year around 4% to 5%. And that guidance is taking into account, how we believe Banistmo operation is going to behave. So we are pretty confident that, we can achieve that returns during the 2021 year. Regarding your second question I will pass on to, José Humberto.

[José Humberto Acosta:]

Thank you, Juan Carlos. Yes Carlos, as we mentioned before, the key difference is the level of provisioning that we are having in comparing our models with the local accounting system. This is a particular year in 2020 which, it was the other way around. I mean, the IFRS provisioning level was higher than the Colombian regulation provisioning. We are expecting Carlos, next year that will be aligned in order to reduce and to mitigate that difference in between the two level of net income.

[Carlos Gomez:]

Sorry, when you say next year, you mean 2022, or do you mean 2021? And again, should we expect a reversal of the impact that we saw in 2020?

[José Humberto Acosta:]

No. We are expecting for this year 2021, that the gap will reduce, if you compare both. Again, we are not talking about reversing. We are talking about that, because of the mortgages, some provisions will reverse will be coming down. But because of deterioration, you are going to see some provisions going up.

[Juan Carlos Mora:]

Carlo, let me elaborate a little bit more. The main difference as I mentioned is, regarding provisions. And during -- let me say normal times, those two accounting methods converge in general. But when we have these events the IFRS model incorporates further looking and incorporates macroeconomic variables into the models that's where the difference comes. So we will expect those numbers to converge in the future. But during this year, that are not normal years those numbers are a part. But we should converge, on these two accounting methods.

[Carlos Gomez:]

No. I mean, that is clear, that they will converge in the end. But, you have essentially anticipated some provisions because of what you said, they are forward-looking in IFRS? And you incorporated the macroeconomic variables. So it stands to reason that, if that comes to pass in 2021 you will have to provision more locally than you will have to provision in IFRS since you already have your provisions, which means that your results locally could be lower than under IFRS. I want to understand, if there is any …

[Juan Carlos Mora:]

That…

[Carlos Gomez:]

…kind of confusion there?

[Juan Carlos Mora:]

That could be the case, but it depends on how -- again, how the economic outlook or the economical behavior is going to be. Because, if the deterioration appears and we don't have that deterioration reflected on local accounting rules you are right, we need to incorporate additional provisions on local rules. But it depends on how the variables behave. But your analysis is completely correct. But we cannot conclude exactly, how it's going to be that behavior on local accounting.

[Carlos Gomez:]

Thank you for the clarification. Thank you.

[Juan Carlos Mora:]

Yeah. Thank you, Carlos.

[Operator:]

Ladies and gentlemen, we have ended the question-and-answer session. And this concludes today's conference. Thank you for your participation. You may now disconnect.