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BanColombia S.A. (NYSE: CIB)
Q3Â 2020 Earnings Call
Nov 13, 2020, 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 2020 Earnings Conference Call. My name is Vanessa and I'll be 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 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 to 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. 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 -- Chief Executive Officer
Good morning, everybody and welcome to our conference call for the third quarter 2020. I hope all of you and your families are safe and healthy. During the third quarter, Colombia ended the mandatory preventive isolation. The country is now facing the double challenge of containing the second peak of infections, while at the same time, gradually reopening the economy. The data have shown that September was the best month since the start of the health crisis, reflecting a better performance of agriculture and mining sectors, complemented by the reactivation of retail and construction activities that have benefited from more freedom of movement in the main urban centers.
While we are still in a very uncertain environment during the third quarter, Bancolombia performed better than the previous one. The net income for this quarter was COP280 billion. Before getting to the details of the results, I want to mention two key topics. First, regarding credit risk, we recorded 31% less provision charges compared to the second quarter of this year, as a reflection of a better economic activity and the increase of mobility in the main cities of the country. The cost of risk decreased during the quarter, but it still reflects weak economic outlook related with the pandemic. This provisioning level and the lag in NPLs formation results in a coverage ratio of 232% for the quarter.
The second point is regarding our digital strategy for Bancolombia. Digital transformation is a continuous process and the medium to generate solutions that meet the needs of people and companies. This has a higher goal to promote sustainable economic development to achieve well being for everyone. We started this strategy three years ago and now is showing very positive results. The actual health crisis has made possible to see the preparation of the bank in terms of digitalization. From the moment that preventing isolation measures led us to limit physical operations, we were able to redirect most of our clients' needs to digital channels. Today, we have more than 12 million digital clients.
At this point, I want to turn the presentation to Juan Pablo Espinosa, who will further elaborate on the performance of the Colombian economy Juan Pablo?
Juan Pablo Espinosa -- Chief Economist
Thank you, Juan Carlos. During the past few months, the Colombian economy has rebounded from the low-teens in April and May as lockdowns came to an end. To do a gradual resumption of activities in most sectors and higher mobility within the country, GDP variation went from minus 15.7% year-on-year during the second quarter to an estimate of minus 9.7% in the third quarter. Moreover, initial data suggests that at the start of the fourth quarter, the pace of contraction has adjusted further or around minus 97.6% year-on-year. This recent recovery trend consistent with our full year probably adjusted projection of minus 8.1%.
Going forward, uncertainty and risks remain significant, especially due to the possibility of rising COVID-19 cases that might force authorities to reimpose new containment measures. Nevertheless, we think that the negative impact on the economy of such a scenario would not be as large as we saw in the first half of this year. Other relevant risks are the second round effects of the shocks that have taken place since March, including permanent job losses, the reduction of disposable income and the increase in poverty. However, moving into 2021, we also identified several factors that will promote economic growth.
Low interest rates and in stimulus programs led by the government in sector such as infrastructure and housing will combine with a more positive global context and higher terms of freight. As a result, next year, we project that GDP will recover at a probably adjusted rate of 5.2%. Consistent with this, we anticipate a mild improvement in the labor market. We expect that urban unemployment rate will average 19.3% in 2020 and will adjust to 17.3% in 2021.
Regarding inflation, given the ample negative output gap as well as an abundant supply of food. We think that downward pressures will continue to determine the performance of CPI, leading the annual variation to close this year near 1.5%. Inflation will only start to accelerate gradually in the second half of 2021. And by then activity will start to gain traction and some relief measures taken during the pandemic are reversed. Hence by the end of next year, annual CPI change will go back to the lower half of the target range. Against this backdrop, we predict a long period of low and stable interest rates. We expect that reference rate will be its current level of 1.75% at least until the second half of 2021 when the Central Bank will do some upward fine tuning in order to keep inflation expectations on check.
Finally, a factor that will drive the performance of the Colombian economy during the next two years will be the adjustment of the central government's deficit. After its large widening during the pandemic. However scenario suggests that the peso of fiscal consolidation will probably be more gradual than initially estimated by authorities. However implementing actions that lead to stabilization of public debt will be key to maintain the country's investment grade and keep access to external financing.
Now I want to turn the presentation back to Juan Carlos.
Juan Carlos Mora -- Chief Executive Officer
Thank you. Juan Pablo. I want to continue this presentation by walking you through our digital strategy. At Bancolombia, we decided to develop a strategy focused on a holistic relationship with our clients to solve their needs with financial and non-financial solutions. We have studied the context of our clients from life cycles for individuals to production chains for companies, seeking to be relevant in their daily lives. In accordance with brief analyses, we have decided to evolve our value proposition toward a business model based on ecosystems, developing the value proposition in which clients and financial and non-financial solutions are in one place.
So we are working on orchestrating the demand and supply of certain ecosystems such as housing and mobility through our digital channels. In this way, our more than 1.8 million SMEs and corporate clients have been able to offer their services and products to our more than 15 million clients in Colombia. Through this strategy, we will keep adding new clients approving digital loans and capturing new data sources to encase risk models.
