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Bancolombia S.A. (NYSE:CIB)
Q3 2019 Earnings Call
Nov. 07, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to Bancolombia's Third Quarter 2019 Earnings Conference Call. My name is Anna, and I will be your operator for today's call. [Operator Instructions]. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions].

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 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 SEC.

With us today is Mr. Juan Carlos Mora, Chief Executive Officer; Mr. Jaime Velasquez, Chief Strategy and Finance Officer; Mr. Mauricio Rosillo, Corporate Vice President; Mr. Jose 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 of Bancolombia. Mr. Juan Carlos, you may begin.

Juan Carlos Mora Uribe -- President and Chief Executive Officer

Good morning, and welcome to our conference call for the third quarter of 2019. During this quarter, we saw a confirmation of the trends observed during the first half of the year. I want to make a special mention to three factors. First is the consistent improvement of the credit portfolio. Second, the positive evolution of fee revenues, driven by more volumes of transactions; and finally, the positive effect of our digital strategy, which permits to grow the number of customers and transactions.

Let me elaborate on these factors. Regarding the credit cycle, we continue seeing a consistent improvement in the quality of loan portfolio. And as a result, the quarterly provisions continue to drop down. The formation of past due loans during the quarter is the lowest of the year and indicated the vintages are performing in line with our expectations.

During this quarter, we completed the required provisions for Ruta del Sol and Consorcio Express. Today, we have a 90-day coverage ratio of 191%, which we consider very healthy to protect the balance sheet. This evolution leads us to estimate the cost of risk for 2019 is going to be between 1.8% and 1.9%. Now I want to elaborate on fee revenue. In recent months, we have seen a positive evolution of the number of transactions and the fee revenue linked to them. After a slow beginning of the year, customers are increasing the activity, and products like payments are evolving very well. And as a result, the income from debit and credit cards has been positively impacted.

Asset management has benefited from higher assets under management and the promotion of mutual funds among retail clients. Bancassurance continues to be one of the leading fee lines since we have promoted that product as a key component of people financial welfare. The rapid growth in consumer loans benefits the evolution of premiums. Nevertheless, it is more frequent today that clients get a life insurance policy independently from whether they have a loan facility or not.

Today, fee represents 20% of the revenues of the bank, and our goal is to continue promoting them by offering more value-added products and create a comprehensive solution to our customers. Finally, regarding the business evolution, we see the digital strategy having an impact on all business units. The segment that is experiencing the largest transformation is consumer credit.

Today, Bancolombia is signing around 150,000 new clients every month. We are onboarding new users at very little cost with our digital platforms like Nequi and through our legacy systems. This space is not only possible thanks to the simplification of processes, the new channels we are using and the use of analytics. The consumer credit segment has been a key component of our strategy in recent years. The good evolution of the portfolio has contributed in the improvement of profitability.

On slide number three, we present a set of operational metrics that gives you an idea of the materialization of our strategy. In particular, I want to highlight three factors: One is the accelerated growth of Nequi and Bancolombia La Mano, which have combined a combined base of 3.2 million customers. Our goal has been focused on promoting not only the acquisition of new customers, but also the utilization of the platforms. Today, we have a whole ecosystem around our digital bank and have started offering value-added products like consumer loans and insurance, among others.

The second is the fact that out of 100 products that Bancolombia originates today, 16 are sold through online and mobile banking. This number improves month-by-month. Finally, please look at the rapid growth of transactions in mobile channels, which grew 53% over the last year, while the number of transactions through branches decreased. Also, the use of banking agents have been -- is having a positive impact in the way clients interact with the bank.

With these elements in mind, I want to ask Jose Humberto Acosta to elaborate on the main topics that are driving the business today. Jose Humberto?

Jose Humberto Acosta Martin -- Vice President of Finance and 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's numbers. I want to start this presentation making a reference to the performance of international operations, which you can see in slide number four. We continue seeing positive trends across the Central American operation.

In Banistmo, we continue expanding NIM as a result of the loan portfolio repricing and stable funding cost. Also, efficiency has improved as existences grew 0%. In BancoAgricola, we highlight a 6% growth of the loan book, the 7.5% reduction in provision charges, the improvement in efficiency and as a result, the 34% increase in net profit.

In BAM, Banco Agromercantil de Guatemala, we continue with our efforts to improve the efficiency. In order to do so, we have shut down 7% of the branches during the year and have reduced the head count by 13%. Also, we increased the provisions for some corporate clients, which increased the coverage of past due loans. I would like to mention that the 8.5% depreciation of the peso versus the dollar during the quarter had a combined effect on the balance sheet and the results of the bank.

