Bancolombia S.A. (CIB) Q2 2019 Earnings Call Transcript

Bancolombia S.A. (NYSE: CIB)
Q2 2019 Earnings Call
August 6, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen and welcome to Bancolombia's second quarter 2019 earnings conference call. My name is Sofie and I'll 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. During the question and answer session, if you have a question, please press * then 1 on your touch tone phone. 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 this conference call, in 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. Juan Carlos Mora, Chief Executive Officer, Mr. Jaime Velasquez, Mr. José Humberto Acosta, Chief Financial Officer, Mr. Rodrigo Prieto, Chief Risk Officer, Mr. Jorge Humberto Hernandez, Chief Accounting Officer, Mr. Alejandro Mejia, Investor Relations Manager, and Mr. Juan Pablo Espinosa, Chief Economist.

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

Juan Carlos Mora Uribe -- Chief Executive Officer 

Good morning, everybody and welcome to our conference call for the second quarter of 2019. Bancolombia has had a positive performance during this quarter. The results are in line with our expectations at the beginning of the year and confirm some of the signals that we saw during the first quarter.

I would like to highlight two main issues that have driven our results during this quarter. First, the consistent credit quality improvement and a reduction in provisions and second, the steady acquisition of new customers and the continuous growth in consumer loans as well as the increasing number of transactions we are processing through our channels -- let me elaborate on these factors.

In relation with provision charges, we experienced a consistent improvement in the quality of the loan portfolio and therefore the provisions for the year are changing their trend. The deterioration of the loan portfolio has decreased in recent months and that implies lower provision charges. The corporate clients that had high impact in 2018 reached an adequate coverage level, which has a positive impact on the cost of risk. In June, we charged off Electricaribe's loan, contributing to the improvement of the PDL ratios.

Today, we have a 90-day coverage ratio of 165%, which we consider enough to protect the balance sheet. We believe that the cost of risk in 2019 will be below 2% as we expect the trend observed during the first half of the year to continue.

Regarding the number of transactions, they grew 26% over the last year. The mobile channel is gaining more relevance and growing more than 50% year on year. Coupled with more transactions, we continue to undergo a strong growth in consumer loans, which already present 19% of our loan book. Furthermore, we are expanding our customer base by adding more than 1.3 million customers over the last 12 months, improving the risk-adjusted returns of the portfolio.

Now, I want to give you an update of the progress on the digital front. Please go to slide No. 3. We are changing the business in such a way that more interactions with processes, channels, and products are conducted digitally. As a result, clients have a more convenient relationship with us and the scalability and efficiency of the business increases.

The outcome of this strategy is the growth in our consumer base. Today, we have more than 12 million customers in Colombia. Three key platforms complement the physical and online channels and permit us to reach a point where 60% of our customers use digital channels.

NEQUI, a digital bank for individuals, which has more than 1 million customers in Colombia and is adding around 100,000 per month is also in Panama. Bancolombia Llamanos, an inclusion platform targeting not bankerized individuals, which has now more than 1.4 million users and is adding new services such as micro loans. The Bancolombia, where more than 4 million customers operate on a regular basis, the portfolio savings, loans, mutual funds, and other services is integrated in one single platform.

Regarding enterprises, we have two groups, large corporations, which already have a high use of products and operate through the online and mobile platforms. The relationship manager helps the clients in their most complex needs and complements the clients with standardized interactions, like cash management, FX trading, hedging, etc. For SMEs, we offer a complete portfolio of financing products and services. Out of the 1.6 million universal SME customers, more than 56% are active users of the digital platform. We will continue developing the SMEs segment potential.

A key topic for our business evolution today is the macro situation in Colombia. We estimate that the GDP will grow around 3% in 2019. During the last month, we have seen a moderation of the economic recovery. But on the positive side, we highlight the household financial sales. The total financial burden has come down to 15% from 17% in 2017. Also, at the line, inflation has been in the upper end of the range set by the central bank. The current inflation remains [inaudible]. As a result, Colombia has had stable interest rates for the last 14 months and we maintain our forecast of 4.25% rate at the end of 2019.

This combination of factors explains to a large extent the evolution of corporate trade demand in Colombia. Having said this, I want to mention that our expectations for the second half of the year remain in line with what we have seen so far -- moderate growth on the loan portfolio, around 7%, stable margins around 5.8%, efficiency ratio around 48%. With these elements in mind, I want to ask José Humberto to elaborate on the main topics that are driving our results. José?