Moving to Slide 5. We can see some figures of this strategy. Bancolombia's QR code as a model to connect formal and informal retailers with more than 8 million digital clients through our digital channels has reached close to 450,000 merchants throughout the country in less than two years. This service allows small businesses to sell digitally and physically receiving the money from their customer purchases, directly to their savings, checking Bancolombia La Mano or Nequi accounts. With the transaction data of QR, we have already pre-approved credit lines of more than COP430 billion to clients, who have not had access to credit from the financial system before.
We launched in Alliance with Suramericana [Phonetic] a platform that will be available in our digital channels and its purpose is to strengthen independent workers, who represents about 50% of the workforce in Colombia. We pursue to connect 600,000 independent workers in the country with more than 15 million clients of Bancolombia, to accompany them in their growth through the formalization and access to digital credit, thanks to the new data sources that the bank will have.
Each independent worker will have a digital account such as Nequi or Bancolombia La Mano and QR codes to receive payments for services. In the upcoming weeks, our clients will be able to find a personal finance assistance in our app that will help them to manage their day-to-day finances and bring them closer to their housing or mobility goals through financial planning. Additionally, Bancolombia aligned with its purpose of orchestrating supply and demand to fully serve the needs of our clients will launch the housing and mobility solutions two market places for our clients to find their next home, their next vehicle with financing and rental solutions in one place.
During the first nine months of the year, Bancolombia distributed more than 2.3 million products through digital channels, which represents 45% of total products sold. Sales through digital channels as of September 2020 have increased by 79% when compared to the same period of 2019. The digital sales have maintained a steady evolution on a monthly basis, despite the reactivation of the physical channels during the reopening of the economy in the third quarter. This performance indicates that the customer experience evolution has accelerated during 2020 toward the permanent impairment adoption of digital channels by many of our clients.
The balance of digital time deposits reached by September COP4.5 trillion coming from COP363 billion in January showing an important growth throughout the year. Digital sales continue to gain relevance toward reducing the operational expenses. In average, the distribution of the products through digital channels represent only 36% of the cost of selling it via physical channels. The digital competitive environment in Colombia is getting tougher, new players are entering the market, but we have been preparing for these during the last three years. We have a robust client-based products and services, coupled with the access to a very competitive funding that give us size and cost advantage.
Now I want to turn the presentation to Jose Acosta. Jose?
Jose Humberto Acosta Martin -- Chief Financial Officer
Thank you, Juan Carlos. Now turning on Slide 7. I want to walk you through the evolution of the relief program in our loan book. Trade reliefs have decreased from June to September by 30% coming from 44% to 14% in a consolidated basis. Out of total loans under relief, corporate loans represents 46%, consumer represents 22%, mortgages 19% and SMEs 12%. This trend shows the evolution in the first wave of relief across the board.
In Colombia, 10% of total loans are still under relief. However, this percentage should come down to 4% in October, 3% in November and less than 1% by December. Regarding Central America, the relief program is as follows. In Banco Agromercantil, we have 1% of the total loan book under relief. In Banco Agricola in Salvador, we have 21%, which should come down to zero by December. And finally, in Banistmo, we have 45% of the total loan book under relief. This proportion may vary until December because of the moratorium law in Panama. Even though the moratorium law is until December 2020, the regulator in Panama gave an extension of the terms of the low until June 2021.
On Slide 8, we present the breakdown of the first wave reliefs and the PAT program in Colombia. Regarding credit reliefs in Colombia, we want to point out that the first wave of reliefs is almost done, and now represents 6.9% of total loans as of September. It is important to highlight that 88% of loans after the relief ended are performing. 8% of the loans have been canceled, 4% are 30 day past due, which is a very positive indicator on the improvement in the payment capacity of our clients. Regarding PAT remember that this program began in August and will end in December 2020 and we have to offer different alternatives of payment for our clients.
It is important to highlight that those alternatives are by demand. Structural solutions of medium and long-term will be granted, according to the individual client condition. PAT program accounts for 3.4% -- 3.1% of total loans as of September. Out of the total program, the 43% are structural solutions for corporates, 34% for consumers and mortgages, and 23% for SMEs. The solutions are basically three, grace periods, defered payments, and tenure extension.
In Slide 9, we present the breakdown of provisions during the quarter. As we did the previous quarter, we want to explain the provisions breakdown. First, provisions associated to the update of macro scenarios and COVID-19 represented 37% of the total provision expenses, as of September. We want to highlight that the expectations for macro variables deteriorated from the second quarter to the third quarter of this year. In most of the geographies, reflecting the still uncertain economic environment in which the bank operates. Second, regarding provision charges associated to the consumer loans, we must mention that those correspond to a normal pace of deterioration and represents 32% of the total provisions as of September.
