Bancolombia S A : Q3 2022 Bancolombia S.A. Earnings Conference Call script in English

Bancolombia

Third Quarter 2022 Earnings Conference Call

November 16, 2022

Bancolombia - Third Quarter 2022 Earnings Conference Call, November 16, 2022

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

Juan Carlos Mora, Chief Executive Officer

Juan Pablo Espinosa, Chief Economist

Jose Humberto Acosta, 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

Jason Mollin, Scotiabank

Andres Soto, Santander

Ernesto Gabilondo, Bank of America Merrill Lynch

Tito Labarta, Goldman Sachs

Carlos Gomez, HSBC

Julian Ausique, Davivienda Corredores

Yuri Fernandes, JPMorgan

Alonso Garcia, Credit Suisse

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

Operator

Good morning, ladies and gentlemen, and welcome to Bancolombia's Third Quarter 2022 Earnings Conference Call. My name is Ariel, and I will be your Operator for today's 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, addresses matters that involve risks 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

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Bancolombia - Third Quarter 2022 Earnings Conference Call, November 16, 2022

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

With us today is Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Mauricio Rosillo, Chief Corporate Officer; Mr. Jose Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mrs. Catalina (phon) (inaudible), Investor Relations Director; and Mr. Juan Pablo Espinosa, 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

Good morning, everybody. Welcome to Bancolombia's third quarter conference call.

In this quarter, we reported COP 1.6 trillion of net income. We are having a responsible growth across all segments, increasing revenue, and producing positive operating leverage. The asset quality metrics of the bank remain strong, confirming an effective origination strategy.

The countries in which we operate present a good performance, especially Colombia, which may grow at a rate above 7% in 2022 and has contributed to the rapid expansion of the bank's portfolio during the year. In recent months, however, we have seen a change in the trend of credit demand, particularly in retail, driven by inflationary pressure and a high interest rates environment that is impacting the customers' payment capacity.

Liquidity continues to be one of our focus areas coupled with our capital structure and risk management. We hold a solid funding base that supports comfortably our needs to operate the business. We have increased the collection of deposits in the last year and also we have broadened the access to mid- and long-term financing from multilaterals and international banks that complement funding structure.

It is worth mentioning that this week ends the approval process by congress of the tax reform that will allows the government to collect an additional 20 trillion pesos to face its social expenditure program in 2023. This reform has a direct effect on financial institutions, imposing a surcharge that increases the statutory tax rate from 35% to 40% from 2023 to 2027. In general, this reform has focused on a greater contribution from high-income taxpayers, as well as corporates from financial and energy sectors. Energy companies will have incremental taxes associated with both oil and energy prices.

An important subject to follow in the government agenda will be the minimum wage increase that will be key for 2023 inflation development. Currently it is being discussed by stakeholders and it is based on the projected consumer price index (CPI) growth above 12% for the end of the year. For the rest of the topics in the political agenda, we have not seen further progress so we will be looking forward for new announcements through the end of the year.

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.

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Bancolombia - Third Quarter 2022 Earnings Conference Call, November 16, 2022

Now, please go to Slide 3 in the presentation. Let me start by saying that the Colombian economy has continued to perform better than initially expected. Based on the still-strong performance seen in the third quarter of the year, we anticipate a GDP growth of 7.8% in 2022, higher than our previous estimate and above the consensus forecasts. This is due to the strength in private consumption and the increase in terms of trade thanks to oil and coal prices.

In contrast, for 2023 we foresee a sharp moderation of growth, to a rate of 0.9% in the central (phon) scenario, as aggregate demand cools off in a context of higher interest rates, global deceleration and continued uncertainty. We anticipate that next year the best-performing sectors will be public administration, agriculture, financial services, and utilities. On the contrary, retail, manufacturing, mining, and construction are expected to contract.

The main risks for economic activity next year are: first, a sharp tightening of financial conditions caused by recent stress in markets; second, a pronounced deterioration of households' purchasing power as a result of persistent inflation; third, a deterioration of labor markets caused by economic deceleration and higher salaries; and fourth, the spillover effects of a major moderation of the global economy.

On the front of interest rates and prices, we anticipate reference rate will peak at the first quarter of 2023 to a level between 12% and 13%. This is consistent with an inflation closing at 12.5% in 2022 and remaining well above the Central Bank's target range during 2023 and even in 2024. Our point forecast for December 2023 is 7.5%. The main reason behind this prospect is that core inflation will remain under pressure, because of peso depreciation, the operation of indexation mechanisms and salaries revisions.