José Humberto Acosta Martin -- Chief Financial Officer

Thank you, Juan Carlos. For all of you, following the presentation, at the end, you can find additional information that complements the bank numbers. I want to start this presentation making a reference to the performance of the international operations, which you can see on slide No. 4. We have been seeing a positive trend across the geographies. In Banistmo, we have expanded NIMs, product of the loan portfolio reprising and stable funding cost. Also, cumulative costs growth has been negative, minus 0.7%.

In BancoAgricola in Sao Paolo, we highlight the consistent growth on the loan book and the stable funding cost. Also, we have had the negative growth in expenses, minus 6.5%. These factors have contributed to the cumulative 18% return on equity in this operation. In BancoAgricola in Guatemala, we updated the coverage for some corporate clients, which impacted the cost of risk and the results in the quarter. On average, the cost of risk for the group during the quarter was 1.8%. The main driver of the overall performance of Bancolombia was the evolution of the business in Colombia, given the relative weight of this operation.

In slide No. 5, we present the loan growth. The portfolio expanded 9% over the last year, mainly driven by consumer loans. As a matter of fact, consumer loans grew more than 26% year on year, and that represents a fifth of the total credit portfolio. As we mentioned at the beginning of the call, our efforts in convenience and digital channels have allowed us to grow much faster than the market in terms of customers and loans.

Bancolombia has consolidated its leadership in Colombia, with a market share of 26.2% of gross notes. And in consumer loans, we reached the 19% market share. The impact of the financial performance of the bank is reflected in better margins, a more stable deposit base, and the largest pool of active customers in Colombia.

Coupled with the growth, credit quality of the consumer loan portfolio has been in line with our forecast. The use of data and the knowledge of our customers has permitted to originate more loans and maintain deeper rates within our risk appetite. Today, the commercial portfolio rose 4.7% year on year, a slow pace compared to historical standards. We are looking forward to the second half of the year with a faster economic growth, which eventually will drive demand from companies. We reaffirm our loan growth at around 7% for this year.

On slide six, we see the evolution of margins. In the second quarter of this year, we show a positive performance of NIMs. This expansion is mainly explained by higher yields of the loan portfolio due to a change in mix and stability in the funding costs. The 26% growth in consumer loans outpaced the 4.7% growth in commercial loans, contributing to the change in loan book composition that is taking place.

Cost of funding has been stable because the Colombian Central Bank has kept interest rates at a level of 4.25% during the last 14 months. Additionally, the securities portfolio has benefited from the reduction of yields of Colombian treasury, helping the overall NIM to increase during the quarter. We don't forecast big variations in margins during 2019 and we are expecting a NIM of around 5.8% at the end of the year.

The funding strategy for some geographies would be to replace long-term debt with client deposits and promote checking and savings accounts like we have done in the first half of this year. The market leadership and franchise have permitted to accelerate the growth of savings and checking accounts over timed deposits. The outcome is a change in mix that maintains the funding cost relatively stable.

In slide seven, we present provision charges. In line with the trends of the first quarter, we have lower charge-off provisions than one year ago. This better performance is explained by three main components. One is the reduction of large corporate cases as we reached the target coverage and we did the write-off of Electricaribe.

The second is the overall improvement of the vintages, which has impacted parameters use for the estimated expected lows and therefore requiring lower provisions. Finally, the lower amount of new passive loans that we have seen in the year, this can be observed across all segments, commercial, consumer, and mortgage loans. The 90-day coverage ratio decreased because the run-off of a large loan to a mass transportation company in Bogota, which reached the 90-day threshold.

We wish to stress the fact that the rapid growth in the consumer loan portfolio has come along with the lower cost of risk for that segment. This is because the consumer loan portfolio and its NII have grown much faster than passive loans and cost of risk. The recent performance of the loan portfolio has lowered the cost of credit and lead us to forecast that this metric will be below 2% for the whole year.

The next slide No. 8 shows the quality of the loan portfolio. In this slide, we consider improvement in the 30-day passive loan and coverage ratios. This reduction is the outcome of the slower pace of deterioration. The 90-day passive loan ratio increased because of the iteration of a large loan to a mass transportation company in Bogota. The most important fact of this slide is the consistent reduction in the amount of new passive loans. This confirms the improvement in the conditions of the loan portfolio, in particular the commercial loan portfolio.