Moving to Slide 10, we give you a snapshot of the composition by stages and their coverage. Regarding the composition by stages, during the quarter, we can see that there was an important increase in Stage 2. This increase was explained by three aspects. First, clients in which they relief ended, did not get a structural solution and not to have the capacity to pay yet. Therefore they became 30-day past due. Second, the number of clients in watchlist increased. And third, the output of the risk assessment of our expert margin resulted in higher risk. On the other hand, the client increase in Stage 3 was due to a higher number of clients in watch list and a higher deterioration in loans that were not part of relief programs and that over passed the 90 days threshold. Coverage by stages shows a strong protection of the balance sheet. Our levels of coverage are aligned with the average of the financial system.
Slide 11, represent provision charges and allowances. Cost of risk for the quarter for the last 12 months was 3.4%. Cost of risk without COVID-19 effect was 2.3% for the quarter and 2.4% for the last 12 months. As a result of our provisioning model, the level of allowances has increased as a proportion of the total loan portfolio, protecting the balance sheet in an environment that is still uncertain. It is important to mention that even though the provision level was lower than the one reported in the second quarter, we expect that provision charges to increase for the fourth quarter because of the end of the first wave reliefs, worsening of macro variables in Central America and the increase of the structural solutions and under the PAT program.
The next slide shows the past due loan formation and coverage. New past due loans during the quarter increased, mainly due to higher NPL formation related with the end of the reliefs, therefore some clients became past due mainly in credit card, personal loans and mortgages. Also there was a corporate client related to bio-fuel production that defaulted during the quarter. This client is highly provisioned with a coverage of 84%. The coverage ratio rose to 232%, explained by the provisioned based in expert models, clients in watch list and past due loan requirements -- past due loans requirements. Also bear in mind that our risk provision models are based on expected losses under IFRS-9.
On Slide 13, we present the capital situation of Bancolombia and subsidiaries. Total service ratio stands at a level of 14.8%, while CET1 at 11.4% for the third quarter, well above the minimum regulatory requirements. These levels lead the bank in the high range of our solvency target. This increase in the capital ratios explained, by the reclassification of existing resource in the occasional reserve to the bank's legal reserve, approved by the extraordinary shareholders meeting last July. This is a remarkable fact having a strong capital position is fundamental pillar to face the new future. The adoption of Basel III in Colombia is scheduled to start its implementation in January of 2021. The effect of the accounting reclassification we did anticipated most of the Basel III impact. So we are not expecting a material change in the ratios for January but because of FX volatility and uncertainty regarding year-end results ratios may vary.
On Slide 14, we present the liquidity position of the bank. In a consolidated basis, we are expecting a high liquidity levels to maintain for this year due to low demand in the loan portfolio and low dynamics in withdrawal from savings and checking accounts. Saving and checking accounts have consolidated as the main funding vehicle with 50% share of the total funding.
I want to highlight that throughout the year, we have achieved a continuous decrease in the funding cost, reducing 64 basis points in the last 12 months. In addition to the increase in savings and checking accounts, this improvement is explained by the following reasons. First, the liability management transactions we executed last year and in January this year, allowing us to exchange all bonds with high coupons for more cost and capital efficient ones. And second, the decrease in credit lines with financial institutions.
On Slide 15, we present a snapshot of our stand-alone operations. In general terms, the trend throughout the different geographies operated by Bancolombia is similar, margins under pressure, fees recovering as economies are starting to reactivate non or slightly growth of the loan book and a solid position in terms of capital and liquidity. In the same way, coverage ratios have been one of the key indicators in Colombia and in Central American subsidiaries, sustaining a level of 232% in a consolidated basis. Amid the main challenges ahead, I would like to point out the positive evolution in terms of efficiency to bring down the cost to income ratios consistently or in the four operations such as coordinated effort that contributed gradually to profitability ratios.
On Slide 16, we see the evolution of margins and net interest income. Lending margin continue under pressure during the third quarter, explained by several reasons. First, the increase in Stage 3 clients under IFRS-9 that generates fewer interest income. Second, during this year in Colombia, the cut of rates by the Central Bank has reached already 250 basis points. We don't expect further cost cuts for this year. Third, the mix between consumer and corporate loans will continue to impact the margin the driver for growth will be in corporate loans. And finally, the loans under reliefs and PAT program will return a lower interest rate because of the structural solutions of grace periods, deferred payments and tenure extensions. On the other hand, it is important to note that the decrease in cost of funds has added receivings and partially offset the compression to our lending margins, which ended the quarter at a level of 5.5%. We are expecting NIM at around 5% area for the year end.
Slide 17 shows the evolution of expenses and efficiency. The trends in cost efficiency for the Bank continue to show an encouraging outlook. During the first nine months of 2020, total operating expenses have contracted already more than 1% when compared to the same period of 2019. General expenses have remained relatively stable growing less than 1% below inflation rates, reflecting the management actions to maintain a strong cost control. Moreover, personnel expenses have significantly contributed to the improvement of operational burden dropping more than 7% mainly attributed to bonus plans related to employee benefits.