In slide five, we present the loan growth. The portfolio expanded 12% over the last year, mainly driven by consumer loans. Out of this growth, 6% is explained by the 17% depreciation of the peso versus the dollar during the last year, which impacted 37% of the loans denominated in US dollars. In line with the trend observed over the last quarters, consumer loans continue expanding at a rapid pace of 31% year-on-year. This segment already represents 21% of the total loan portfolio.

Commercial loans grew 6% and non-taxes grew 12%. The contribution of the growth in consumer loans is very positive. As an example, during the last 12 months, the assets related to the consumer segment in Colombia grew 26%, and the cumulative net income grew at around 51%, contributing to the better return on assets. These metrics indicated that the risk-adjusted returns for the new loans are very positive and continue -- and contributed to the improvement of the overall returns of the bank, while using the capital in a more efficient way. Linked to the growth in consumer loans, [Indecipherable] a greater number of transactions, utilization of credit and debit cards, money insurance policy attached to loans and more banking services.

On the other hand, the commercial loan portfolio remains slow due to weak demand from large corporates. We see this trend in line with the moderate economic growth, but at the same time, we see improvement in the credit quality of corporate customers and a healthy balance sheet. Now we look forward to 2020, when demand should pick up along with the faster GDP expansion. We reaffirm a loan growth at around 8% in 2019. That is excluding impacts of FX.

On slide six, we see the evolution of margins. In the third quarter of this year, we saw a compression in margins due to two reasons. First, there is an IFRS 9 accounting effect, which caused a drop in recorded revenue associated to loans classified in stage three. These loans were accruing interest until June 2019, but due to a ruling of the IFRS Committee, these revenues should be reversed. As a result, we had one-off adjustments of COP115 billion in interest, which represents 25 basis points drop in the lending NIM. This effect is compensated by the lower provision charges sold. The net effect in the results of the period is neutral.

The second reason is the reduction in margins generated from securities, which, in general terms, have had a positive year. In the second quarter of this year, there was a big appreciation of Colombia Government securities and other investment income. Excluding this adjustment, the lending NIM remains stable, and we forecast no variations for the rest of the year. Cost of funding remained stable as the Colombian Central Bank has kept interest rates at a level of 4.25% during the year. We are expecting a NIM at around 5.8% for the whole 2019.

In slide seven we present provision charges. In line with the trends of the first half of this year, we had a positive performance of cost of risk. All segments are performing very well, and that implies lower provision charges. Despite this reduction, the coverage increases. 90-day coverage ratios increased as a result of the new -- of the low NPL formation and the restructuring of Consorcio Express, the mass transportation company in Bogota.

Also during this quarter, we made COP139 billion in the recent charge for Ruta del Sol, which reached 89% coverage. As we mentioned in the previous slide, during this quarter, we had an adjustment related to IFRS 9 and had a lower provision charges by COP115 billion. There is no effect of this adjustment in the net income. As we have seen during the last year, the rapid growth in the consumer loan portfolio has come along with a lower cost of risk for that segment. This is because the consumer loan portfolio and its NII have grown much faster than past due 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 in between 1.8% to 1.9% for the whole year.

The next slide number eight shows the quality of the loan portfolio and the past due loan formation. In this slide, we can see the improvement in past due loans and coverage ratios. This reduction is the outcome of a slower pace of deterioration. We have experienced improvement in the commercial loans and completed the provision of large corporate clients. Also, during this quarter, we restructured the loan to Consorcio Express and that contributed to the low NPLs formation during the quarter. Again, we expect to maintain the recovery path in 2019 and as we mentioned before, we forecast the cost of credit to be in between 1.8% to 1.9% for the whole year.

Slide number nine, shows the evolution of fees. Fees continue growing during 2019. During the third quarter, net fees showed an increase of 17% versus the same period in 2018, and they now represent close to 20% of the total operating income. Revenues in this line have evolved positively due to a greater level of transactionality. The bank reached 2.6 million credit cards and 9.9 million debit cards in Colombia, growing at a pace of 6% and 10%, respectively, year-over-year.

Regarding the fee cost structure, the bank has experienced higher expenses associated to the banking agents, which have expanded as one of the main transactional channels. Currently, 19%, 1-9%, of the monetary transactions performed in Colombia added security through banking agents. The fee growth forecast for 2019 will be at around 8% to 10%.