We have experienced improvement in SMEs and the issues with large corporate clients are in the past. Also, we have accelerated pace of charge-offs as we reach 100% coverage for troubled clients. The total amount of charge-offs was 1.16 trillion pesos. The effect of Electricaribe write-off was 642 billion Colombian pesos. We expect to maintain the recovery path in 2019 and, as we mentioned before, we forecast the cost of credit to be below 2%.

Slide No. 9 shows the evolution of fees. Fees are presenting a steady growth in 2019. To put it in perspective, fees have grown faster than total revenues of the bank over the last three years and as a result, they represent today 18.5% of the total operating income. Gross fees grew 13% versus 2018, representing a very dynamic pace. This evolution is explained by more transactions related to cash management services, bank assurance, debit cards, and asset management. Nevertheless, we have had higher expenses related to fees and services that we pay for and help us to move from fixed costs to variable costs.

Through 22% versus one year ago, lease agents already represents 18% of the total transactions performance by Bancolombia. And the fast growth in cost related to collections, which supports our strategy to grow faster in consumer loans and contribute to a low NPL ratio in that segment. We maintain our fee growth target between 8% to 10%.

Slide No. 10 shows the evolution of expenses and efficiency. During this quarter, we saw a consistent trend of improving in the cost to income ratio. This is mainly explained by the positive performance of revenues, which have diluted expenses. During the second quarter, we observe the stability in the operational expenses. Cumulative growth for the first six months of the year is 7%, but we are confident that as we advance in the year, the fee growth will converge toward our estimations at the beginning of the year, that is to be at around 5%. We reaffirm our forecast of cost to income that will be at around 48% at the end of the year.

After seeing the results of this quarter, I want to review our expectations for the year. Growth will remain in line with our forecast for all geographies, reaching 7% for the year. Regarding margins, we will continue optimizing the funding structure and promoting retail loans in the portfolio mix in order to maintain NIMs at around 5.8%. Fees should maintain a positive trend given the growing number of transactions in Colombia and the launching of new products in other countries. We forecast 8% fee growth.

In 2019, we see a normalization of the cycle, the stock of passive loans is not growing and we forecast a cost of risk below 2% as we see better performance of the loan portfolio. The combination of cost and revenue evolution should put the cost to income ratio at a level of 48%. With this combination, we forecast a return on equity between 12.5% and 13%.

After elaborating on these key topics, we want to open the line for questions. Thank you.

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. If you have a question, please press * then 1 on your touch tone phone. If you wish to be removed from the queue, please press the # sign or the hash key. We ask that you please limit yourself to one question and be prompt. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press * then 1 on your touch tone phone.

Our first question comes from Gabriel Nobrega from Citibank.

Gabriel Nobrega -- Citigroup -- Analyst

Hi, everyone. Good morning and thank you for the opportunity to ask questions. During the quarter, we saw that your 90-day NPLs actually increased despite you fully writing off Electricaribe. So, I here I just maybe wanted to understand what has happened and also, where do you believe we are in the NPL cycle in Colombia. Also, on the second question here, could you just guide us through the ongoing process with the government in relation to the liquidation of CRDS and are you expecting any relevance reversals from this loan? Thank you.

Juan Carlos Mora Uribe -- Chief Executive Officer 

Thank you, Gabriel, for your question. Regarding the 90-day ratio, as José Humberto mentioned, one big customer of the massive transportation [inaudible] reached the 90-day threshold. That's why the number increased during the quarter. As we mentioned in the last conference call, an agreement was reached among the operators of the massive transportation system in Bogota and Transmilenio.

Based on that amendment to the contract, we negotiate a risk operation of the loan with those operators. So, we will expect that for the third quarter, those loans are going to be normalized based on that change that we did for the loans. So, that will change during the third quarter. We feel comfortable with the level of provisions that we have at this moment. So, we don't expect any surprises on that front.

Regarding the Ruta del Sol II, we are expecting today what is going to be the result of the arbitration process and based on that, we will move forward. Let me remind you that we have a coverage of 50% of that loan that would have been in our books.

Gabriel Nobrega -- Citigroup -- Analyst

Our next question comes from Ernesto Gabilondo from Bank of America Merrill Lynch.