Our cost to income ratio stands at a level of 49.7% for the third quarter of this year. The depreciation of the local currency had an impact on efficiency, when excluding the FX impact and cumulative figures, the reduction in operational expenses for the first three quarters of the year, we have reached more than 4%. For 2020, we are expecting to report our ratio between 0% and 2% of our operating expenses. Regarding income tax, the figure shows a recovery of COP11 billion, mainly explained by the Colombian operation. Such a boon refers to the tax impact related to fiscal concepts such as tax discounts, liability management operations and tax shields resulting from the second quarter net losses.
Slide number 18 shows the evolution of fees. Fees have been receding during 2020. During this quarter, they grew 12% when compared to the second quarter of 2020 and decreased 2% when compared to the third quarter of last year. Lines such as debit and credit cards, bancassurance, trust brokerage and investment banking have contributed to the performance of fees during the year. In bancassurance, we have grown 20% for the year. We expect these products will continue leading the growth next year.
Now I want to turn the presentation to Juan Carlos for the closing remarks. Juan Carlos?
Juan Carlos Mora -- Chief Executive Officer
Thank you, Jose. At a summary, I would like to highlight several elements of the third quarter results. The balance sheet structure remains solid. We are expecting the loan portfolio to remain stable or could even have a single low-digit growth 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 this economic cycle.
This year has higher levels of uncertainty. We think that the fourth quarter of the year will reflect more accurately, the performance of our clients in terms of their payment capacity and therefore, we could know what will happen in terms of risk. Bancolombia is well prepared to face the new normal. We have a stronger capital and liquidity position, a better cost structure and more diversified portfolio of products and services leveraged by a robust digital strategy with a positive evolution of digital platforms that have allowed us to gain over 4 million new clients during the year.
After elaborating on these 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 Instructions] Our first question comes from Thiago Batista. Your line is open.
Thiago Batista -- UBS -- Analyst
Yes. Hi, guys. Good morning. I have one question about asset quality. So if you can comment, how fast do you believe that the cost of risk of Bancolombia will normalize it. So to be more specific, in 2021 next year, do you have any sense on the level of cost of risk and if it's possible to see, let's say, kind of still high level of provisions in the first half and then some normalization in second half. So if you can talk a little bit, I know that is tough question but on how you can see the dynamics of cost of risk going forward? And another one, very briefly one, and linked with this cost of risk is, how fast will be the normalization of the banks ROE? So if you can comment, what we can expect for next year, if it's high single-digit close to 10 above that. So, only a big numbers or big indication on how fast would be the recovery of the banks results?
Juan Carlos Mora -- Chief Executive Officer
We are expecting, maybe as we mentioned on the script a certain level, at the same level of provisions or either a little bit more this next quarter of this year. What we expect next year? Next year we are expecting the first half maybe to maintain a certain level of provisioning because of two factors. First, because of the PAT program, which means there will be more clients of restructuring that will require provisions. And the second factor that will be because of the Banistmo operation in Panama, they will finish partially the relief program.
So we are going to see the same effect that we are seeing here in Colombia during the second half of the year. So those are the two reasons why we believe that this -- that first half of the year, the provisions we maintain certain level. When we are going to reach the new normal in terms of cost of risk, a new normal meaning in between 2% area, maybe in two years and this is basically because of the effects of COVID-19.
Regarding your second question, regarding return on equity, obviously, because this is a high correlated with the cost of risk. We believe that the next two years, the return on equity will be single-digit and we will go back to the double-digit return on equity in two years. I mean, beginning in 2023.
Operator
Our next question comes from Ernesto Gabilondo from BOA.
Ernesto Gabilondo -- Bank of America -- Analyst
Hi. Good morning, Juan Carlos, Juan Pablo, Jose Humberto, and good morning, everyone. Thanks for the opportunity. My first question is on the deferred portfolio. Can you walk us through the first and second round of the deferred loans. I believe that initially 50% of the portfolio was integrated by deferred loans and as of today it's only 14%. So, can you repeat how much of the first round is current restructured and delayed? And for the second round, how much do you expect to be restructured and delayed? And when do you expect to communicate the payment behavior of the second round? And very quickly a second question, in terms of taxes. I believe you have a couple of quarters with no taxes, so how should we think about effective tax rate during the last quarter and for the year? Thank you.
Juan Carlos Mora -- Chief Executive Officer
Thank you, Ernesto. Let me elaborate on your question, related -- the deferred part of the portfolio and currently, in Colombia, we have around 10% of the total portfolio with some kind of relief and 14 in total, in a total portfolio on a consolidated basis. The total portfolio is performing -- that part of the portfolio is performing close to 90% are current. So, the other part was canceled. So just 4% is 30-day past due loans. So that behavior, we think it's a good behavior it shows that the payment capacity of the clients was affected but still they have cash flow to serve their portfolios.
And related taxes, you are right, we had lower taxes because of some tax shields and some particularly is of the quarters, but we expect the tax rate on a consolidated basis to be between 10% and 15%. So it's going -- they are going to be somewhere tax charges at the end of the year related to how we're going to behave. And I want to refer to Thiago's question since I was not able to answer. Definitely 2021 will be a transition year, its going to be a better year than 2020, but it's not going to be a normal one definitely. So cost of risk is going to move toward a mid-term normalized figures, but still its going to be above that level.
