Image source: The Motley Fool.
BanColombia S.A. (NYSE: CIB)
Q2Â 2020 Earnings Call
Aug 6, 2020, 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 Second Quarter 2020 Earnings Conference Call. My name is Tanya. I'll be operator for today's call. [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 and future filings and press releases or verbally address matters that involve risk and uncertainty. Consequently, these 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. Mauricio Rosillo, Chief Corporate Officer; Mr. Jose Humberto Acosta, Chief Financial Officer; Mr. Rodrigo Prieto, Chief Risk Officer; Mr. Jorge Humberto Hernandez, Chief Accounting Officer; Mr. Carlos Raad, 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 of Bancolombia. Mr. Juan Carlos, you may begin.
Juan Carlos Mora Uribe -- Chief Executive Officer
Good morning, and welcome to our conference call for the second quarter of 2020. I hope all of you and your families are safe and healthy. The second quarter of the year observed a significant -- in a significant way the impact of the pandemic, not only in Colombia, but also on a global scale. We are living under a new challenging environment, which has led us to quickly adapt as a bank and as individuals to face this new reality.
In Bancolombia, we're fully committed to support our clients and take care of our employees. The net income for the first half of 2020 was around COP263 billion. This is mainly because of a net loss of COP73 billion for the second quarter.
I want to start by giving you an overview of four key points. The first is about our solid liquidity position and the robust capitalization levels. We have diversified funding sources with our resilient deposit base. Since the first quarter, we have experienced a material increase in our deposits that have remained throughout this quarter and this has allowed us to sustain high quality liquid assets. On the capital front, our Tier 1 ratio reported for the first quarter is 9.3% and will increase after the Extraordinary Shareholders Meeting approval, by which we reclassified COP4.12 trillion from occasional reserve to legal reserve in a consolidated basis.
The second point is that we have increased our provisions by 76% compared to the first quarter of this year, as a reflection of weaker economic outlook related with the pandemic. This provisioning level results in a coverage ratio of 208% for the quarter. The third point is regarding our digital strategy. We have been a leading bank in Colombia supporting the government with distribution of subsidies. We rapidly implemented an operating model that allow us to distribute more than COP442 billion through our digital platforms Bancolombia a la mano and Nequi, successfully adding over 2 million new clients.
And finally, the last point is about the macroeconomic environment. Since the gradual reopening of the economic activity in April, we have seen a slow recovery, but the uncertainty around the impact of COVID-19 and the overall performance of the economy in the second half remains significant.
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?
Juan Pablo Espinosa -- Chief Economist
Thank you, Juan Carlos. Let me start by saying that following the trend seen in many countries as a result of the lockdown measures taken to contain [Phonetic] the advance of the pandemic, during the second quarter of 2020, the Colombian economy experienced the largest contraction in several decades.
According to our estimates, year-on-year variation of GDP in this period was around 16% which is close to the upper bound of our forecast range. The decision of Colombian authorities to gradually restart activities in key sectors such as manufacturing, construction and retail has led to a correction in the pace of contraction. As a result, monthly figures of economic activity moved from 20.5% in April to 16.6% in May and 11.3% in June.
Despite the small improvement, we think that for the second half of 2020, the risk to growth are biased to the downside. In fact, as containment measures keep limiting the operation of several industries and uncertainty regarding the advance of COVID-19 remains, activity will be affected. This perspective is incorporated in our view of GDP contracting between 6% and 7% -- 6% and 9% for full year 2020. It is also important to mention that the negative effects of the pandemic have also translated to the labor market as unemployment rate has soared to the highest levels since the recession of 1999. We foresee that in the short term, urban unemployment rate will continue to increase albeit at a lower pace than that seen in April and May.
Regarding prices, during the past few months, consumer inflation has moderated markedly, thanks to several actions taken by the government aimed at reducing the burden of utility payments to households, as well as a better performance of food prices and low pass-through of depreciation.
Going forward, we anticipate that inflation will further correct due to lower pressures on the main components of the CPI. Hence, year-on-year variation will likely close the year below the floor of the Central Bank target range, which is 2%. In terms of monetary policy, Colombian Central Bank has reacted proactively to the challenges arising from the pandemic and the reduction in oil prices. In addition to the increase in liquidity provision and asset purchases, it has cut its benchmark rate to 2.25%, the minimum level since the introduction of the inflation targeting regime. Due to the risk to growth, employment and deceleration of prices further cuts are likely. However, future decisions will be contingent on new data and we think that bankrupt [Phonetic] will continue to act cautiously.
Finally, it is worth mentioning that over the past few months, condition in global financial markets have improved. As a consequence, oil prices have recovered faster than initially expected and the Colombian peso has gained some ground beyond our previous expectations. Moreover, given that we expect an additional inflow of dollars, due to foreign debt disbursements, the local currency can sustain its recent gains.