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

Hi, good morning, Juan Carlos, José Humberto. Congratulations on your results. My first question is on interest rates. Where do you see them this year? After the Fed's movement, do you think there's room for Colombia to lower rates? What's your sensitivity to a potential cut of 50 basis points in the interest rates? My second question is on the global trade war. Have you evaluated any potential impact on the economy or for Bancolombia? How does this compare against the region?

My last question is on your digital transformation. Juan Carlos, I believe you have done a fantastic job in this front. So, can you elaborate on what are the new challenges and opportunities? For example, how are you doing with the new QRs in taxis and mom and pop shops? What are you doing on smarter solutions? Are you developing apps for mom and pops? What are you doing in terms of fintechs? I don't know if there's a cross-selling topic for the next years. Any color on this will be very helpful. Thank you.

Juan Carlos Mora Uribe -- Chief Executive Officer 

Thank you, Ernesto. I am going to answer your question in the reverse order you put them. Let me first take your comment and question around digital transformation. As you mentioned, we have been working on this front for the last three years and we are now seeing the results. In concrete examples, we now have more than 100,000 shops that accept Bancolombia's QR code. The number of transactions through this mechanism are increasing rapidly. And our target is to provide a simple way of payment for small shops. I think the results are there and are improving and we see it in the number of customers that we are acquiring.

You mentioned fintechs. We are very active working with different fintechs in different fronts. We are doing joint ventures but also we are investing in some of them. So, we believe that fintechs complement very well our strategy and again, we are seeing the results in the number of customers that we are acquiring. Besides that, we have two platforms to do the basic transactions that people need and those two transactions, the one, NEQUI, which is a pure digital bank, is doing very well. It's growing fast.

The services that we are providing, the customer really appreciates what we are doing. We are starting to offer micro loans and that's growing also. You mentioned cross-selling. That's another target, another focus that we have. The numbers are also improving. We are happy with the results so far, how the operational numbers are improving, but also we know that still we have a lot a way to go and we keep moving, investing on the digital front.

With this, I'm going to pass to Juan Pablo Espinosa, who is going to answer your questions around interest rates in Colombia and the trade war.

Juan Pablo Espinosa -- Chief Economist

Yes, Ernesto. Regarding interest rates, not only the Federal Reserve but also by the central banks, Brazil and Chile has led several agents to maybe expect a rate cut in Colombia. However, we continue to expect as our baseline that referenced interest rates will remain stable for the remainder of the year. That is based first on the consideration that inflation has been increasing in a steady way in the last few months. For example, we knew that the inflation in July is through that almost 3.8%, which is close to the central bank ceiling. Given that there are short-term pressures on prices, that's a fact that will keep central banks cautious, in our opinion.

We have mentioned during the call we think the economy is going to recover in the second half of the year. So, in terms of having more stimulus in the monetary policy side, we think that's the case in Colombia because activity is going to pick up and interest rate levels, at this moment, are attractive enough to lead to more growth. Finally, with the uncertainty in global markets, we think the current levels of interest rates allows the central bank to counter in a certain way the effects on the markets, especially the weakness of the peso.

Regarding the trade war, we think that on the financial side, Colombia is exposed to volatility and risk-aversion, as we have seen during the last few days. In that sense, I think the Colombian peso could, in the short-term, weaken more than we have seen so far. In my opinion, that's a factor that will lead in the future to an adjustment in the current position in the country and eventually will go back to the levels we think are in line with fundamentals, which is around 3,200.

On the real side of the economy, especially on the possibility that the change in the trade flows across countries can actually lead Colombia to access some products, especially some products that are now subject to tariffs coming from China. In the medium term, I think this confrontation leaves opportunities for a country such as Colombia, which has at this moment active trade with the US and will remain to have a free trade agreement in effect with the United States.

José Humberto Acosta Martin -- Chief Financial Officer

Regarding the sensitivity, Ernesto -- for every 50 basis points of change of interest rates, the sensitivity for the bank is 4 basis points. That is basically because on the loan side, 70% of the loans are floating and on the liability side, around 50% are floating as well.

Operator

Our following question comes from Jason Mollin from Scotiabank.