We find that our cost of risk, mid-term loss cost of risk should be around 1.7%, 1.9% and definitely next year will be, as I said, better, but not on that range. And related ROEs, again transition year, where we think that ROEs should be around, on the top of a single-digit figure, but we will see how it's going to perform. The performance of the portfolio is encouraging. We think that is performing better than we expected, but we need to wait and see how the 2021 will develop. I want to pass to Jose Humberto Acosta to -- if he want to add something to these topics.
Jose Humberto Acosta Martin -- Chief Financial Officer
No, Juan. I think the answer is completely -- is complete. So I have no comments.
Operator
Our next question comes from Sebastian Gallego.
Sebastian Gallego -- Credicorp Capital -- Analyst
Hi. Good morning, everyone. Thanks for the presentation. My question today will be devoted to Central America. We saw a mixed performance across different regions. Just want to understand in more detail some of the trends, particularly when we saw -- as we saw net losses in Guatemala, but the strong resulting in El Salvador also considering as well the situation of Panama, if you can provide a bit more color on the expectation on what could happen, given that the beliefs are still high, as you mentioned on the script. And maybe the second question is related to capital. You mentioned on the script that Basel III should not materially affect the capital ratios. The question here is, at the very beginning banks in Colombia were expecting kind of a positive effect due to the implementation of Basel III. Are you no longer expecting that positive effect? Thank you.
Juan Carlos Mora -- Chief Executive Officer
Thank you, Sebastian. Related to Central America operations, we need to divide it in the three countries that in which we operate. Let me start with El Salvador, Banco Agricola is performing very well. The situation there shows that the bank that non-performing loans are performing well, as I mentioned, so profitability of the bank is good -- operational ratios are fine. Remittances which are a very important part of the Salvador economy are performing well, very well I could say. Same thing in Guatemala by the way. So it's not something that is just related to Salvadorians, but it is more related to Central Americans in the US mainly. So remittances are performing well.
The operations in El Salvador are normal. Guatemala, also the economy is performing, I could say, well. We have losses because we had some provisions, that I could say I extraordinary. We are on the way of normalizing our operation in Guatemala. What I mean what normalizing. We have standards about coverage ratios, how to provision and we are on that way. So we are doing our job on Guatemala, but I'm positive around the performance of the economy and positive on the performance of the Banco Agromercantil. But it will still need some additional adjustments that will affect the performance of Banco Agromercantil in the near future. So I could qualify the performance of both banks, good.
The case of Panama, it's a little bit different. We are as Juan mentioned and we mentioned under -- still on the some moratorium that don't allow us to see what is the real asset quality and we will remain on that situation for a little while. So we need to wait and see, how the economy is going to perform. But still, we don't have much information. We are working with our clients. We are providing them solutions related to their particular cases. But the case -- in the case of Panama, I could say that we should wait for the moratorium to end to see what is the real asset quality in Panama.
Related capital, we had extraordinary shareholders meeting at the end of July. We move from -- we move reserves to main -- to be our a permanent reserves. So that -- that movement did was to improve our capital ratios, but still there are some -- you mentioned Basel III implementation and Basel III implementation will start in Colombia begin in next year and we still -- we will see some positive effects on the capital ratios. The density of the assets is going to change for better lower. So that will improve our ratios. We need to start accounting some additional buffers like the operational risk and systemic. But all-in-all, we will still have some benefits on capital ratios from the implementation of Basel III.
Operator
[Operator Instructions] Our next question comes from Jason Mollin.
Jason Mollin -- Scotiabank -- Analyst
Yes. Hi. Thanks for the opportunity. My question is a follow-up on the payments being made by the first wave of rescheduled loans. I think you showed almost 88% in the presentation. I think you were saying almost 90%. Can you give us that evolution, what was that in the second quarter? I think it was not nearly as good. So I wanted to understand better that evolution. And then as a follow-up on capital, but more so on the movement in shareholders' equity in the quarter, we saw a boost above the net income generated and I believe a portion also came from translating the dollar capital or equity you have in Central America. If you can give us some specifics on what is the dollar equity that you have and how did that impact it? And if there was any other impact because it seems like it was larger impact than just that FX movement? Thank you.
Juan Carlos Mora -- Chief Executive Officer
Thank you, Jason. Let me take your first question, and I will pass the second one to Jose Humberto. During the second quarter around 44% of our portfolio was under some kind of relief. So during that period indicators actually improved. The NPLs were down, but that was because of that particular situation that a lot of our portfolio was under some kind of relief. So second quarter is not a quarter in which we can -- from which we can have good information about the performance. Even though, we keep doing provisions, coverage ratios improved. Third quarter, now that the first wave of relief ended, as we mentioned and now we entered in a different phase, which is more structural phase of restructuring the clients, the customers. The clients loans is much clear what, how the loan portfolio is performing.