I want to turn the presentation back to Juan Carlos.
Juan Carlos Mora Uribe -- Chief Executive Officer
Thank you, Juan Pablo. I want to continue this presentation by sharing with you what has been Bancolombia's response to the COVID-19 pandemic. Regarding our employees, we have focused on three main tasks. First, deploying resources to assist our employees in terms of mental and physical health. Second, establishing remote work schemes to the majority of our workforce for safeguarding purposes. And third, adopting the opening model, so that we can run the business without significant disruptions, designing a specific return plans to the corporate buildings under strict protocols supported on analytics to optimize the schedules and the use of workplaces. As of today, 58% of the group of employees are working from home.
On the other hand, Bancolombia has adopted the support of communities as a priority during the pandemic. We have assisted the government in delivering subsidies under its difference support programs, benefiting more than 857,000 people and more than 55,000 businesses. Over 1.7 million employees benefited from the subsidies distributed by the Bank.
Now turning to slide 5, I want to walk you through the details of the impacts of the relief program in our loan book. We have taken several actions to help our customers over the last months in different fronts. First, we granted a three-month grace period to the personal loans and up to six months grace period to the mortgages loans, whereas for SMEs and corporate loans we granted these on a case-by-case basis, based on the situation of each client. As you may see in the slide, in average, the total relief program has represented around 50% of the total loan book, except in Banco Agromercantil de Guatemala, in which it represents 31%. In the case of Bancolombia, 50% of the total relief is related to retail, 20% to SMEs and 30% for corporate loans.
Moving to slide 6, we can see one positive aspect of the current situation, in which is the growth in the adoption of digital banking. The number of clients and transactions has increased substantially over the year. Nequi and Bancolombia a la Mano have almost doubled since 2019, and are now reaching an aggregate of 6.6 million users. Nequi has grown over 300% in the transactions over the last year and Bancolombia a la Mano has increased almost by three times the number of remittances during the second quarter of 2020 as compared to the same period of 2019. This trend accelerated during the second quarter as Nequi showed a 45% growth in the number of users and 60% in the number of transactions, while Bancolombia a la Mano grew 55% in the number of users and distributed over 1 million payrolls as of June with an annual growth of 20%. We expect these trends to continue during the second half of 2020, although not all at the same pace.
On slide 7, we present the current status of our distribution channels in Colombia. The key point I want to emphasize is the rapid adoption of digital channels. During the second quarter, total transactions conducted through digital channels represented 87%. In this quarter, transactions performed through digital channels have grown 60% when compared to the second quarter of last year.
I wanted to highlight two important facts. First, 70% of our clients uses at least one of our digital channels, and second, the significant growth in digital sales of this year, it represents close to 43% of the total number of products sold. This is more than double the figure of 2019.
Now I want to turn the presentation to Jose Acosta. Jose?
Jose Humberto Acosta Martin -- Chief Financial Officer
Thank you, Juan Carlos. On slide 8, we present the breakdown of provisions during the quarter. As we did in the previous quarter, we want to explain the provisions breakdown. First, the provisions associated to the update of macro scenarios with a more negative forward-looking outlook and COVID-19 which represented 49% of the total provision expenses during the quarter. We want to highlight that the expectations for macro variables changed significantly from the first quarter to the second quarter of this year across the board. As an example, expectations of GDP in the case of Colombia is minus 6% coming from minus 0.8% of the first quarter of this year.
Second, regarding provision charges associated to consumer loans, we must mention that those correspond to a normal pace of deterioration explained by the 17% nominal growth of the consumer loan portfolio between June of this year and June of last year. This growth occurred mainly in personal loans. Finally, we did the specific provisions for corporate clients in Colombia that also impacted the number.
Moving to slide number 9, we give you a snapshot of what we are doing with our clients in terms of risk categorization. Because of the relief programs, we have been working the risk assessment front using internal data and developing the models to determine the level of risk of the loan portfolio, so that we can estimate NPL formation on the provisioning level of each group of risk. Assume, for the retail segment that represent 34% of the total loan book, we identified that 68% is in low risk, which means that those clients will be able to pay their obligations on time in the coming months. The 19% is in medium risk, which means those clients will need some type of solution to pay their obligations, and the 13% is in high risk, which means those clients are highly affected and might need a restructuration of their conditions in the coming months.
SMEs represents 13% of the total loan book and corporate represents 52%. As the SME segment has been the most impacted by '19 [Phonetic] and the economy lockdown measures, the portion with high risk is at 37% level. It is worth mentioning that during the first wave of reliefs in the corporate book, we develop a contingency of internal bundle of short-term solutions for each client depending on the type of support they needed. For the second wave of relief solutions of medium and long term will be granted according to the individual client condition.