Under these circumstances, we do not see a space for a quick change in the monetary policy cycle. Actually, we anticipate mild repo rate cuts by the second half of 2023 to a level of 10% in December next year. This means that monetary policy will remain in contractionary mode during the foreseeable future.

Regarding the exchange rate, in our basic scenario we forecast an average USDCOP rate of 4915 for 2023, up from 4250 in 2022. This means that the factors supporting Colombian peso weakness, namely tight financial conditions, higher-than-peers current account deficit, and uncertainty regarding the reform agenda will remain relevant. This depreciation would stimulate non-traditional exports, at the cost of exerting significant pressure on tradable inflation.

Finally, on the fiscal side, we expect Central Government's deficit to reduce from 5.6% of GDP in 2022 to 4.8% of GDP in 2023. This figure is consistent with the fiscal rule and incorporates the additional revenues from the tax reform. Moreover, if we assume that the additional tax collection coming from this reform will be split between social programs, debt service and fiscal consolidation, we anticipate that the net impact of the reform on overall economic activity will be negligible.

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

Juan?

Juan Carlos Mora

Thank you, Juan Pablo.

Moving to Slide 4, I want to present the loans and deposits performance.

In the last two quarters, growth in the loan portfolio has been mainly driven by commercial loans which entails lower risk and provides better coverage structures. In retail, the most dynamic segment has been

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Bancolombia - Third Quarter 2022 Earnings Conference Call, November 16, 2022

personal loans. We are experiencing a slower growth explained by high inflation and high interest rates. This changing trend is reflected more sharply in products such as credit cards.

In terms of our liability structure and given the environment of rising rates, after the first quarter, time deposits have grown at a faster pace than demand deposits, thus supporting our increasing funding needs.

Access to mid-term funding from international banks was also key during the quarter to complement our overall funding structure.

For the fourth quarter, and surely throughout a good part of the first half of next year, time deposits will be relevant to maintain a stable funding structure and comply with the liquidity requirements.

A couple of weeks ago we carried out a sustainable bond issuance for 640 billion pesos, through our International Development Bank. This is a mechanism used for the first time by a Colombian bank.

On Slide 5, we see the growth breakdown. When we analyze the evolution of the loan portfolio and the deposit base, it is important to note that depreciation of the peso had a significant impact, not only in an annual basis but also in the quarter. The local currency depreciated almost 11% from the end of June to the end of September, so after excluding the FX effect, the actual loan and deposit growth was 3%. Year- over-year the depreciation of the Colombian Peso was 20%, so the real expansion in loans and deposits was 16%.

On Slide 6, I want to provide some details on our pre-approved origination strategy.

The credit portfolio growth, when excluding inflation, has been around 15% year-over-year. Such performance is the result of a process that we began five years ago. Based on the analysis of the cash flow and expenses of our clients, we have been able to calculate their payment capacity and offer preapproved lines of credit with significant outcomes for the bank.

Leveraged on analytics, we have been able to implement this strategy broad-based across all segments in the case of retail, out of our customer base, 1.5 million have received an automatic customized offer in 2022. This process has led to a positive origination approach reflected in the 30-day past due loan ratio of 12.7% (phon), lower when compared to a 5.6% of the whole consumer portfolio.

On SMEs and corporate clients, we have also developed the capacity to preapprove loans based not only on the financial statements but also on the actual cash flows allowing us to be more accurate on our offers. This explains why we are having a better risk profile than the pre-pandemic figures, bearing in mind that in 2023 we could experience a higher deterioration caused by inflationary pressures, higher interest rates and lower economic growth.

On Slide 7 and Slide 8, we present the transactional performance of the bank as one of the key developments to highlight in the last few years, powered by the investments we made in technology, the modernization of the distribution network, and the implementation of digital solutions. We continue experiencing an accelerated shift to digital channels coupled with an important demand for services in physical channels, increasing our footprint in banking agents that have partially absorbed the increase volume of transactions.

We would like to share some of the figures that show our competitive advantage in the use of the different channels offered by the bank: first, a share of more than 70% in the Colombian mobile transactions market confirms our strong presence on the clients' everyday activities; second, an upward trend in digital engagement has led 76% of our customers to adopt at least one digital channel to execute their

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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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