And as I mentioned before it's performing well, let me say that, even though they are -- in general, the economy is affected and of course, some payment capacity of some clients is affected, but it's performing well. So second quarter was -- for me, was a quarter in which we didn't get much information of the actual quality. Third quarter give us more and more information and we are confident that what we are seeing, it's good. Let me say that economic activity in Colombia, September, October has been a good. We see much more activity around sectors that were very affected and that is encouraging, but still as we mentioned in our presentation, still there are a lot of uncertainty around -- if these trends are going to consolidate or not. But what we are seeing at this moment with information that we have is that the loan portfolios are performing according what we were expecting or even a little bit better.
Let me pass your question around capital to Jose Humberto.
Jose Humberto Acosta Martin -- Chief Financial Officer
Thank you, Juan Carlos. Yes. The equity it is improving and is increasing because of combination of three factors. The first one, as you mentioned Mollin, today we have more than 30% of our equities in US dollar and you have to take into consideration that the valuation of the currency of 20%, so that this is the first reason why the equity is increasing. The second one is, the net income cumulative. We are having COP0.5 billion in net income in September. So it is reflected also on the equity side. And the third reason is, we announced a complete acquisition of Banco Agromercantil that was 40% of the operation that also is reflecting on the equity. Solvency ratio, the impact of the -- moving some deep reserves from occasional to legal reserves, the real impact to us in terms of solvency ratio at around 200 basis points.
Operator
Our next question comes from Carlos Gomez.
Carlos Gomez -- HSBC -- Analyst
Yes. Hi. Good morning. It's also a clarification of what you said before you were very clear guidance in terms of taxes for this year, but I don't think you gave guidance for 2021. Also you referred to more provisions in the fourth quarter, I mean, the profitability of the Group, which already reduced to 4% ROE this quarter. So should we expect a loss in the last quarter of the year? And again related to this and given your capital position, do you have any expectations for dividends for next year? Thank you.
Juan Carlos Mora -- Chief Executive Officer
Thank you, Carlos. Let me take your second and third comments and I will pass the first one to Jose Humberto. Fourth quarter -- what we expect during the fourth quarter. What we are seeing is that we are going -- we're moving to a more normalized situation. What means normalized? Normalized, meaning that the loan portfolio performance is going to reflect the current situation of the economy. We were, as I mentioned before on the relief and during the second quarter, the third quarter, it's more accurate in terms of reflecting the situation of the economy, but fourth quarter is going to show us, how is that situation. So we are saying that we could have more provisions during the fourth quarter because we don't know yet how the clients are going to perform -- perform in terms of payments, those that are still under some kind of relief.
But on the other hand, what I -- that I mentioned that the performance of the economy, how the economic activity is behaving, some sectors are showing better results than expected. On the other hand, unemployment rate, it's, recovering a bit so we need to see if that trend continues. So to be more direct and to conclude, we could have higher provisions during the fourth quarter, but still we don't know. We think that the economy is performing a little bit better than we were expecting. And in terms of losses, we think that on the performance of the bank in terms of income -- fee income, what we are doing on expenses, it could or should work on a positive way and our expectations are that, that actions or that things that we are doing could make us to have a quarter in which we don't have losses, but still we don't know.
And I want to be clear that still there is some uncertainty and we are not now very clear on how the last quarter is going to perform. Related dividends, it will depend. It will depend on how the year ends in terms of net income. We are now on the third quarter, on the positive side. It is related to your question about the performance of the fourth quarter. If you ask me, I am positive about the performance of the fourth quarter, but still we have a lot of uncertainty. Let me pass your other question to Jose Humberto.
Jose Humberto Acosta Martin -- Chief Financial Officer
Thank you, Juan. Carlos, yes, what happened till September, as we mentioned on the credits, because of the net losses that we registered in the second quarter, we have this tax recovery. And remember that we had the liability management exercise exchanging sub debt and also they gave us a tax shield. So that's the reason why we have right now a tax recovery. What is going to happen at the end of the year is maybe some operations we have net income. And in those operations, the statutory tax will be in between 35% to 36%. That's the reason why our guidance computed tax at the end of the year will be on the range of 10% to 15%, as Juan mentioned.
Next year, we are going to see the performance of the different operations that we are having. Remember that our statutory tax in Colombia will be 36%, Salvador, 35%; the other two operations in Guatemala and Panama, 25%. So if you blend a combined maybe our taxation of our tax rate, effective tax rate next year will be in the range of 25% area. But again, it depends of the performance of the cost of risk, depends on the recovery of the economies in which we operate, depends on the loan growth that we are going to see maybe in the second half of this year.
Operator
Our next question comes from Alonso Garcia.
Alonso Garcia -- Credit Suisse -- Analyst
Good morning, everyone. Thank you for taking my question. I just wanted to touch base on the opex side. I mean this year, the past two quarters, opex has been a positive surprise. I just want to understand how much of this positive surprise is explained by the much lower activity this year. I mean the pandemic or how much of these cost savings are here just -- I just want to understand after 0% to 2% opex growth this year, how much should we expect next year, and the coming years we should expect opex growth aligned with inflation going forward? And also how do you think of your efficiency ratio in the mid-term perspective? Thank you.