Slide 10 shows the evolution of expenses and efficiency. The cumulative growth in operating expenses for 2018 has been 8%. This growth is explained by the following reasons. In labor cost, we posted higher provisions for bonus plan payments due to a higher return on equity.

In general expenses, the 17% depreciation of the pesos versus the dollar was the main impact. We forecast to have a cost-to-income ratio at the end of the year at around 49%. And for the year, we are expecting an opex growth of around 6%, excluding effect of FX variations. Finally, I want to present the return on equity for the quarter, which was 13.4% as a result of the COP879 billion net profit. This result confirms the good trends that we have seen in recent quarters.

I want to highlight the fact that this positive return on equity evolution is driven by the return on asset expansion, which sets the conditions for further return on equity expansion as the loan portfolio starts growing again in 2020.

Juan Carlos?

Juan Carlos Mora Uribe -- President and Chief Executive Officer

After seeing the results of this quarter, I want to address our expectations for the year. Growth will remain in line with our forecast for all geographies, reaching around 8% 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 around 5.8%. This should maintain a positive trend given the growing number of transactions in Colombia and the launching of new products in other geographies. We forecast 8% to 10% fee growth.

In 2019, we see a normalization of the cycle. The stock of past due loans is not growing, and we forecast the cost of risk to be between 1.8% and 1.9%, as we see better performance of the loan portfolio. With this combination, our forecast ROE will be around 13.5%, which is higher than our estimates we had one quarter ago.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And we have a question from Thiago Batista from UBS. Please go ahead.

Thiago Batista -- UBS Investment Bank -- Analyst

Hi guys, thanks for the opportunity. I have two questions. The first one, about the decision of the Colombian Constitutional Court about the 4% surcharge on taxes. My question is how much you guys are expecting in terms of tax rate for next year? And if you see any kind of reversion on the tax in the 4Q because of this decision? And my second question is about the profitability. You already mentioned that we can see further expansion of profitability, but what is the level that we can see in coming years?

Jose Humberto Acosta Martin -- Vice President of Finance and Chief Financial Officer

Okay, Thiago. Regarding your first question, yes, the implications of the rule of the taxes, the impact, it will be reflected in 4Q. And just to give you a number, assuming that we have to reverse the 4% of taxes, the number would be at around COP70 billion in reduction of taxes. That implies that our taxation at the end of the year will be in between 27% to 29%.

Regarding the profitability, you see the apparent performance of the return on equity this year. We are forecasting the return on equity for next year that will be at around 14.5%. And the key driver to reach that level would be loan growth, and we are expecting a much better performance of the loan growth next year that will be around 10%.

Juan Carlos Mora Uribe -- President and Chief Executive Officer

I would like to add, Thiago, that we are taking a conservative approach on taxes. We are reversing, as Jose Humberto mentioned, the extra 4% according to the rule of the Constitutional Court for this year. But we are not affecting the taxes expected for 2020 until we know the result of the tax reform that was presented again to the Congress in the past weeks. So we are reversing what is certain, which is the reduction of the taxes. But we will expect the result of the tax reform on Congress to do the appropriate -- or to have the appropriate measures on taxes for 2020.

Thiago Batista -- UBS Investment Bank -- Analyst

Thank you. [Indecipherable]

Operator

And we have a question from Jason Mollin from Scotiabank. Please go ahead.

Jason Barrett Mollin -- Scotiabank Global Banking and Markets -- Analyst

Hi. I have two questions. My first question is related to the impressive 30% growth in the consumer book, and that, in combination with a very controlled non-performing loan data. Perhaps you can talk about what's driving this growth? What kind of clients, the percentage of clients that are new to the bank that are already part of Bancolombia and really, if this is sustainable to show this kind of growth, given the size of your business.

We have no other bank with your kind of market share in Latin America, that I know of anyway, growing consumer at this kind of rate. How comfortable are you with the expectation that the NPLs will not start coming through And is that -- is this kind of growth rate part of your 10% growth expectation in loans for next year Is that sustainable on the consumer side? Thank you.

Juan Carlos Mora Uribe -- President and Chief Executive Officer

Thank you, Jason. Let me elaborate a little bit on your -- topics that you mentioned. We developed a strategy three years ago to increase our market share on consumer loans. Three years ago, our market share was well below our general market share in loans, was below 14%. Today, our market share in Colombia of consumer loans is around 19%, which is still lower than our market shares on other type of credits. For example, on commercial loans, our market share is at least about 30% this year.