Regarding SMEs and individuals, in the first wave of reliefs, SMEs had a similar treatment of that of the corporate book, but individuals got an automatic program of grace periods that ended in July for personal loans and will end in September for mortgages. It is important to highlight that this automatic program of grace periods intended to help clients to comply with national regulations regarding payment reliefs during COVID-19 lock downs. And as a result of these, the relief program represents around 51% of the total loan portfolio in Colombia. One implication of the grace periods is that past due loans did not increase, and the other is that to recognize the risk of the loans that we see in the grace periods, we used expert models that help us to keep the same levels of provisions historically observed, and therefore to better estimate the provisions expenses.
On the other hand, for the second wave of reliefs, which began in July and end in December of this year, we have to offer different alternatives of payment for our clients. Some of them are mandatory by regulation and orders are optional. It is important to highlight that those alternatives are by demand, which means that our clients must ask for the solution and must show evidence that they really admit it. Some of the launched options that we will offer to our clients are self-managed solutions through our digital channels to extend for example the tenure of loans at specialized channels such as BPOs and audio banking to request solutions that are suitable for each client depending on their needs and banking sales representatives for SMEs and corporates to develop the best solution to help in these segments.
Regarding the composition by stages during the second quarter of this year, we can see that there was an increase in stage 2 and stage 3. The increase in stage 2 was explained by two aspects. First, the number of clients in watch list increased; and second, the output of the risk assessment of our expert models resulted in higher risk, both because of COVID-19 pandemic. On the other hand, the increase in stage 3 was also due to a higher number of clients in watch list and a higher deterioration in loans that were not part of the relief programs and that over past the 90 days threshold.
Finally, we expect to see a high deterioration of the loan portfolio in the second half of this year as the economy continues to suffer the impact of the lockdown. In this highly uncertain economic environment, estimated NPL formation is quite challenging, which make it difficult to have an estimation of the provision charges and portfolio quality metrics for 2020.
In slide 10, we present provision charges and allowances. Cost of risk for the quarter was 4.8% and 3% for the last 12 months. Cost of risk without COVID-19 uptake was 2.4% for the quarter and 2.2% for the last 12 months. As a result of our provisioning models, the level of allowances has increased as a proportion of the total loan portfolio.
The next slide shows the past due loan formation and coverage. New past due loans during the quarter decreased mainly due to the relief programs that began in March 2020. Also we maintained the pace of charge-offs loans during the quarter, restructure some clients and there is some recovery of loans. Therefore, the behavior of the NPLs is negative, which means that they are being reduced. The coverage ratio rose to 208%, mainly explained by the provisions based in expert models that help us estimate the possible deterioration of the loan book and therefore the provisions necessary to cover those NPLs. Also bear in mind that our risk provisioning models are based on expected losses under IFRS 9.
On slide 12, we present the liquidity position of the bank. The second quarter has shown a sustained trend in high liquidity levels in the consolidated figures and in the four geographies balance sheet, which the bank operates. It is worth mentioning that we have an optimal funding structure with an important level of stable retail deposits, thanks to a strong customer base. The flight to quality effect seen in the first quarter continues to be reflected in the liability side and has contributed to the high liquidity levels. This has allowed us to withstand the grace periods we have granted to our clients.
During the first semester of this year, the balance on checking and savings accounts have increased by 19% and represent 49% of the total funding. Such growth has been consistent in all four geographies. The output of mix with a lower share from time deposits has permitted to improve the cost of deposits, quarter-by-quarter.
I want to highlight that the last week of July, we successfully executed the second international senior bond issuance for Banistmo for $400 million. The use of proceeds of the transaction is to establish a stable and diversified funding base. These liquidity levels should be maintained for this year due to the low demand in the loan portfolio and low dynamics in withdrawals from savings and checkings account.
On slide 13, we present the current capital situation of Bancolombia and subsidiaries. Total solvency ratio stands at a level of 12.64% while CET1 total is 9.3% for the second quarter, well above the minimum regulatory requirements, which signals a solid position to face the upcoming challenges. The Bank has been in recent years accumulated capital, thanks to the -- to its earnings retention policy. According to the test performance under stressed condition in terms of credit quality and considering the current environment and our portfolio growth outlook, the capital ratios are comfortable to comply with the regulatory thresholds.
Last week, as Juan mentioned, it was approved by Extraordinary Shareholders Meeting, the reclassification of existing results in the occasional reserve to the Bank's legal reserve. Under the current Colombian regulation, the only reserve of this is shareholders' equity considered as a basic solvency with legal reserve. Several measures were taken in Banistmo and Bancolombia for a total value of COP4.12 trillion. This action aims to increase the Bank's solvency levels, while the shareholders' equity will not suffer any particular change.