Juan Carlos Mora -- Chief Executive Officer
Thank you. Alonso. Let me give you some color, and then I'll pass your question to Jose Humberto for comments. Related, how structural are the measures that we are taking related opex. There are some measures that are more related to what is happening during this year and related to the peculiar situation that we are living. Let me elaborate a little bit. We -- bonuses, for example, is one topic that it's peculiar of this year. That is going to go on a more normalized way in the future. But other than that we are working on a structural measures that are going to stay. And our target on efficiency, definitely, it's keeping improving efficiency that has two main drivers. Of course, how are we going to control opex and we -- for next year, we expect some growth, real growth, but still we think that the program that we are undertaking to cost control are going to have positive effects in 2020. So we will have some growth in 2021 since we need to maintain investments and keep providing the bank with tools to compete in the market, but we will expect income to recovery. So efficiency ratio should improve next year and we really shouldn't going back to continuous improving of efficiency ratio in the future.
With this I want to pass your question to Jose Humberto for additional comments.
Jose Humberto Acosta Martin -- Chief Financial Officer
Alonso, if you check the numbers of each operation individually, all of them are growing negative in terms of expenses. We have been doing our job, as Juan mentioned. Just to give you a couple of examples. In terms of headcount, we are always almost maintained the same number of headcount that a year ago, we have been doing some efforts in different geographies. In terms of branches, this year, we have been reducing 17 branches, 1-7 in some operations in Panama, in Colombia and also in Salvador.
So at the end of the day, we are creating the foundation of the new way to do business, new way to distribute our products. So again, you have to take in consideration that there were an inflation in Colombia of FX -- I'm sorry, FX depreciation of the currency of 11.7%. If you discount that, the negative growth could be at around minus 4% in expenses. So we are doing our job. And as Juan mentioned, we are expecting to maintain this opex under controlling the next coming two years.
Operator
Our next question from Yuri Fernandes.
Yuri Fernandes -- JPMorgan -- Analyst
Hi, Juan Carlos, Jose Humberto. Thank you for the opportunity of asking questions. I had a very quick one on margins. I heard on your presentation, you're saying like the outlook is challenging because of the mix, the rate pressure, the PAT program, and you mentioned news around 5% by year-end. And I just want to check what this 5% means because if we look to the total margins now, this quarter, I think it was 4.9%. So this is an improvement, like of 10 bps? Or when you say around 5%, and you are talking about the margins on loans that was 5.5%.So an additional 50 bps pressure for the fourth Q. So I just want to understand a little bit more the dynamic of the margins for the 4Q and as a result, for 2021.
And if I may, a second one on provisions. We see Bancolombia doing more provisions than peers overall and we know that all the banks in Colombia, at least the way we look here, right, they are under IFRS 9, and they should provision as expected losses. But still, we see a very big difference between you and some of your peers. And I know it's hard to talk about peers, but what are things happening here? Like you think Bancolombia had the worst underwriting. It's a different mix or maybe peers are having different assumptions on the expected losses model. How do you address this big discrepancy of you building a lot of losses on the loans and some peers not doing as much as you are?
Juan Carlos Mora -- Chief Executive Officer
Thank you, Yuri for your question. Let me take your second one and I will pass your first one related NIMs to Jose Humberto. As you said, it's difficult to talk about peers, but we can talk about ourselves. What we are doing is, we are addressing the credit risk on a position that we want to be on the conservative side. As you mentioned we are doing some expect -- we are working on an expecting losses situation. But there are some parts of that provisioning that it's how you tackle the situation.
And let me give you some more details. When you incorporate in your models, the expected performance of the economy it's very different when you expect at some official forecast mentioned a GDP, a decline of 6% during 2020 or you expect 8% decline during and that's going to affect your provisions. So it depends on what inputs the banks are using, even though we operate in similar conditions. And related to your question is our underwriting process worse than the others. I don't think so.
And the numbers show that because you see how the other indicators behave and there is no big difference how the NPLs, how be credits moving from a 30-day, past due to 90-day past due behave. There are no big difference among the different banks. So at the end, its how you incorporate your view of the future and if you incorporated it faster, or you are waiting and see and you will do it later. That's my view on that question, Yuri. Let me pass your question related provisions to Jose Humberto.
Jose Humberto Acosta Martin -- Chief Financial Officer
Thank you. Yuri, yes, you are right. There are a combination of factors that had a big pressure of the NIM. But just to give you an idea, what's going to happen in the 4Q. What is happening right now in this Q, the third Q is, there is an increase in a Stage 2 -- Stage 2 credits because now people are increasing that level of past due for 30 days to 90 days. In the next quarter, we are going to see an increase of the 90 days past due. And when you get the 90-day past due, you have to increase the provisioning. But also you don't have to approve interest. So that will impact the NII for the fourth quarter basically because of the Stage 3 incremental.
The other reason is, we did our job reducing our funding cost and you see that the numbers is dropping 69 basis points the whole year. We did our job and marginally we are not seeing more space to reduce the funding cost on the same trend. That's the reason why we are expecting up 5.1%, 5.2% area, NIM at the end of this year and we are expecting to maintain the 5% for the whole year 2021.