Jason Mollin -- Scotiabank -- Managing Director

Hi, my question is on your guidance and outlook for the rest of the year. You've been mentioning you expect an acceleration in economic activity, yet you're talking about loan growth guidance of about 7% for the full year. We saw 9% year on year in the second quarter, 26% growth, as you mentioned, in the consumer side, slower growth on the commercial side, but how should we think -- I mean, the ROE guidance you're talking about is 12.5% to 13% and you reported 13.5% in the first quarter, 15% in the second.

So, are you looking for a material slow down that you're talking for ROEs in this 12.5% to 13%? I think part of it may be explained by the tax rate that was low in the second quarter, 25%. Typically, you talk about that being higher. You did talk about the high level of income from the securities in the net interest margin. That was 4.7%. That seems relatively high versus history. So, are you expecting pressure on loan growth?

You talk about stable NIMs for the year, but I would imagine from this quarter, there would pressure on that securities income. In general, why are you talking about a lower ROE for the year with an acceleration in income and what are the drivers behind this outlook for slowing profitability? Thanks.

José Humberto Acosta Martin -- Chief Financial Officer

Thank you, Jason. We have to explain several factors that explain the second quarter. The first one is cost of risk. You see that the cost of risk this quarter is 1.8% and our expectation is to be around 2% or 1.9% at the end of the year. That will affect, in a certain way, the level of income at the end of the year. Securities -- you see a very good performance of the security portfolio, which is 9% of our assets. We'll see, as Juan mentioned, the second half of the year, we don't expect a major change in interest rates.

So, the securities will behave as expected, meaning that these will be 1% of NIM of the securities. So, you don't expect from them huge performance for the rest of the year. The third factor is the fact that the FX, you see this evaluation of 10% year on year. One-third of our loan portfolio is in US dollars. So, we don't believe that at the end of the year, we don't have a clear picture about FX. That's the reason why we think that will be 7%.

The fourth factor is the path of growth of consumer, yes, it's growing at a pace of 26%, but there will be a kind of plateau. Remember that the first half of last year we very weak in terms of economic activity because there were elections, the situation politically was very noisy. That affected the level of business. So, you are compared to different basis, the first half of last year with the first half of this year. That's the reason why the combination of those four factors, why we believe that the loan growth at the end of the year would be 7%.

Juan Carlos Mora Uribe -- Chief Executive Officer 

Jason, let me summarize our view. We think that the trends that we saw during the first semester are going to continue during the second semester. The loan growth, we are cautious and we are forecasting 7%. Let me remind you that it's affected by the exchange rate. We need to take into account the FX rate. Second, at the beginning of the year, in general, we were expecting a 3.5% GDP growth for Colombia. Now, we are expecting 3%, which is not bad, but it's lower than we expected at the beginning of the year and that is affecting the commercial book.

So, for me, the question is how the commercial loans are going to perform. We have seen low demand and broadly, that's going to remain for the rest of the year. Regarding ROE, remember that we are accumulating capital. So, even though the returns, the net income, it's growing and it's improving, we are calculating the ROE on a higher base.

Also, it is important to take into account that cost of risk is key. At this moment, we are operating at around 1.8%. We think the cost of risk should be around 2%, a little bit lower, probably, but still, we need to be sure how it's going to perform the second semester. We combine all of that, the returns on equity are around 13%.

Operator

Our next question from Tiago Binsfield from Itau BBA.

Tiago Binsfield -- Itau BBA -- Analyst

Hi, everyone. Thank you for taking my question. I just have one question on NEQUI. You now have 1.1 million users. I don't know if you shared this information, but if possible, can you tell us how many of these clients are not Bancolombia clients? In other words, how many of these clients do not have a Bancolombia account? Also, a second part of this question, can you share a little bit more details on your monetization strategy or the revenue potential of these NEQUI clients? Thank you.

Juan Carlos Mora Uribe -- Chief Executive Officer 

Thank you, Tiago. At this moment, around 500,000 customers of NEQUI are not Bancolombia customers. Those are just NEQUI clients, which for us is very positive. They are seen in NEQUI in alternative for their financial transactions as a platform that allows them to move money digitally.

Regarding monetization, we have the basics, the core products of the platform are free, meaning a savings account and you can withdraw money in any Bancolombia ATM or banking correspondent free of charge. But we have additional services like a prepaid card in which you already have more than 100,000 prepaid cards. We also have a joint venture with PayPal and that has been very successful in which NEQUI customers could bring money from their PayPal account and withdraw that money in pesos in Colombia. That has been very successful.