As a result, this accounting movement will increase the regulatory capital position and under our pro forma exercise with June numbers, we estimate our core equity Tier 1 ratio of 11.2% in a consolidated basis which leaves the Bank in the high range of our solvency target. This is a remarkable fact, because under the current circumstances, having a strong capital position is a fundamental pillar to face the near future. The adoption of Basel III is scheduled to start its implementation in 2021. Our pro forma analysis suggest that we will increase our capital levels again.
On slide 14, we present a snapshot of our stand-alone operations. Through the different geographies operated by Bancolombia Group, it is important to highlight the solid position of the stand-alone banks in terms of capital and liquidity, is one of the priorities to operate with reliability in the current uncertain environment. In the same way, coverage ratios have been one of the key indicators in Colombia and the Central American subsidiaries, sustaining a level of 208% in a consolidated basis. With many challenges ahead, we would like to point out the positive evolution in terms of efficiency to bring down to cost to income ratios consistently in the four operations as coordinated effort to contribute gradually to profitability ratios.
On slide 15, we see the evolution of margins and the net interest income. Lending margins were under pressure during the quarter, mainly explained by two reasons. First, the increase was based sometimes under IFRS 9 that generates fewer interest income, and second, during this year, in Colombia, the reduction of the taking [Phonetic] by the Central Bank has reached already 200 basis points. And it's expected that the cut rates will further continue through this year.
On the other hand, it is important to note that the decrease in cost of funds have added resilience and partially offset the compression of -- to our lending margins, which ended the quarter at a level of 5.1%. Core deposits continue with the positive evolution shown in the beginning of this year during this quarter. However, we are expecting a NIM at around 5% at the end of this year. Finally, a steady balance in the loan portfolio and a sustained accrual of interest of clients on the relief programs during the recent months explain the stability in NII for the second quarter of this year.
Slide 16 shows the evolution of expenses and efficiency. Our focus on cost efficiency has delivered positive results. During the second quarter of 2020, the bank has managed to decrease the total operating expenses by 15% when compared to the first quarter of this year, and by 8% when compared to the second quarter of last year. In general, the first semester presents positive performance driven mainly by lower personnel expenses and partially offset by higher administration and general expenses.
During the first six months of this year, personnel expenses grew 0.8% on a yearly basis. But excluding the FX impact, we will have experienced a negative variations of 2.5%. For 2020, we are expecting to increase our operating expenses between 2% and 4%. Regarding income tax, the decrease during the quarter was mainly explained by the Colombian operation. One of the main aspects that explain the decrease are higher level of provisions related with loans that generate deferred taxes.
Now I want to turn the presentation to Juan Carlos for the closing remarks. Juan?
Juan Carlos Mora Uribe -- Chief Executive Officer
Thank you, Jose Humberto. As a summary, I would like to highlight three main elements of the second quarter results. The balance sheet structure remains solid. The loan portfolio will not grow as expected. It could be around minus 2% for the end of the year. The funding composition shows high liquidity levels, diversification and cost reduction, and solvency levels are more than enough to face these economic cycle.
The digital development of the Bank has allowed us to connect the government support and the most vulnerable population to provide banking services to our clients without leaving their funds and to expand the client base through Nequi and Bancolombia a la Mano. This year definitely has high levels of uncertainty. We think that the fourth quarter of the year will reflect more accurately the behavior of our clients in terms of their payment capacity. And therefore we could know what will happen in terms of risk.
After elaborating on these topics -- key topics, I want to open the line for questions.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instruction] And our first question comes from Andres Soto from Santander.
Andres Soto -- Santander -- Analyst
Good morning, Juan Carlos, Jose Humberto. Thank you for the presentation. I would like to zoom in, in the process of provisioning in this quarter. I understand half of the provisions are related to general COVID-19 update. I would like to understand how do you break that down between a general, let's say, a general mobile apps update versus the exercise that you presented in slide 9, where you classify the risk level for every of your segments. And to that point, I would like to understand a little bit better. I was kind of surprised that you can see that only 13% of your retail portfolio has high risk. I would like to understand what assumption is behind that? Why are you confident in this number? Or we may see these number deteriorate once these loan rescheduling plan phases out and you start asking your customers to payback? Thank you.
Juan Carlos Mora Uribe -- Chief Executive Officer
Thank you, Andres for your question. Let me take the second one and I will pass the telephone to Jose Humberto. We started doing a very deep analysis of the behavior of our clients in April. So we are running models in order to assess how they are in the economic development. And we are confident that that assessment is giving us enough information to classify the clients in different -- in the three different categories that we mentioned. So the numbers that we are showing are based on that analysis, as I mentioned, deep analysis, and we are confident.
It is possible that the situation of the customers during the second half of the year change. And so we will continue assessing that situation. So with the information that we have today, that is a very good estimate of this new situation [Technical Issues], but that situation could develop in the future. Jose, could you take the first Andres question, please?