And so we are now leaders in market -- in consumer loans in Colombia, and the growth has been mainly on our current customers. Even though we are acquiring customers at a very good pace, our study was based on addressing our current customers. And we did that with a different approach, using analytics and the information that we have on our current customers to offer them pre-approved lines of credit. And based on that, we have improved our participation on the market.

And that's -- and the result is that growth that you mentioned, about 30%. Regarding your question if that is sustainable, we think that those growths are not going to be at the same level in the future. We will continue focusing on consumer loans, but it's clear that after reaching close to 20% market share, we don't see that we will continue growing at the same pace.

Regarding your question if we consider that growth on our guidance of 8% and 10% loan growth, yes, we are considering that growth. But you will see a double-digit growth, but more on the teens than these figures that we are seeing at this moment.

And we are confident that we are doing -- we are approaching these customers with -- in a way that NPLs are not going to suffer. And we have seen that so far, and that on top of a good performance of the Colombian economy.

So overall, we aren't going to see the same levels of growth, but still, it's going to have a healthy growth. We are confident that in the way we are doing the business or we are growing the loan -- the consumer loans, we have controlled the NPLs. And overall, these numbers on retail loans are incorporated on our forecast for the growth of the loan book.

Operator

Our next question is from Nicolas Riva from Bank of America. Please go ahead.

Nicolas Alejandro Riva -- BofA Merrill Lynch -- Analyst

Yeah. Thanks very much. I have two questions. The first one on Panama. So last week, Aval announced that they are acquiring Multibank. That makes them the second largest bank in Panama. In Panama, you already have Banistmo. Does this change in any way your strategy in Panama, which remains quite fragmented as a banking system. And then the second question on Consorcio Express. So you say that you restructured the loan for COP700 billion or about $200 million. Does this mean that you moved it back to performing status and that you extended maturities or lowered interest rates. If you can give some color on what happened with this loan in the third quarter? Thanks.

Juan Carlos Mora Uribe -- President and Chief Executive Officer

Thank you, Nicolas, for your questions. Regarding Panama, we have a clear strategy in Panama. We have improving our performance in Panama with Banistmo. We're keeping this in the same direction. The bank is improving its profitability, and we will continue on that trend. It's a -- competition in Panama is high. We know that. But we are confident that with the incorporation of new products, digital products, our digital platforms, we are able to compete in that market.

So we will continue in the way we are going. And our goal is to keep improving the profitability of Banistmo, and we are confident that we are on the right direction. Regarding Consorcio Express, as you mentioned, the loan was restructured. We extended the tenor of the loan. But I would like to highlight that we kept the provisions, the reserve associated with the loan. The loan is reserved now around 65%. It has a positive impact on past due loans, as Jose Humberto mentioned, but we are taking a conservative approach, and we would keep the reserves until we saw how is going to be the performance of Consorcio Express in the future.

Operator

Our next question is from Jorge Kuri from Morgan Stanley. Please go ahead. Hello, Jorge. Your line is open and unmuted.

Jorge Kuri -- Morgan Stanley -- Analyst

Hi, good morning everyone. Congrats on the numbers. Two questions, if I may. The cost of risk, which has been better than expected, in particular, in the later quarters, how does that shape up for 2020? Can you continue to see improvements or the fact that you're growing your consumer book at this rapid pace means higher provisions? And so where do you envision the cost of risk to end up in 2020?

And then my second question is on capital. You're growing very rapidly. Your ROEs aren't improving as fast in order to self-fund the growth. And so the Tier 1 ratio looks a bit on the low side. And so I just wanted to get your view about where do you feel comfortable with capital? How do you see that moving along? And to what extent there may be some additional capital needed in order to continue to capitalize on the growth opportunities that you see ahead? Thank you.

Juan Carlos Mora Uribe -- President and Chief Executive Officer

Thank you, Jorge. Regarding your first question, cost of risk, we are confident that a level of 1.8 -- between 1.8% and 1.9% of cost of risk is achievable in 2020, even with the growth that we are having on the retail portfolio.

And let me elaborate a little bit. The cost of risk of the bank, the long-term cost of risk of the bank in the past with a different distribution among the different type of loans was around 1.6%, between 1.5% and 1.6%. With a better credit cycle, with a better performance of the economy, and as I mentioned with the origination that we are doing, we are confident that the 1.8%, 1.9% cost of risk is achievable.