We also have a pop-up business growing. Additionally, we also have an agreement with the massive transportation system in Medellin in which you can prop up your card for riding the metro, also growing very well. You can do payments. Also, we integrated NEQUI with the QR study of Bancolombia.

So, now, NEQUI is accepted in any shop that receives a Bancolombia QR. So, that's growing also. As you see, there are businesses around that generate fees and we are reaching a number of customers that allow us to continue growing and improving returns of this platform.

Operator

Our next question comes from Andrés Soto from Santander.

Andrés Soto -- Santander -- Analyst

Good morning. Thank you for the presentation and congratulations on the results. My question is related to FX. Based on yesterday's performance, the Colombian peso has depreciated almost 20% over the last 12 months. The last time we saw this performance, we saw an impact of that in terms of asset quality. I would like to understand what is the current exposure of your clients in terms of local clients, Colombian clients with US dollars and how do we assess this risk, putting some pressure on your asset quality indicators? Thank you.

Juan Pablo Espinosa -- Chief Economist

Thank you, Andrés. Yes, there is a small portion of our loans in Colombia in US dollars. That would be at around 5%. Most of them are related to trade business. That implies that this kind of company can take these kinds of loans, they have protections because they are exporters or they have derivatives. So, we don't see as a first stage a huge impact because again, the size of their own portfolio in US dollars, it is very limited in Colombia. On the other side, we are protecting our balance sheet against FX. Remember that around 20% of our equity is also in US dollars. That protects our services ratio and protects us against FX variations.

Operator

Our next question come from Julian Amaya from Davivienda Corredores.

Julian Amaya -- Davivienda Corredores -- Analyst

Good morning. Thank you for the presentation. I have two questions. The first one is related to the growth of the consumer portfolio. Could you please explain a little bit further about this. Also, the performance of the operation in Guatemala, could you also explain about this and the trend in the future? Thank you?

Juan Carlos Mora Uribe -- Chief Executive Officer 

Thank you, Julian. Regarding the consumer loans, we decided a couple of years ago that we want to add more consumer loans to our books. We are using our analytics capabilities in combination with other information to assess the credit worthiness of our current customers, basically. Based on that, we are preapproving lines of credit to them. That's why we are growing at the pace that we are growing.

Most important is that we are growing without deterioration of the loans. As you see, the past due loans on consumer loans are not increasing. If you compare our past due loans in Colombia with other institutions, it's even better. So, we are growing in our customer base based on information and analytics that we have on our customers. On the risks that we are taking, we think it's under control.

Regarding Guatemala, let me pass that question to José Humberto.

José Humberto Acosta Martin -- Chief Financial Officer

Thank you, Juan. In Guatemala, we have been doing several things. The first is the key challenge there is how to become more efficient. Remember the number of efficiency levels a year ago were around 70%. Today, we are at the range of 65%. Our target is to reach a level of 50% efficiency ratio in 2020. How we are planning to do that, with a combination of factors -- first, we are reducing the number of branches. We came from more than 220 two years ago and we are expected to close the year with 150 branches.

The second one is the headcount. We announce a reduction of the headcount of 9% in April, which is helping to become more efficient. This is on the efficient side. On the quality of the loan portfolio side, we are increasing the level of provisioning under IFRS standards. So, the combination of these two factors is the reason why it's affecting the financial segments for this second quarter.

Operator

Our next question comes from Yuri Fernandes from JP Morgan.

Yuri Fernandes -- JP Morgan -- Analyst

Thank you, gentlemen. Congratulations on the results. My first question is regarding the Central American business. If you can explain a little bit how you see El Salvador and Panama growing the future, in particular in Puerto Rico, the cost of risk was really low. So, are those 20% ROEs sustainable for that business or could we see more mid-teens ROEs for Puerto Rico? And for [inaudible], it seems like the tax rate was a bit low. If you can comment on that, it would be great.

My second question is regarding a small asset sale you had, I think 35 billion pesos pre-tax. If you can comment on what would that, if we should see additional asset sales in the future, that would be great, as well. Thank you.

Juan Pablo Espinosa -- Chief Economist

Thank you. Regarding Central America and BancoAgricola, as you mentioned, yes, the cost of risk this quarter is historically low, reaching the level of 0.5%. Our forecast is that cost of risk at the end of the year will be 1%. This is the BancoAgricola position, by far the most profitable operation that we are having.