Jose Humberto Acosta Martin -- Chief Financial Officer
Okay. Thank you, Juan Carlos. Andres, good morning. Yes. Half of the provisions that you're mentioning is because of parameters update and COVID. And basically what we did is to create an expert model based on historical data of the multi-customers and they receive their grace period. And also including the different sectors in which they operate more and an additional capacity obtaining. Based on that assumption, I will say that out of the 50% of that provisions, 70% is because of the expert models and 30%, it is because of the updating of the different parameters that we use under expected losses model.
Just to -- as we mentioned on the script, we have to change, for example, the GDP growth that was minus 0.8% on March and that will be minus 6% on June. So the proportion is 70% because of the expert modest that we have to create for those clients, an environment assuming the risk profile and the 30% for the updated models. The other 50% that you are seeing is because business as usual, mostly of them is because of consumer deterioration, the other ones are SMEs and corporate deterioration.
Operator
And our next question comes from Ernesto Gabilondo from Bank of America.
Ernesto Gabilondo -- Bank of America -- Analyst
Hi. Good morning, Juan Carlos, Jose Humberto, Juan Pablo, Carlos and good morning, everyone. Thank you for your presentation. The first question is on the political side. We have seen the former President Alvaro Uribe was placed under house arrest. So given that he's well known in Colombia and an important member of the right center and the one that choose President Duque. Your opinion, do you think this political noise can give some empowerment to Petro [Phonetic], and when do you have presidential elections?
Then, my second question is a follow-up in the NPLs and provision charges. I believe the low NPLs were explained by the relief programs, and that they represented roughly COP63 or 30% of your consolidated loan book. And I believe you have created COP1.2 trillion from your expected losses model due to these COVID-19 impacts. However, I believe there is a second round of relief programs taking place. So I would like to know how much of your portfolio is in the second phase? And when should we think NPLs showing up will be, the first one by year-end and the second phase at the beginning of next year. And how should we think about the level of provisions that you have created in the second quarter and cost of risk of this quarter? Should we think, it will maintain the same levels during the next quarters? And you will wait depending on the evolution after the relief problems? Any color on this will be appreciated. Thank you.
Juan Carlos Mora Uribe -- Chief Executive Officer
Thank you, Ernesto for your questions. Let me take the first question and I will give a comment on the second one, and Jose Humberto will give you more color on the second one. Regarding the situation around Alvaro Uribe [Phonetic], Colombia have a very strong institutions and a tradition of respecting those institutions. So I'm confident that this situation is going to be as strong on those situation and some are going to have an effect on the economic front.
Regarding elections, presidential elections in Colombia will be in 2022. So, President Duque government is in the half of their term. So still there are more -- two more year of this -- of Duque's presidency [Phonetic]. Regarding your second question, as you mentioned, we have disclosed in the first full month after the pandemic started, we gave some relief to our customers. Now we are starting the phase 2. Because of those reliefs, NPLs are lower than those we had at the beginning of the year. So we expect that those NPLs are going to deteriorate.
Definitely, what we are facing now is that we are going to work client by client assessing the risk level and working with them with a solution for position that they need according to their particular situation. So NPLs will deteriorate definitely. Cost of risk -- it's difficult to know at this point, how the cost of risk is going to be at the end of the year and at the beginning of next year. We were made in [Phonetic] at the beginning of the year, cost of risk of around 1.7%, 1.8%. For the quarter, it was more than 4%. The cost of risk is going to remain high definitely. How high? It depends on how the lockdowns evolve, how the economic situation evolves and how well those will help you to achieve the customers' goal. With this, I will pass the question to Jose Humberto for more detail.
Okay. I think Humberto is not on the line. Let me wait for him to reconnect. On that [Indecipherable] we are estimating the provisions, and since we are doing an accounting base on expected losses, the remaining of the year will have a high cost of risk. Other than that, I don't think that next year -- I think that next year we will start improving the cost of risk but the peak is going to be this year and then it will improve next year.
Operator
Thank you. And our next question comes from Tito Labarta from Goldman Sachs.
Tito Labarta -- Goldman Sachs -- Analyst
Hi. Good morning and thank you for the opportunity to ask questions. I'm going to shift that to your expenses. We did see some good cost control there down like 8% year-over-year on the operating expenses. Just you mentioned I think 2% to 4% growth is what you expect for the year, but just to think about them, where else can you control cost? Is the shift to digital helping, like how much can that help? How should we think about your branch network and you could maybe just give some more color on the cost control and what are the efforts going there to keep costs under control and maybe reduce expenses if you can? Thank you.
Juan Carlos Mora Uribe -- Chief Executive Officer
Thank you, Tito. Thank you for your question. Expenses is a focus of our job now. We are working hard on -- very hard on how to control or be very productive as well on efficiency front. We were working on the [Indecipherable] side and we are optimizing our build in usage, the office space we -- totally optimized and that is going to -- something that is going to last with new rate of working and so there is this sort of optimization.