And as I mentioned, the cost of risk -- the long-term cost of risk in the past was around 1.5%, 1.6%. So we are factoring that -- the fact that we have more consumer loans on our books, and we are incorporating that factor on our guidance. So we are confident that better economic -- macroeconomic conditions in Colombia in the next years, and with the way we have originated the consumer loans, we will reach that level of cost of risk in 2020.

Regarding capital, we don't foresee the need for additional capital. But let me ask Jose Humberto to elaborate a little bit more on that aspect.

Jose Humberto Acosta Martin -- Vice President of Finance and Chief Financial Officer

Thank you, Juan. As Juan mentioned, we feel comfortable with the capital that we are having today. Remember Jorge that for the next years, we will have two different factors. First, loan growth. In our math, the loan growth in between 10% to 15%, we are able to maintain the same capital level. And second, in 2021, there will be implemented Basel III. So you will see an adjustment basically in the risk-weighted assets. So for today, we believe that the capital that we are having today is more than enough, again, to maintain us a healthy loan growth in between 10% to 15%. And on the Basel III, we will continue to maintain the level for maintaining that investment grade in front of the rating agencies.

Operator

Our next question is from Jorg Friedemann from Citibank. Please go ahead.

Jorg Friedemann -- Citigroup Inc -- Analyst

Thank you for the opportunity. I have also two questions. The first one, on this point that you just mentioned, Jose Humberto, on Basel III. We are aware that Basel III implementation in Colombia is pointed toward probably the reduction of RWA. And given that you are growing in some lines of retail, this could benefit the bank. So if you could give us an updated overviews of guidance of where you believe -- I know Bancolombia could add in terms of core Tier 1 as a result of the Basel III, that would be very welcome.

And my second question is with regards to taxation. I understood from the comments from Juan Carlos that he mentioned that for the next year, you are still waiting for Congress to decide upon what is happening to taxation. But just to be clear, if this year, you are doing some reversals, and correct me if I'm wrong, but I understand that the COP70 billion reversal is for the full year that you're just downwards by the removal of the tax surcharge of the 4%.

Next year, are you still maintaining an expectation of a 3% tax surcharge? Or should we also work with the same level of final tax rate of this year between 27% and 29%? Thank you.

Jose Humberto Acosta Martin -- Vice President of Finance and Chief Financial Officer

Thank you, Jorg. Regarding your first question, yes, the big change of the Basel III will be focused on RWA, as you mentioned. And remember that in our case, our density will come from 76% that we are having today currently, and on the Basel III, that will be at around 65%. That means, in terms of Tier 1, that assuming the level that we are having today at around 10%, the new Tier 1 under Basel III will be 11.5%. That means that we are releasing 150 basis points of Tier 1.

Regarding taxation, yes, we are assuming the deferred tax for the next year will be assuming the 3% coming down the taxes. So that's the reason why we are not changing any particular deferred tax for next year, waiting for the last resolution. So that means that taxation for this year will be 27% to 29%; and next year, will be on the 27% area.

Juan Carlos Mora Uribe -- President and Chief Executive Officer

Just to be clear, Jorg, we are assuming that for Colombia next year, the statutory tax is 37%. And we are going to wait for the ruling of the Congress regarding that. But today, we are not incorporating any changes on that assumption. So taxation for next year is affected for that statutory tax of 37% in Colombia and waiting to see what's happening in Congress.

Operator

Our next question is from Alonso Garcia from Credit Suisse. Please go ahead.

Ricardo Alonso Garcia -- Credit Suisse AG -- Analyst

Good morning everyone. Thank you for taking my question. And my question is regarding NIMs. I mean you mentioned that excluding the impact from the adjustment on state of clients, the lending NIM is basically stable. But my question is, I mean, you are increasing -- the consumer portfolio is outperforming significantly the rest of the portfolio. So my question is what are the drivers behind this performance in NIM -- of stable NIM despite this better mix in the loan portfolio.

So going forward, my question is how should we think of NIM considering this higher share of consumer in total loans, but at the same time, considering that the margin on the securities portfolio should probably normalize to lower levels, one that the Colombian securities stop from repricing, as we have seen recently. Are you seeing pressures in pricing from competition in any segment of your own portfolio or in funding? I'm happy to hear your thoughts on this. Thank you.

Jose Humberto Acosta Martin -- Vice President of Finance and Chief Financial Officer

Okay, Alonso. Regarding your question, as Juan mentioned, our forecast of loan growth in consumer next year would be around 15%. That implies that the loan growth will be almost aligned with the loan growth of the rest of our segments. That is one of the first-time impacts the NIM and to maintain the NIM at the level that we are saying that is 5.8%.