We are expecting to close the year with a return on equity at around 17%. And this is because of combination of cost control, loan growth. They are growing both in commercial and also, in consumer loans. The NIMs are quite health. So, this is a very good operation. But again, cost of risk, we are forecasting a cost of risk at around 1.1% or 1.2%. The coverage, which is relevant, that would be at around 250%.

Regarding Banistmo, the reason why the taxation in Banistmo, it seems low this quarter is because we have an exposure in securities and those securities are tax-free, the interest that we receive. That explains part of the reduction of the taxation. Remember then the statutory tax in our international operation is at around 25% in those geographies and the statutory tax in Colombia is 37%, but the combination is reflecting at 28% this quarter and the reason is because of the performance of the international operation.

José Humberto Acosta Martin -- Chief Financial Officer

And Yuri, regarding the 35 billion you were asking about, this is the result of the sale of our operations in Peru. Remember, we completed that process during this quarter. So, we booked this 35 billion as revenue.

Operator

The next question comes from Nicolas Riva from Bank of America.

Nicolas Riva -- Bank of America Merrill Lynch -- Analyst

Thank you for taking my question. I've got to follow up on Ruta del Sol. You mentioned earlier in the quarter you were expecting a decision from the Tribunal today. I wanted to ask you what your expectation is regarding that liquidation value, how much more the banks are going to get repaid. If you can remind us your exposure, you mentioned 50% coverage of the exposure. I am estimating a number around $110 million for diverse exposure before reserves, but if you can remind us your exposure in dollars or Colombian pesos, that would be helpful. Thanks.

Juan Carlos Mora Uribe -- Chief Executive Officer 

Thank you, Nicolas. As I mentioned today, we are expecting the decision from the Tribunal. Our position is that we lent money to a project. That money was invested. The road is there. It's not completed, but the money that we lent was invested in the project. So, our expectations are that we should get repaid for the money that we lent and was invested. We need to wait for the results of what the Tribunal is going to say today. For us, it's clear that we lent money. The money was invested and we should be repaid.

Regarding our exposition, we have an exposition of 390 billion pesos, which is something around $110 million. With this volatility now, I don't know how much it is in dollars -- around $110 million to $120 million. And we have a coverage of half of that. Already, we have reserves for that. We need to wait for how this is going to evolve. We will analyze the results. We will see the decision and based on that, we will take the actions accordingly to that decision.

Operator

Our next question comes from Sebastian Gallego from CrediCorp Capital.

Sebastian Gallego Betancur -- CrediCorp Capital Ltd. -- Analyst

Thanks for the presentation. I have two questions mostly on strategy. The first one is related to a new branch format that you launched in Medellin. Can you please tell us how that's going and if you're planning to expand that branch model. The second question is regarding all that digital strategy and all the services you're providing with NEQUI and all the products you have been mentioning. What's the status of those products and those services in Central America. Are you already implementing all that strategy or what stage are we on right now? Thank you.

Juan Carlos Mora Uribe -- Chief Executive Officer 

Thank you, Sebastian. Regarding your first question, as you mentioned, we opened a branch. We call it a lab. It's a branch in which we are experimenting with the different technologies and different interactions with our customers. It's a self-service area, which is doing very well. The acceptance of that self-service area is very positive. Also, the branch, how the branch is organized is not like a traditional bank branch.

What we are doing is we are learning a lot. We are learning how the customers like what we are offering and we are adjusting the model. So, the concept of lab is working very well. Yes, we are planning to open a branch in Bogota this year. And we will continue evolving on this concept. As I mentioned, it's a concept in which we interact with our customers. We learn and we adjust and we will be adding some of the things that we are learning in the traditional branch network. So, it's part of the process of our evolution and our relationship with our customers.

Regarding our digital platforms in Central America, NEQUI was launched in Panama two years ago. It's growing well. It's very well accepted. It's also an alternative to the traditional banking offer in Panama. We are very happy with the results of NEQUI in Panama. In the case of El Salvador and Guatemala, we are launching new products in El Salvador. The QR code strategy is there. We launch a new app this year. So, it's also going very well and we are leading that process in Central America.

In the case of BAM, our focus now is different. We are working on cost. We are working on the number of branches. So, this year is going to be more on organizing and having the platform. Next year, we will start to deploy this strategy in Guatemala.