Then on the labor cost, we keep optimizing the cost. So we are optimistic that we can do a good job on controlling the expenses during the year and efficiency is going to improve. Let me pass these questions to Jose Humberto and also Jose if you can -- if you want to add something to the answer I gave to Ernesto, please go ahead.
Jose Humberto Acosta Martin -- Chief Financial Officer
Okay. Thank you, Juan Carlos. Yes. Regarding expenses, there is one-off reduction at expenses in the second quarter as Juan mentioned. We reduced the bonus plan because of the performance of the bank at the end of the year will be different as we forecast at the beginning of the year. That explains the main reason. And you have to take in consideration also the FX. If you remove the FX factor during this year, the cost expenses increased minus 2.5%.
I will say that we have had in the structure of cost, around 85% is fixed cost. So it is very complex to reduce. So our number at the end of this year -- that will be in between 2% to 4%. But as Juan mentioned, we are asking ourselves in medium term, what will be the new way and the new structure of branches, the way or new structure of digital channels, and maybe we will restructure -- the structure of cost of the bank. So again, the guidance will be 2% to 4% basically because our fixed cost is -- it is important in terms of rate.
Regarding the questions of Ernesto, Ernesto, yes, I just want to clarify that, we have COP70 billion on relief on the first wave that was 51% of the total loan and COP90 billion in a consolidated base that will be 44% of the loan book. For the second wave, based on the data that we create, trying to understand the cash flow of their clients, we are suggesting, we believe that the second wave, 60% of the clients, they will pay business as usual, because they have enough level of liquidity, and around 20% to 25% of the clients, they will need another round or the reliefs or more extension to the obligations or reduce the interest rates, and a small portion, which will be at around 10% to 15%, we know then they will probably need more time of restructuring. Just to give you an idea for example, in terms of mortgage to give them 30 years of tenure. So this is the red flag, the 15% of the loans that we probably believe, then they don't have the capacity to pay their obligations.
Juan Carlos Mora Uribe -- Chief Executive Officer
And let me ask [Phonetic], regarding the Tito's question, we are seeing room for branch optimization. It's something that we will do on a mid-term period. The increase in digital transaction has shown us that we can move a lot of activity from the branches to digital. So, definitely we see room for improvements on the branch network. So you will see there a room for improving our expenses.
Operator
Thank you. And our next question comes from Gabriel Nobrega from Citigroup.
Gabriel Nobrega -- Citigroup -- Analyst
Hi, everyone. Good morning and thank you for the opportunity to ask questions. My first question is with relation to asset quality. Are you seeing any specific sector that is being more affected than you expected from the pandemic? And then if you could also elaborate how is your exposure to these sectors and how you are managing risks?
And then my other question is actually a follow-up on this question from expenses, during the quarter we did in fact see a rationalization on other administrative expenses. But at the same time, we saw you adding 1 million clients in Nequi and 1 million clients in Bancolombia a la Mano. So my question here is, do you believe that you will have to continue on increasing your IT investment? Or are you already been able to collect fruits [Phonetic] from your digital banking initiatives, especially where we have almost more than 6 million clients in both of these end platform? And also as I believe and during COVID, people are using more and more digital channels. Thank you.
Juan Carlos Mora Uribe -- Chief Executive Officer
Thank you, Gabriel. I have some difficulty hearing you. So I am going to try to answer, what I [Phonetic] touch of your questions. Regarding the digital channels, we don't -- because now we are benefiting from the investments that we have done. We have invested in digital payments, I don't know, three, four years ago. We were creating basically two platforms Bancolombia a la Mano and Nequi. And now we are benefiting from those platforms. The numbers are impressive. As we mentioned, the growth is in new customers.
Gabriel Nobrega -- Citigroup -- Analyst
Hello?
Operator
We lost our speaker. Someone else can take over the question, please.
Jose Humberto Acosta Martin -- Chief Financial Officer
Okay, yes. Yes, as Juan mentioned, we were allocated around $100 million to $150 million on an annual basis for a digital project. So, no matter, if we are trying to reduce the expenses. The allocation of expenses in terms of investing of IT, it is key for us. And you know that one of the pillars during this second quarter is the growth in the customers of digital banking. So we are now planning to change the other way around. We want to invest more to get more potential in order to operate because the level of transactionality is growing.
And regarding your first question, regarding sectors, you know that we have a well diversified loan structure in terms of sector. Our huge exposure today could be e-commerce. Well, we have around 15%. We have consumer services at 35%. So we have a well diversified. I believe we have concerns about construction. For example, in which we have 11%. Just to give you an idea, in terms of airlines, we don't have exposure. In terms of Ecopetrol, we have small portion of Bioenergy that is also, almost 82%, 83% fully provisioning. So again, concerns regarding all the macroeconomic outlook, but in particular, we don't have any specific sector, which we believe that will have a huge impact.