The second thing is the cost of funding, we are assuming a very stable cost of funding. You see that the Central Bank interest rate is maintained the same level, 4.25%. So this is the other element that we are forecasting to sustain the NIM at a level of 5.8%. And the third factor, the third element is, in our forecast, the security investment, the NIM of the securities investment, it is around 1.5%. You see that the performance of the last three months -- or during the year, it's above expectations because of the repricing of the sovereign.

So again, next year, assuming NIM of the securities portfolio of 1.5%, the result will be -- the combination of these three factors will be that the NIM will be stable.

Juan Carlos Mora Uribe -- President and Chief Executive Officer

And to elaborate a little bit on Jose Humberto's answer. We are growing on consumer loans, it's clear, but we are seeing an increased pressure from competition on the retail book. So we are seeing that these factors are -- lead us to believe that we will maintain our NIM next year. We -- you are right, this year was -- the performance of the NIM of investments was very good, and we don't expect that to continue next year. So Jose Humberto mentioned a level of 1.5%. So we -- and we will keep working on the cost of funding. We think that we have space to work on the cost of funding. So all of those forces lead us to believe that we will be able to maintain our NIM of around 5.8% during 2020.

Operator

Our next question is from Ernesto Gabilondo from Bank of America. Please go ahead.

Ernesto Maria Gabilondo Marquez -- BofA Merrill Lynch -- Analyst

Hi good morning. Juan Carlos, Jose Humberto and good morning to all your team, and congratulations in your results. A couple of questions from my side. The first one is a follow-up in loan growth. I just want to know which could be the drivers that you are seeing for the loan portfolio growth of 10% next year, especially in the consumer segment? Would it be employment? Would it be economic growth? And how do you see the impact of the tax reform in this segment?

And then for my second question is on your opex growth for next year. Do you still have room to reduce branches and personnel while migrating the clients to digital channels? And how has been your new initiative of attending clients through QR codes?

Thank you.

Juan Carlos Mora Uribe -- President and Chief Executive Officer

Thank you, Ernesto. Regarding loan growth, we will continue -- as we have mentioned a couple of times, the growth of the retail book will be around 15%. And your question regarding who are going to be -- what are going to be the drivers for that growth, we think that the good economic performance of the economy will be the main driver. There is one aspect that we need to keep in mind that is the unemployment in Colombia is presenting higher rates or higher ratios than we expected. So we need to watch that. And so the unemployment will be a factor to watch.

We need to be aware that the impact of the migrants from Venezuela, it is important on the positive. And on the negative, it's probably affecting that rate. But again, it's improving consumption in the country. So we need to watch that factors very carefully. But we still -- we believe that the performance of the economy will be the main driver next year.

Regarding opex, we will continue to work hard on opex. We know that it is continuous task to work on expenses. We don't see a lot of space to keep reducing the number of branches. We will -- our efforts will be focused on improving our processes, the digitalization, being more efficient on onboarding clients, on how we serve them, and that is going to help on expenses.

And we will keep reviewing how is going to be our channel strategy regarding the branch network. The banking agents will continue to be one of our main focus on improving our coverage of the countries.

Let me say that we are having that strategy also in Panama, in Salvador, in Guatemala in which we are pursuing that strategy of increasing the number of banking agents to serve our customers. So branches, not a lot of space, digitalization will help efficiency. And we will continue to dilute the fixed costs that we have on a large number of customers, which is going to help us on efficiency.

Operator

Our next question is from Johanna Castro from Itau BBA. Please go ahead. Johanna, your line is open and unmuted. Please go ahead. Our next question is from Lamar Sella [Indecipherable] from Bearings. Please go ahead.

Lamar Sella -- Bearings -- Analyst

Good morning, gentlemen. Thank you very much for taking my questions. I've got a few questions left. So the first question is with regards to your stage two loans. Obviously, you do report your 30 days due and as well as 90 days due numbers. I'm just wondering, when you look from 30 to 90 days, what is the Stage two loans as a percentage of total loans? Perhaps you could also elaborate on the coverage ratio?

On the Stage 3 loans, I was just wondering whether you could give us a breakdown of the coverage ratio in terms of tangible assets as well as cash? So if you could elaborate on that. Third question is with respect to deferred acquisition costs. Obviously, you do have a bancassurance business model. I just want to understand the dynamics in the deferred acquisition costs for your insurance business? And I hope you'll be able to plug a number there.