Operator

Our next question comes from Alonso Garcia from Credit Suisse.

Alonso Garcia -- Credit Suisse -- Analyst

Good morning. Thank you for taking my question. My question is regarding regulation. [Inaudible] attempted to eliminate the number of banking fees. So, that removed a significant source of risk for Bancolombia. I want to hear from you if you were seeing any proposal in the foreseeable future or any sort of risk [inaudible] in the coming quarters. Thank you.

Juan Carlos Mora Uribe -- Chief Executive Officer 

Thank you, Alonso, for your question. Regarding regulation, you mentioned that project that went through Congress last semester. I think that's the process that we are going to continue seeing. Our position is that if we advance in our strategy of offering better products, digital products, in many cases, free products. That's the way that we are going to keep moving on the direction of having a good offer to our customers and not letting those initiatives have ground on how we go to the market.

So, there are some initiatives already in Congress, but they are much more moderate and many of them are also in line with what we are thinking. We will continue to see that. I think it's a trend all around the world. If we keep improving our offer and being closer and adding new customers, we think we can handle well this trend that is there in the market.

Operator

Our next question comes from Carlos Gomez from HSBC.

Carlos Gomez-Lopez -- HSBC Securities -- Analyst

I have two questions. The first one refers to El Salvador. Do I understand correctly that you expect now an even term ROE of 17%? How comfortable are you lending in El Salvador? It has been a difficult market and not a high growing economy from a number of years. Are you more comfortable now than you were in the past? My second question refers to capital. You may have mentioned it earlier and I may have missed it. If you can give your estimated timeline for Basel III implementation right now and remind us of the impact? Thank you.

Juan Carlos Mora Uribe -- Chief Executive Officer 

Thank you, Carlos. Regarding El Salvador -- yes, we feel comfortable in El Salvador. We have been feeling comfortable since we are there. The economy is not growing much. You are right. But we are market leaders. The margins are good. The cost of credit is low. The bank is more efficient. So, we have a combination that is really positive in El Salvador.

So, we will think that ROEs in El Salvador will continue around 16%-17%. It's not something that we just saw on one quarter, but we think that in the mid-term, we can achieve those returns. It's a combination. We are investing in El Salvador in new technologies. As we mentioned, in digital, the cost of risk is low, the economy is not growing much, but we are market leaders and we manage to grow our loan portfolio on decent numbers. And costs are under control. We really believe that we can maintain those kinds of returns in El Salvador.

Juan Pablo Espinosa -- Chief Economist

Regarding your second question, we are expecting the new regulation from the regulators and they are adjusting their risk-weighted assets. At the beginning, a year ago, we thought that we would begin the process next year, but we are not sure that will take place the second half of 2020 or we'd have to wait until 2021. We didn't realize any particular message from the regulator and any particular decrease we are expecting. Once we know, we will let you know when it's going to happen, the Basel III in Colombia.

Operator

We have no further questions at this time. Thank you, ladies and gentlemen. I will now turn the presentation back over to Mr. Mora, Chief Executive Officer, Bancolombia, for final remarks.

Juan Carlos Mora Uribe -- Chief Executive Officer 

Thank you, everybody for your interest in our conference call. We think that the results that we presented are good. We are confident that these results are based on the trend that we are following. We will expect that the second semester of the year performs similarly to the first semester. Again, thank you very much. We expect you in the next conference call for the third quarter of 2019. Have a good day.

Operator

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

Duration: 61 minutes

Call participants:

Juan Carlos Mora Uribe -- Chief Executive Officer 

José Humberto Acosta Martin -- Chief Financial Officer

Juan Pablo Espinosa -- Chief Economist

Gabriel Nobrega -- Citigroup -- Analyst

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

Jason Mollin -- Scotiabank -- Managing Director

Tiago Binsfield -- Itau BBA -- Analyst

Andrés Soto -- Santander -- Analyst

Julian Amaya -- Davivienda Corredores -- Analyst

Yuri Fernandes -- JP Morgan -- Analyst

Nicolas Riva -- Bank of America Merrill Lynch -- Analyst

Sebastian Gallego Betancur -- CrediCorp Capital Ltd. -- Analyst

Alonso Garcia -- Credit Suisse -- Analyst

Carlos Gomez-Lopez -- HSBC Securities -- Analyst

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