Operator
Thank you. Our next question comes from Sebastian Gallego from Credicorp Capital.
Sebastian Gallego -- Credicorp Capital -- Analyst
Hi. Good morning, everyone. Thank you for the presentation. I have three questions. The first one, if you could provide a bit more color on the specific cases, you have provision during the second quarter and the evolution of those? Second question, if you could comment on the trends that you have been observing in the Central American operation in terms of potential provisions and the need for extraordinary provisions in Central America going forward? And the last question, probably, if you could comment on a potential or the potential worst-case scenario that you're considering today in terms of provisions and the impact that that will have on the Bank's capital position? Thank you so much.
Jose Humberto Acosta Martin -- Chief Financial Officer
Okay. Thank you, Sebastian. Regarding special cases as you mentioned, there was one specific special case which is Bioenergy, in which we have an exposure of around $120 million to $130 million. We have right now fully provisioning, we have an 84% provisioning in that, it is more than enough.
Regarding your second question, the trend that we observed in the other geographies is the same trend that we are having in Colombia. In terms of provisioning, the impact will be also in Banistmo because of the economy is fully impacted because of COVID-19. In El Salvador, I will say this is on average, the same that it is happening in Colombia. And the lowest level that we are seeing is in BAM in Guatemala, and the main reason -- there are two reasons why. It is because of the country, it is an agricultural industry there, so the economy is not as impacted as the rest of the countries. And second, the level of EBITDA [Phonetic] is still maintaining certain level of liquidity in the clients. So just to give you an example, in terms of reliefs, the only country in which we have 31% of the total loan portfolio under grace period. It's in Guatemala, which is -- it's a very good. So this is in terms of geographies, same trend as Colombia.
In terms of potential worst case scenario, that's one of the reason why we decided to have a general assembly in order to increase the solvency ratio, in order to move some accounts from the occasional reserves to legal reserves. In our calculations, assuming the worst case scenario could be three times more of the provisions that we had last year. We will have more than double the minimal level of Tier 1 ratio at the end of December. So we don't have again any specific concern assuming and you have to take in consideration that in July, we will have a Tier 1 ratio of around 11.2%.
Operator
And our next question comes from...
Jose Humberto Acosta Martin -- Chief Financial Officer
I don't know if Juan Carlos -- I'm sorry, Juan Carlos, if you want to add something to the question of Sebastian.
Juan Carlos Mora Uribe -- Chief Executive Officer
Thank you, Jose. Sebastian, good morning. No, just to emphasize, that the trends in Central America are similar, as Jose Humberto said that the ones are in Colombia. And we are going in the same path. We are working with our customers. We are assessing their economic situation and providing solutions for that situation. So, I don't have anymore to add, Jose.
Sebastian Gallego -- Credicorp Capital -- Analyst
Thank you, Juan.
Operator
Thank you. Our next question comes from Jason Mollin from Scotiabank.
Jason Mollin -- Scotiabank -- Analyst
Yes. Hi, everyone. My question is related to the asset quality of the portfolio as well. Specifically to the chart that you talked about the customer sub division by risk level and you're showing 13% of the retail as high risk, 37% at the SME and 16% in corporate. Can you talk about what that means, high risk? Do they have collateral, and maybe you could talk about the collateral and guarantees you have by segment. The mortgage book, I believe, is around 13% of total. And I think there were a higher percentage of deferrals there. And if you can tell us what you're seeing there? Are any other clients that -- are clients making payments even though there was the ability to defer?
And how -- the second part of my question I found it pretty interesting, the comment that in the second wave of, let's call it deferrals, 60% is your estimate that will likely pay as usual. What are you using to determine that? Is that their cash flows, their bill payments, if you can provide some information that would be helpful? Thank you.
Juan Carlos Mora Uribe -- Chief Executive Officer
Thank you, Jason. Let me give you a general information and then Jose Humberto could give you more details. What we are doing is -- and it's related with your first question and the last part of your question. We are assessing the situation of our customers based on how they are moving their money, what money is flowing through their accounts, how we see the sectors. So with all of that we are assessing the situation of the customers.
And the numbers are showing what we mentioned. How -- the higher risk we are seeing on SMEs, in which we see that higher number of companies are on high risk. And then, yes, we are seeing payments and people, is paying, and we see even we are estimating how the customers are going to behave, and the behavior -- the actual behavior is better than the one we estimate. So we keep assessing the situation of our clients, we keep adding more information to see what is the situation of the customers. With this, I will pass your question to Jose Humberto for more details.
Jose Humberto Acosta Martin -- Chief Financial Officer
Thank you, Juan Carlos. I think it is very clear answer. And I want to summarize your second question. The 60% is because the data that we collect. We know that they have capacity of payment because they have on checking and savings accounts liquidity or maybe time deposits we compare with the level of debt. That's the reason why we believe that these 60%, we have capacity of payment.