Fourth question is with regards to the double leverage, assuming, I mean, you do have a double leverage in the system as well because you've got the bancassurance as well as the bank -- the insurance as well as the bank. And I think that the bancassurance has -- could have potentially some of sponsorship in terms of injecting capital in one subsidiary, which is potentially debt for another subsidiary or holding company. And the fifth question, I mean, I'm just wondering, in terms of NIMs because you kept on, I mean, reiterating, like I mean, NIMs probably will be flat 5.8%.

So I think, I mean, when you look at the key metrics, tools you have at your disposal at the moment, to improve NIMs, you either stretch your LDR, which I think, I mean, has reached its limits. Because I mean, we look at the numbers, it's 122%, so I don't think you might be able to improve that. Second one is increase the mismatch in your ALM gap. And the third one is basically reprice the book. So if you're able to reprice your book, which percentage of your book is due for repricing within one year?

Thank you.

Jose Humberto Acosta Martin -- Vice President of Finance and Chief Financial Officer

So Lamar, thank you for your questions. Let me elaborate on a couple of them. First, the loan-to-deposit ratio that you highlighted is 116, and this is this historical because the way we are funding, not only with the deposit, customer deposit base, also we are using the capital markets. That explains the number, and is [Indecipherable] a reverse gap, which means that we have longer terms on the liability side than the tenors on the asset side, which is a very orthodox approach to maintain a healthy loan growth.

Regarding the NIM, again, the NIM is stable. We -- the securities, we are not expecting a major change in the next coming years. So we are able to sustain the NIM that we mentioned in the previous question of 1.5%. Stage 2 is around 4.7% of the total loan portfolio and is showing a very healthy trend. In the past, we had a bigger proportion of that.

In terms of the floating that we are having on the asset side, 70% of the loans are floating. But the remarkable thing is around 50% of the liability is floating as well. So we are reducing our asset-sensitive condition. Regarding your other questions, if you will agree, we will send you an email with the detailed information of Stage 3 and Stage 2. Thank you.

Operator

Our next question is from Yuri Fernandes from JP Morgan. Please Go ahead.

Yuri R. Fernandes -- JP Morgan Chase & Co -- Analyst

Thank you gentleman. I have a follow-up on Alonso's question on cost-to-income, if you can provide any kind of guidance for '20 or '21? Because the bank is running at 51% now. I think the year end target is 49%. But this is still pretty high when you compare to other Latin America large banks, right? So I'm just wanting to know if you have any focus on reducing cost-to-income to lower -- low 40 going ahead?

And my second question is regarding fees. I understand that growing more on retail also benefits your fees. So if you can comment how you see fees evolution for '20? And also if there is any risk of regulations, if you can give an update on the regulations on fees, how those things are in evolving in Colombia? Thank you.

Jose Humberto Acosta Martin -- Vice President of Finance and Chief Financial Officer

Yuri, regarding cost-to-income, yes, the 49% is impacted, again, because FX, the volatility in Colombia is quite high. You see a big peak -- a big depreciation of the currency. We are focusing our efforts in the opex growth, and the capex growth will be 100 bps above inflation for next year, which means that we will be in the range of 4% to 5%. And this year, we are expecting to close at a level of 6%. Our medium-term target for efficiency is to reach the level of 46% in the next coming two years. And that will be a combination of the capex under control, plus the fact that the NII will grow, basically the main driver would be the loan growth. So if you combine those effects, loan growth of 10% and expenses growth of 4% to 5%, you'll get the 46% that we are expecting in two years.

Regarding fees, our expectation next year is to reach a level of fee growth of around 10%. And again, this is because of the level of transactionality of all the things that explain, one, regarding consumer and our strong deposit base and customer base. What we expect in terms of regulation? You see that, always, there will be an issue regarding the economy, but we, Bancolombia, we are offering to low income clients a bunch of products with zero cost.

We are promoting bancanization of the low-income operation with different products, with different channels. So we are, at the end of the day, helping to support the economy to put more people in the banking industry. But again, the regulation always will be there.

Juan Carlos Mora Uribe -- President and Chief Executive Officer

Yuri, and fee regulation is always a risk. What we are doing is -- we have a diversified source of fees. So what we are doing is we are improving the products that generate fees. So we have, as I mentioned, a deeper supply base of fee-generating products. And we work hard through the banking association and to different -- on -- be very clear on what the banks are offering in Colombia. And as Jose Humberto mentioned, those products that are basic for the bancanization are most of them without fees.