Juan Carlos Mora -- Chief Executive Officer
Jose, Yuri was asking about NIMs, could you give some information about what we are expecting. We mentioned during the remarks that we are expecting by year end a NIM around 5%. We reported 4.9% and we still need to see how interest rates will evolve, but our please Jose give Yuri some more information about the NIM.
Jose Humberto Acosta Martin -- Chief Financial Officer
Yeah. I'm sorry about that. Yes. We were talking about the lending NIM of the loan portfolio. If you combine the 5.5% of the lending portfolio NIM with the securities portfolio NIM that there is 1.7% that's a reason why it is right now at a level of 4.9%. For us, it's very complex to realize how will be -- which number will be at the end of this year the combined NIM. We are just referring to the NIM of the lending portfolio that currently is 5.5% at the end of the year, that would be 5.2%. And the whole NIM will depend up the performance of the security portfolio.
Operator
Our last question comes from Andres Soto.
Andres Soto -- Santander -- Analyst
Good morning. Thank you for the presentation. My question is related to digital strategy. When we look at your numbers, is really impressive what you have achieved in terms of digital adoption and increase in clients via digital. So my question is related to what is your target in terms digital strategy, meaning are you looking at this, either as a way to increase your market share in consumer loans. Are you looking at this as a way to improve your efficiency.
Therefore, you should have a reduction in expenses, shutting down from branches or just this defensive strategy and this connected to your medium-term guidance where you say that you're going to expect returning to double-digit ROE until 2023, which implies that based on the cost of risk assumption that basically implies that your margin is not going to expand that much. So I don't see that much of our mix benefit in that, you are expecting and expenses will need to continue increasing in nominal terms year after year. So I don't see that being reflected as efficiency. So I'm kind of puzzle, how we can incorporate the results of digital in terms of profitability.
Juan Carlos Mora -- Chief Executive Officer
Thank you, Andres, for your question. It's going -- the digital strategy is going to serve as a defense strategy, but that's not the main goal of the digital strategy. As we mentioned, we have been developing all the actions and all we need to really become a digital player in the markets in which we operate. And we have been doing this now for more than three years. And during this crisis, it is health crisis, that strategy is getting a boost. Adoption has been very, very high from our clients. But we will, I could say, prepare for that launch. So numbers are very -- we feel very comfortable and happy with the numbers that we are seeing, how our clients are adopting new possibilities to deal with the bank and to access our products. And as we mentioned, not just the financial products, but how we move in being more involved in everyday life of our customers. So in terms of numbers, we mentioned we are getting in the pace of 300,000 new customers a month.
Now digital sales are improving, even though people could go to branches still, the digital sales keep growing. So market share, definitely, we are getting market share. I can say that, and we will keep getting market share because we have the capabilities to capture this new way in which clients want to relate with the banks, and we have the tools, and we have now the possibility. It's more how the clients adopt what we are offering them more than if we are prepared to offer them the different alternatives on the digital. So we definitely -- we are there and we see it during this period. There is a lot of comments about fintechs and how fintechs -- and fintechs are going to -- are playing a good role.
And they are very good players, and they are. But we -- since we have been working on this for a while now, we are able to present an offer to the consumers that equals the alternatives that some fintechs could offer to the market. So it's a strategy to grow, and we are seeing that is paying results. Definitely, it's going to have another effect, which is an effect on expenses. We -- as you know, an expense that is important for banks is related to the branch network. We -- in a way that we are moving toward a digital offer and digital relationship with our customers.Branch are going to evolve, and that cost could change. So as a consequence of the strategy, we will see a better performance of our costs.
At the end, it's a midterm strategy that is designed to gain market share to be a very active player and to compete in the market that is going to have an effect on opex and will work as a defense for new participants in the market that will find a player that is very well positioned to compete with the new alternatives that are going to be in the market.
Operator
Thank you. There are no further questions. I'll turn the call over back to Juan Carlos Mora, CEO for closing remarks.
Juan Carlos Mora -- Chief Executive Officer
I want to thank you all of you for your participation in this call and your interest in the Bancolombia results. We will have -- I think that the fourth quarter is going to show us how is the real situation of the economy and related to our clients. I am positive that what we are seeing is good. We will see that next year when we are together to present the full-year results conference call in which we will expect you to be with us. So thank you very much again for your interest and have a good day.
Operator
[Operator Closing Remarks]
Duration: 76 minutes
Call participants:
Juan Carlos Mora -- Chief Executive Officer
Juan Pablo Espinosa -- Chief Economist
Jose Humberto Acosta Martin -- Chief Financial Officer
Thiago Batista -- UBS -- Analyst
Ernesto Gabilondo -- Bank of America -- Analyst
Sebastian Gallego -- Credicorp Capital -- Analyst
Jason Mollin -- Scotiabank -- Analyst
Carlos Gomez -- HSBC -- Analyst
Alonso Garcia -- Credit Suisse -- Analyst
Yuri Fernandes -- JPMorgan -- Analyst
Andres Soto -- Santander -- Analyst