And regarding your first question, as Juan mentioned, it's different, it's in three phases. First, because of the historical behavior, we analyzed what happened in the previous months with every single client; second, because of the sector that they belong, no matter if you are -- have very good behavior, you work in a hotel for example, we note that because of the sector, we will need to put in risk; and third, again because of the cash flow.
Operator
Thank you. Our next question comes from Yuri Fernandes from J.P. Morgan.
Yuri Fernandes -- J.P. Morgan -- Analyst
Thank you, gentlemen. Good morning. I will have just one question regarding NII. It's -- I guess it's no secret that Colombian banks are asset sensitive and it should suffer because of lower rates. But my question is regarding the stage 3 loans. We have all those questions on the risk loans, on the 50% of our loans being on forbearance. So when you look to the stage 3, the non-accrual book, it has not increased that much, it's about 7.6% of your total loans. And my concern here is that stage 3 loans, they may increase a lot, and may be a perfect storm right, because you have the asset sensitive, your loan book are not growing as you said, you expect your loans volumes to decelerate in the second half.
So my question and I think maybe this is more a 2021 talk like, what you expect for NII, what you expect for margins because we may have an outlook that provisions maybe higher in 2020 as you said, and maybe provisions decrease in 2021. But maybe NII would be much weaker going ahead. So what's your thoughts on stage 3 loans? How you're thinking NII? That would be nice. Thank you.
Juan Carlos Mora Uribe -- Chief Executive Officer
Hey. Thank you, Yuri. Yes, you are right. I mean we will see that the margins are going to decrease. Interest rates are going to be low, lower than the ones that we have now. We are working on the cost of funds and we have some room there. But we are foreseeing stronger margin compression, if that's clear. Regarding your question about how we are seeing the behavior of the portfolio regarding stage 3 loans, we are seeing that the stage 3 is around 7% of our loan portfolio. And it will increase, but we are incorporating all of that on our provisions.
So we will have some pressure from margins and will increase provisions regarding the stage 3, but we are taking into consideration both aspects in our projections and we are incorporating those issues now. I don't know Jose Humberto if you have something to add to Yuri's question.
Jose Humberto Acosta Martin -- Chief Financial Officer
No, Juan. That is very clear.
Operator
And our next question comes from Thiago Batista from UBS.
Thiago Batista -- UBS -- Analyst
Yeah. Thanks, guys. I have two small follow-ups. One on the expenses side, you mentioned 2% to 4% of expenses this year. This is increasing or a decline of 2% to 4%. This is the first one. The second follow-up, if you can release first, the size of the credit relief program specifically on mortgage, probably this is a big part, but if you can share with us the size of the mortgage in the relief program?
Juan Carlos Mora Uribe -- Chief Executive Officer
Thank you, Thiago. Good morning. Related to expenses, we are seeing -- when you mentioned -- when we mentioned 2% to 4%, it is an increase, but we are working very hard to do better than that. And I think we can achieve that. This year as we mentioned, we are -- the variable part of the salaries is not going to be there, so that could account for something like 20 or may be more of the total labor expenses. And the other measures that we are taking related to the office space, we are not growing as you could imagine in the number of -- in the headcount. So with that measures, I am optimistic that we can do better than that. Let me pass your second question to Jose Humberto.
Jose Humberto Acosta Martin -- Chief Financial Officer
Okay. Regarding your second question, Thiago, the sites -- the mortgage composition in the loan portfolio, it's at around 11% and at around 70% to 75% of those mortgage were on the relief program. We offered them six months, so we will see the second round beginning of September of reliefs.
Operator
Thank you, ladies and gentlemen. I will now turn back the presentation to Mr. Mora, Chief Executive Officer of Bancolombia for final remarks.
Juan Carlos Mora Uribe -- Chief Executive Officer
I want to thank you, all of you for joining us on this call. I hope this situation in the world improves soon. Please take care and stay healthy, and we hope to see you on our conference for the third quarter of 2020. Thank you very much.
Operator
[Operator Closing Remarks]
Duration: 67 minutes
Call participants:
Juan Carlos Mora Uribe -- Chief Executive Officer
Juan Pablo Espinosa -- Chief Economist
Jose Humberto Acosta Martin -- Chief Financial Officer
Andres Soto -- Santander -- Analyst
Ernesto Gabilondo -- Bank of America -- Analyst
Tito Labarta -- Goldman Sachs -- Analyst
Gabriel Nobrega -- Citigroup -- Analyst
Sebastian Gallego -- Credicorp Capital -- Analyst
Jason Mollin -- Scotiabank -- Analyst
Yuri Fernandes -- J.P. Morgan -- Analyst
Thiago Batista -- UBS -- Analyst