So we are aware that there is a risk of regulation, but we are approaching that risk with diversification and -- with providing our customers with a series of transactions that don't generate fees.

Operator

Our next question is from Neha Agarwala from HSBC. Please go ahead.

Neha Agarwala -- HSBC -- Analyst

Hi, thank you for taking my question. I have a clarification on your presentation. You mentioned digital sales and that it's at 16.6%. Is this the number of loans that are generated out of digital sales or the value of the loans? My second question is on -- a follow-up again on cost-to-income. Do you have a target in mind for the next three years that you would like to achieve in terms of your cost-to-income ratio? And what part of the improvement in the cost-to-income would be driven by the digital channels and the digitalization of the bank in general? If you can give us any estimate, that will be helpful.

And lastly, if you could give us an update on the competitive landscape in Colombia if you see excessive competition in any particular product or any particular player being more aggressive. That would be very helpful. Thank you so much.

Jose Humberto Acosta Martin -- Vice President of Finance and Chief Financial Officer

Thank you, Neha. As we mentioned before in the previous question, the cost-to-income ratio that we want to reach in two years is to get the level of 46%. Again, a combination of net income, NII and a combination of opex control inflation plus 100 basis points. Regarding your first question, the 16.6% is the number of products, just to clarify your question. Thank you.

Juan Carlos Mora Uribe -- President and Chief Executive Officer

And regarding competition, we see a very healthy competition in Colombia. In general, banks are improving the offering to the customers, including digital offers, including different strategies. So at the end, this is going to benefit the financial customers in Colombia. But it's also giving us new opportunities. Bancanization is improving a lot in Colombia, it's -- which is very good in general for the economy, and it's a source of new business for us. So I see competition increasing, improving, but we are convinced that the strategy that we have, what we are doing is facing that competition and what shows that we are on a positive trend is that we are gaining in general market share.

Neha Agarwala -- HSBC -- Analyst

Okay thank you so much.

Operator

Our next question is from Rodrigo Sanchez from Davivienda Corredores. Please go ahead.

Rodrigo Sanchez -- Corredores Davivienda S.A. -- Analyst

Good morning, gentlemen, thank you for taking my question. Regarding the announcement of Bancolombia, acquiring some office space in the [Indecipherable] in Norte, the project in Bogota, I was wondering if you could give us some numbers about the amount you're expecting to spend on this acquisition and if the whole investment will be recorded during 2020? Thank you.

Juan Carlos Mora Uribe -- President and Chief Executive Officer

Thank you, Rodrigo. As we announced to the market, that is an investment that we already recorded during this quarter -- or this year, better. It's an acquisition of new offices in Bogota, which is in line with our strategy to improve and to have better presence in that market that is very important for us. So it's not just that we will have new corporate offices in Bogota, but it's also a way to pursue that strategy of serving the Bogota market. As we mentioned, the cost of the offices was around COP350 billion, that is all going to be recorded during this year.

Operator

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

Juan Carlos Mora Uribe -- President and Chief Executive Officer

Thank you, everybody, for your interest on our conference call. We are very positive that the trends that we saw during the third quarter will continue during this year, so that the performance is -- in the bank is in line with our expectations. We see very positive trends that are consolidating. The market in Colombia, it's good. And the strategy that we are pursuing is producing the results that we are expecting. So we will hope to see you in our conference call that we present the results for the full year 2019. Thank you very much.

Operator

[Operator Closing Remarks].

Duration: 60 minutes

Call participants:

Juan Carlos Mora Uribe -- President and Chief Executive Officer

Jose Humberto Acosta Martin -- Vice President of Finance and Chief Financial Officer

Thiago Batista -- UBS Investment Bank -- Analyst

Jason Barrett Mollin -- Scotiabank Global Banking and Markets -- Analyst

Nicolas Alejandro Riva -- BofA Merrill Lynch -- Analyst

Jorge Kuri -- Morgan Stanley -- Analyst

Jorg Friedemann -- Citigroup Inc -- Analyst

Ricardo Alonso Garcia -- Credit Suisse AG -- Analyst

Ernesto Maria Gabilondo Marquez -- BofA Merrill Lynch -- Analyst

Lamar Sella -- Bearings -- Analyst

Yuri R. Fernandes -- JP Morgan Chase & Co -- Analyst

Neha Agarwala -- HSBC -- Analyst

Rodrigo Sanchez -- Corredores Davivienda S.A. -- Analyst

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